What Angry Birds Teaches Us About the Future of Media Products

At Midem this weekend I spent some time talking with Peter Vesterbacka, CMO of Rovio, the company behind the phenomenally successful Angry Birds game.  Angry Birds continues to enjoy approximately 1 million downloads a day and as Peter pointed out, that daily download count is more than the majority of music singles ever reach. The conversation got me thinking about why a mobile game can have so much more success than the majority of artists.

Digital Era Products are Tailor Made for Digital Era Devices

To be clear, Angry Birds is not the representative sample of mobile games, to the contrary it is the runaway success story.  And the fact that Rovio hasn’t yet been able to build a new brand franchise to rival Angry Birds emphasizes the uniqueness of the brand.  Nonetheless, Angry Birds illustrates what happens when you build a content product that is tailor made for the digital devices it is intended to be consumed on.  Angry Birds is a content product that does not just utilize the functionality of the smartphones and tablets but depends upon them.  Angry Birds is a 21^st Century content product build for 21^st Century content devices.

Think about when Apple launch a new iPad, they don’t wheel out a senior record label exec with a hot new artist to show off the device, instead they get EA Games to show off a new game that leverages the functionality of the device: graphics accelerator, Retina Display, Accelerometer, Multi Touch etc.  Even the best iTunes LPs do not come close to doing that job, let alone a static audio file, which remains the dominant product that the music industry sells on iTunes and other stores.

Analogue Era Products in Digital Era Clothes

But there is something more fundamental at play rather than simply a technology skills gap between record labels and games publishers, and it isn’t just a record label problem either. The inescapable fact is that record labels, publishers of books, magazines and newspapers and even TV and movie studios are trying to shoehorn analogue era products into digital era technology.  These companies’ products were built for sitting on shelves and for being consumed in single purpose, non-interactive devices.  Games and apps though, are digital era products at home in digital technology while traditional media products are lodgers not yet quite able to keep up the rent payments.

This does not mean that traditional media products cannot have a vibrant future. They can, but they have to truly understand what makes digital era content products work:

• Interactive and Dynamic: digital era content products don’t just leverage the functionality of the devices they are consumed on. They make that functionality core to the content experience itself, to the extent that the content product would not be able to exist without it.
• Visual Experience: digital era content has a visual element at its core. This puts video products at a distinct advantage, but video is an asset that print and music products can leverage too. No coincidence that YouTube is the most successful digital music product in the globe.
• Context and Relevance: digital era content products are increasingly embracing the context of location, social group and time.  They both understand the consumer demand-gaps that these factors combine to create, and they also enrich their experiences by meshing these factors into the products themselves.

None of these three areas are insurmountable hurdles for traditional media companies, but at the same time they are not natural paths for many of their products.  Embracing these objectives often requires an entirely different approach to product development, rethinking what makes the content valuable in the digital age.  For example the audio file in the YouTube video is much less valuable to young teens without the video than with.  The video is as important in that product as the music itself.  Yet the music product development cycle revolves around creating the audio file, not the video.

Embracing digital era product principles also requires an understanding that just because you can does not always mean that you should.  Not all features are appropriate for all types of content.  Not even digital era content products use all the device features available to them e.g. Real Racing relies more on accelerometer functionality while Angry Birds leans towards multi-touch.

Learning lessons from digital era products is a must for all traditional media products.  Most digital versions of traditional media products are digital adaptations, not genuinely new products. Trying to squeeze the round peg of analogue era products into the square hole of digital era devices clearly is not a long-term solution. Until the circle is squared though, digital era products will continue to leave digital adaptions of analogue era products in their slipstream.

Why Google Needs to ‘Do an Apple With Motorola’ to Make Play a Success

2012 has been a fantastic year for smartphones, with penetration pushing past the 50% mark in key markets such as the UK and US (some estimates even put US penetration as high as 70%).  Apple’s iPhone is the leading smartphone in most key markets but Google’s Android Operating System (OS) has much larger market share: c. 70% compared to c. 20% for iOS (Gartner estimated global market shares to be 64% and 19% respectively back in Q2 2012).  But these market share statistics can be misleading, particularly when it comes to understanding the digital content and services marketplaces.

