From Netflix to iTunes: What to expect in 2012

The best stories in digital media are ending the year with some compelling cliffhangers.

And none is more gripping than this one: What's to become of Netflix? In the eyes of online movie renters, the company in 2011 jumped from hero to anti-hero quicker than "Batman: The Dark Knight." The company alienated users by raising prices and threatening to spin off DVD operations.

In digital music, can Apple maintain its grip over the sector without Steve Jobs, easily the most lucid thinker about music distribution during the past decade? The company must now break in new CEO Tim Cook just as iTunes confronts some of its toughest competitors ever.

What, meanwhile, is to become of piracy and the idea of free content? Content owners are pushing illegal file sharing closer and closer to the fringes of the Web. This year, they sued Lime Wire out of existence and convinced big Internet service providers to help crack down on illegal file sharing. Will they see the Stop Online Piracy Act, a much-hated bill among techies, make it through Congress in 2012?

Here's what I think is going to happen:

Online video
Netflix is in for another rough year. The company recently went from projecting losses for the first quarter of 2012 to losses for the full year. It has also recently raised money, which has some on Wall Street fearing that it doesn't have the cash to keep up with the rising costs of licensing TV shows and movies for the streaming service. If that's true, disaster could be in the offing.

Fewer videos mean fewer customers and less revenue. Less revenue means less money to acquire content and the whole cycle repeats itself. But there's hope: the bad economy has consumers dumping cable. (As an aside, isn't it funny how the cable guys went from denying that cord-cutting exists to arguing that cord-cutting isn't caused by Netflix?)

Let's drop the nonsense. Cord-cutting is real, and whether Netflix causes it or not, unhappy cable subscribers are potential Netflix customers. If the customer exodus continues, the pay TV services will be hard-pressed paying high content fees. With the DVD business disappearing, the networks and studios will have a harder and harder time passing up Netflix's cash.

If we continue to face more economic uncertainty in 2012--and if the cable guys continue to charge high fees without adding more value, such as a la carte channels--look for Netflix to exit the year in better shape than it entered. The service is too good a value.

As for handicapping the rest of the sector's leaders: Apple hasn't really been able to make much happen in video downloads, even though it leads the sector and produces some of the most popular mobile video players in iPhone and iPad. Vudu, which offers movies on an a la carte basis, has won favorable reviews for ease of use. Hulu keeps plugging along though it still has a shaky value proposition: Hulu Plus subscribers must pay rates similar to those at Netflix but advertisements are still forced on them. Netflix is ad-free.

Regardless of what Netflix CEO Reed Hastings said was his biggest competitor, look for Amazon to really push Netflix in the coming year. That Amazon Prime deal is too good a subscription offer to pass up in tough times. Amazon can also offer people who prefer owning movies the ability to buy a title and store it on the company's servers. They can access their videos just like they do their Kindle e-books.

Online music
Call it sacrilege, but--I think iTunes will give up market share in 2012. It won't be dramatic, but song downloads are a tired concept. The iTunes software is bloated and users are sick of how it hogs computer power. Apple hasn't jumped aboard the subscription bandwagon and that's the direction the major record labels are trying to steer consumers.

The labels want music fans to pay for access. Whether those fans will cooperate is a whole other question, but Spotify seems to have made a pretty good sales pitch. The company recently reported that it now has 2.5 million paying customers worldwide, making it the largest subscription service out there. Spotify's new app platform didn't inspire much awe at its debut in late November, but the honchos at the streaming service say it's just the beginning, and none of Spotify's top competitors, such as Apple, Google, or Amazon, is as well situated to tap into developer creativity.

In addition, 2012 will bring more melding of mobile phones and music. The idea is to tuck music subscription fees into phone bills so consumers don't have to think about the monthly transactions.

We saw an early deal in August when Rhapsody, one of the sector's pioneers, announced that it had an agreement with MetroPCS Communications to enable subscribers of the company's $60-per-month Android phone rate plan to receive access to the Rhapsody Unlimited Music service.

However it goes, there are too many players in subscription music and a shakeout is coming. For instance: Best Buy sold the Napster service (the legal version) to Rhapsody in October. How far can Rdio, MOG, and some of the other players hang on if they don't start getting wider adoption?

As for the antipiracy fight being waged by the film studios, music labels. and software companies, expect some form of SOPA to pass this year. Also, expect the U.S. government to go after sites such as Megaupload and Rapidshare. The big entertainment companies know that they will never stop piracy, but they also know that they can throw up a lot of roadblocks to make it less convenient than buying legally.