Commentary: Net distribution requires new business models

Every company that distributes content that can be rendered in digital form must develop new business models based on the new realities of Internet distribution.

3 min read

Every company that distributes content that can be rendered in digital form--not just music, but also books and other written information, movies, television, and software--must develop new business models based on the new realities of Internet distribution.

See news story:
MP3.com, music publishers sound out licensing deal
Inevitably, all of this content will move to the Web. The question is whether the current giants of these industries will survive or be replaced by new companies that grasp the new business models better.

As the licensing arrangement between MP3.com and the National Music Publishers' Association indicates, the music industry is finally waking up to the realities of business in the Internet age. This is one of the first of many compromises that the music, film and book industries will need to make to come up with new ways to support a new distribution mechanism.

The good news is that these new business models do not necessarily mean lower profits. However, the new models will probably mean dismantling parts of the present infrastructure of middlemen to preserve profits. That infrastructure will be less needed as more people buy their books, music and movies over the Web.

The music and book industries need to move away from their traditional financial model of $20 per CD or hardback and think more in terms of 20 cents per individual song track or $5 per download of the digital copy of a book, making up the cash flow on volume. They may actually end up making more money.

Several possible models exist. Sites may sell subscriptions that give buyers access to everything on the site for a limited period of time. Or they may provide onetime downloads at a much lower price than that of a printed book or CD to reflect the lower manufacturing and distribution costs. Sites undoubtedly will sell music by the cut rather than in CD-like compilations, enabling individuals to build their own song collections. Novels may be sold by the chapter, as Steven King is doing with his new book. Movies and books may be distributed through different methods at different price levels throughout their lives--at a high price in traditional theaters and bookstores when they are new, then later at a lower price in less expensive formats, and finally online at a cut-rate price. Publishers will need to add to them--much as movies on DVD often contain extra scenes and directors' notes--to revitalize them for markets that have already seen them once.

These models will all require that the industries involved develop policies on digital rights and infrastructures that support those policies, to protect their investment in their intellectual property.

We also anticipate that as new, Web-based business models for intellectual property evolve, they will support the digital-asset management companies that are beginning to appear, such as Content Guard and Media GNA.

Compensation for artists will need to change as well. Instead of being paid any lump sums up-front, artists and other content creators will need to participate in the revenue stream via purer royalty models. Large music and book publishers will continue to need to promote their top artists, but they will need to recognize that they will no longer be able to control their industries.

New writers and performers will be able to publish their own books and music on any of numerous Web sites and handle their own marketing. The greater cost and complexity of producing films will limit this loss of control in the movie industry--but independent filmmakers will be able to find markets directly online.

Every organization that publishes intellectual property--including corporations that publish documents for internal use and for customers--needs to take a close look at how the Internet will impact traditional distribution channels. Certainly, brick-and-mortar-based distribution of intellectual media will continue for the foreseeable future, and hybrid models that combine traditional and new distribution models are likely to be the most successful in these industries, as they are proving to be in other areas of retailing.

Publishing companies need to try out new Web-based business models while they still have large revenue streams from traditional sources. This will enable them to prepare for the inevitable day when a large portion of the listening, viewing and reading public gets its music, movies and books via the Internet.

META Group analysts Dale Kutnick, Peter Burris, Jack Gold, Val Sribar, William Zachmann, David Cearley, David Yockelson, and Andrew Warzecha contributed to this article.

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