Android Fragmentation Complicates Content Strategy

The fragmented nature of the Android landscape is well documented but close analysis of key metrics reveals some startling trends with significant implications for content providers (see figure):

• 60% of iOS devices are on the latest version of the OS (iOS 6) compared to just 3% of Android devices on the latest flavour of Android (Jellybean). Additionally, 88% of iOS devices are concentrated in 3 versions of iOS while Android devices are spread across 10 different versions of the OS, of which 54% are on a version that is 4 releases out of date (Gingerbread).
• There are 260 different Android phone and tablet models, compared to just 6 iOS tablet and phone models.
• There are more than 50 different official Android stores, but just one Apple App Store

Of course there are many mitigating factors, but that simply does not matter from a consumer perspective nor indeed from a content owner’s perspective.  Both iOS and Android have got vast App catalogues (750k and 650k respectively) and both have vast numbers of apps downloaded (35 billion and 25 billion respectively).  Both also have huge installed bases of devices: 450 million iOS devices and 600 million Android devices.  But there is only one clear leader in paid content: Apple.

Looking just at music sales, Apple’s music annual music sales (based on the last reported 12 months) equate to approximately $4.00 per iOS device, compared to just 50 cents per Android device.  Apple wins in part because of its longer presence in market, but more importantly because it exercises complete control of the user journey in a closed ecosystem.

The Importance of Closed Ecosystems

The success stories of paid content to date are closed ecosystems: iTunes / iOS, Playstation, xBox, Kindle.  Though the controlled nature of these ecosystems may limit user freedom, they guarantee a quality of user experience.  In these post-scarcity days of content, the quality of experience becomes a scarce experience which people are willing to pay for.  Google simply cannot exercise that degree of control because of its pursuit of a less-closed (but not wholly open) ecosystem strategy.  It depends upon device manufacturers to determine the user experience and also gives other value chain members much more control, such as allowing operators (Vodafone) and retailers (Amazon) to open their own Android stores, as well as, of course handset manufacturers (Sony).

Smartphones with Dumb Users

In a pure mobile handset analysis this doesn’t matter too much.  But from a content strategy perspective it matters massively so.    The problem is compounded by the fact that that as smartphones go mainstream the user base sophistication dilutes.   With so many consumers increasingly buying smartphones because they are cheap and on a good tariff, rather than for their smartphone functionality we are ending up with a scenario of smartphones with dumb users.  (I am indebted to my former Jupiter colleague Ian Fogg for this phrase). This factor arguably affects Android devices more than it does Apple devices because a) they are more mainstream b) they are often cheaper.  This matters for content owners because the more engaged, more tech savvy smartphone owners are also the ones most likely to pay for content.

Google Needs to ‘Do An Apple’ and Not ‘A Microsoft’

With growth slowing in the digital music space, it is clear that new momentum is needed.  Google is potentially the strongest opportunity to bring mass market traction to the digital music space, but currently its music strategy, and paid content strategy in general, is falling short due to all of the reasons outlined above.

Google does however have an incredibly strong set of assets at its disposal, in terms of installed based and growing adoption.  If Google is serious about making its Play strategy a success then it needs to start putting itself first.  Back in the early 2000’s Microsoft expected to be the dominant force in digital music because Windows Media Player was the #1 music player and Windows DRM was the industry standard rights protection.  But instead of pushing ahead with a bold Microsoft music offering it relied upon its hardware and services partners to do it for them.  Just as Google now is sensitive to the concerns of its commercial partners, so Microsoft was then.  Of course Microsoft lost the battle and their softly-softly approach was powerless to fight off the rapid onslaught of iTunes.   Microsoft eventually realized that it needed to go it alone, launching Zune, but it was too little, too late.  Interestingly there wasn’t much of a backlash from commercial partners when it did so. Launching a standalone music strategy was actually compatible with being a platform partner.

Now Google has an opportunity to learn from both Microsoft’s mistakes and Apple’s success by turning its recently acquired asset Motorola into a closed Play ecosystem to rival iTunes.  This doesn’t preclude Android partners from continuing to build their own devices and app stores, but it does create a paid content beachhead for Google, from which it can build a base of highly engaged digital consumers who will quickly learn to value the benefits of a high quality, unified content and device experience.  In a Motorola ecosystem Google can truly allow Google+ and Play to become the glue that binds together its diverse set of valuable assets.  Without it though, Play will continue to struggle for relevance in a fragmented and confusing Android user journey.

Google Consumer Surveys: A Third Way for Content Strategy

I’ve just published a new post over on Media Industry Blog

Google Consumer Surveys: A Third Way for Content Strategy

Google’s new Consumer Surveys product is a typically disruptive innovation from the search giant.  Leaving aside the massive disruptive threat to survey vendors, Google Consumer Surveys gives publishers a new consumer monetization tactic that will help reduce the recurring conflict between paid content and ad strategy.  A struggle which often begets strategic paralysis.  Freemium just doesn’t translate the same way for news as it does for music.

Read the full post here.

Game: How Not to Survive a Digital Transition

I’ve just published a new blog post on the Gaming industry and music industry comparisons over on Media Industry Blog:

It has been an eventful week for the UK Games industry with leading national retailer Game first suspending trading in its shares and then calling in the administrators.  Yet this morning the Electronic Retailers association announced that Games have just become the largest UK entertainment sales category.  So how can these apparently contradictory dynamics co-exist?  The answer lies in the success of Games as a digital product, or rather series of digital products.  There are also some telling parallels with the music industry.

Read the full post here.

When the Media Industries Really Need to Start Worrying About Piracy (and it’s not yet)

I’ve been a digital media analyst pretty much as long as mainstream music piracy has been around.  I’ve tracked the rise and fall of many sites, services, networks, applications and protocols, including MP3.com, Napster, Music City Morpheus, iMesh, Audio Galaxy, Bear Share, eMule, Gnu Network, Kazaa, Limewire, Pirate Bay, Rapidshare, Megaupload etc etc.  The point I’m trying to make – other than my career’s slightly concerning alignment with the rise of music’s grey market – is that the sector is built upon reinvention.  And that power of reinvention is the key reason why the music industry has a bigger piracy now than it has ever had before.

Of course there are statistics that suggest the file sharing is on the wane in a few markets – notably Germany – but overall the problem is getting bigger because:

• Non-network piracy is in the ascendency. P2P is declining in importance as a medium for piracy.  Non-network sharing (hard drive swapping, darknets, Bluetoothing, mini-nets, digital lockers, forums, binary groups, Instant Messaging, music blogs) are collectively more widely adopted than P2P in many major markets and are growing fast.  All tactics of course which are much more difficult to track and police than P2P
• P2P is getting smarter.  And for those who still do use P2P there is an ever growing array of tools at their disposal that make it harder for their activity to be tracked, ranging from encrypted versions of mainstream P2P apps through to the Pirate Bay’s current shift from Torrents to Magnets

Of course media industries are upping their game too, with major legislative efforts in the US, UK and France, though all with mixed levels of success.   The lesson of the last decade plus though, is of course that whatever actions the media companies take, the piracy problem will be more than a step ahead.  Legislation, judiciary process and enforcement are all slow moving beasts.  Typically by the time media industries catch up technology and consumer needs have moved on.  For example the Pirate Bay looks like it could be blocked from consumers in the UK but a quick search on Google for the name of your content of choice followed by the word ‘torrent’ will serve you up an exhaustive list of alternatives.  Pirate Bay simply isn’t needed anymore.

Do we have the right services?

All of these dynamics are probably familiar to most, but I think we may be on the verge of something very different and of far greater concern for rights holders.  One of the key reasons – some would argue *the*key* reason – piracy is still growing is because the $0.99 cent download and the heavily delayed movie release  simply don’t appeal to most digital consumers.  US VC Fred Wilson recently stated in a Paley Centre debate that ‘we are all pirates’ and that if ‘99% of people are breaking the law then it is the wrong law’.  My twist on that statement would be that if ‘99% of people aren’t using the services that they are the wrong services’. (Of course more than 1% use legitimate services but we are still talking about a nice minority).

Don’t get me wrong, we have some absolutely fantastic services out there for the current installed base of digital music customers, but they are patently not the right services for majority of consumers who account for the 95% of total downloads which are illegal (according to the IFPI).  Regular readers will know that I have been building a case for a music format revolution (you can download my Music Format Bill of Rights report here for free).   There are some really promising first steps happening from some promising start ups but rights complexities are acting as a major decelerator on innovation in this space.

What happens if digital piracy starts to learn from the mobile App revolution?

Of course the grey market has no such problem.  They only ever concern themselves with rights issues if they get taken to court or decide to try to go legit (Napster, Limewire, iMesh, Kazaa etc).  To date the focus of piracy technology has been evading the music industry.  But now, with the revolution in high quality user experiences that the App market has created, there is a very real risk that much of this ethos will bleed through to the grey market.  Indeed there is undoubtedly some direct overlap between the App developer community and the piracy developer community.

The nightmare scenario for media companies is that the pirates turn their attentions to developing great user experiences rather than just secure means of acquiring content.  What if, for example, a series of open source APIs were built on top of some of the more popular file sharing protocols so that developers can create highly interactive, massively social, rich media apps which transform the purely utilitarian practice of file sharing into something fun and engaging?  If you though the paid content market was struggling now imagine how it would fare in the face of that sort of competition.

In the longer term one could hope that such a scenario would act as an accelerator for liberalization and innovation of rights owner practices, but in the nearer term it would be a death knell for many of the current services that have worked so hard to get achieve what they have within often suffocating confines.

Content monetization strategies need reworking too

I’ve said it many times before and I’ll say it again now, and many times again: fighting piracy requires a big fat carrot to go along with the stick.  More than 300 $0.99 download stores in Europe and North America alone is not a carrot.  Now is the time to give the legitimate sector the tools, licenses and support to innovate like never before.  It is also time to recognize that just because piracy users don’t always spend money does not mean that they are not spending.  In the digital age consumers transact in three equally valuable currencies:  Money, Data and Time. Those currencies however are not equally valuable to all industries (e.g. TV broadcasters value time more than record labels, online newspapers value data more than book publishers etc) But it is time for those three currencies to be equally tapped by digital content strategies across all industries (regardless of whether that currency is valuable to them), with supporting ‘virtual commodities’ trading marketplaces in the backend to ensure that all stakeholder ultimately end up getting paid in the currencies they value most.

Unless user experiences and monetization strategies are innovated beyond recognition then the grey market will do it instead, creating a wave of digital piracy that will do for media revenues what the iPhone did for Nokia’s smartphone business.

Sopa Highlights Media Industry Strategic Failings

The controversial US copyright and piracy acts Sopa and Pipa (see this Wired piece for a Bluffer’s Guide on what they are) have been thrust centre stage by Wikipedia’s planned protest black-out on Wednesday.  It has taken an entity the size of Wikipedia to bring the debate out of the confines of the digerati and to the mainstream.   For that Wikipedia deserves great credit.

And the debate does need to take place in the mainstream.  The effects of the bills (if passed, upheld in the face of legal challenge and then successfully implemented) will be felt keenly by mainstream consumers.

However I am not going to add to the already vibrant and detailed discussion about the ethical and constitutional implications of the bills, nor the legion flaws and ambiguities in the proposed legislation. Instead I want to put Sopa and Pipa in the context of wider media industry strategy and response to digital change.

Sopa, Pipa and the Media Meltdown

Back in my days at Forrester I helped develop the concept of the media meltdown to describe the process of media industries responding to the impact of digitization.

The media meltdown occurs in three key stages:

• Stage 1: Audiences take control of their content consumption via new digital technology (think CD ripping, P2P, on demand video streaming, iPads etc).
• Stage 2: Traditional media industry business models crumble while media companies grapple with denial.  Instead of comprehending that a paradigm shift in consumer behaviour has occurred they think they can turn back the proverbial clock by fighting online piracy and restricting the disruptive threat of legal services.
• Stage 3: There are two potential conclusions, either the media industries comprehend that user behaviour has changed for ever and that they need to embrace that change with new business models, or they fail.  (For more on the media meltdown check Forrester’s CPS blog and the ever insightful James McQuivey)

Of course as with any analytical framework, this is a generalized world view but it provides a very useful lens through which to view media industry anti-piracy legal activity, lobbying and resultant legislation.  It is immediately apparent that Sopa and Pipa fall within stage 2 of the media meltdown but it would be disingenuous to suggest that the media companies that have lobbied for them – and for other acts such as the French Hadopi act and the British Digital Economy Bill – are in complete denial.  Rather what we have is a distortion of priorities.  These media companies and their industry bodies in particular rightly identify online piracy as a major disruptive threat to their businesses.  However,  instead of recognizing that behaviour shifts have occurred around which new businesses should be built, they reason that turning off the tap on piracy will starve piracy of oxygen, until it withers away.

Digital Piracy Perennially Outwits the Pursuer

As well intended as this thinking is, it is flawed.  Digital piracy (in its many, many guises) is all about innovation and change.  Every time media companies manage to finally catch up with digital piracy – either through enforcement, legislation or technical measures – the pirates have already moved on. Fighting piracy is akin to a game of whack-a-mole, but in this version of the game the moles learn.  Every time one is smacked down another one comes up that is smarter, harder to see and more difficult to reach.

Mainstream Consumers Become  the Effective Targets of Anti-Piracy

The simple and unavoidable fact is that piracy will always move more quickly and more effectively than its pursuers.  Technology improvements can be measured in days, even hours.  Legislation takes years.  This dynamic is one of the key reasons why acts like Sopa and Pipa have such far reaching implications for mainstream consumers: the hard core tech savvy pirates will always find ways of evading the counter measures, the mainstream will not.  Remember how DRM inconvenienced legitimate customers and did nothing to impact pirates?  The parallels here are clear.  Of course there are obvious and important differences between digital content buyers and passive pirates, but there are also similarities.  One of the most important of which is that they are often the same people.  Many paid content buyers also access free illegal content: they blend their content acquisition practices, often using free illegal sources for either discovery or the content they are just not willing to pay for, and then paying for the rest.

Legislation is Fully Necessary But Strategic Priorities Need Rebalancing

To be clear, this is not an apology for piracy, nor is it an argument against legislation – indeed it is crucial that laws evolve quickly enough to keep up with digital change so they can establish the frameworks in which legitimate content business models can prosper and illegal ones cannot.  Instead I am making the case for a rebalancing of strategic priorities and for taking the long view.  Consumer behaviour has changed for ever.  More people are consuming more content across more platforms than ever before, but fewer of them are paying for it.  Making free illegal content harder to get will only weaken consumption and demand unless game-changing legal alternatives simultaneously fill the vacuum.

For example, turning off access to the Pirate Bay and then pointing users  to iTunes will fall far, far short.  Media companies need to get brave, like never before, and quickly so.  They need to start looking at what makes the illegal services so threatening to them and then give legitimate companies licenses to do just the same, legally.  Some media industries get this more than others. For example the TV studios quickly realized the best way of fighting free was with free itself, launching Hulu, ABC.com and iPlayer as genuinely compelling (in fact even more convenient) alternatives to BitTorrent.

Legislators: Compel Media Companies to License to Identikit Legal Alternatives

If the US Congress wants to ensure that Sopa and Pipa are balanced in a way that will help drive digital innovation rather than stifling it in favour of analogue-era protectionism, they should look to baking-in binding innovation commitments from media companies.  To ensure that for every type of illegal service that is wiped out of the US-facing Internet, the opportunity is created for new companies to offer the same type of service legally, with guaranteed licenses from media companies (i.e. without being watered down to irrelevancy with usage restrictions).  Then Sopa and Pipa could become the foundation stones of a period of unprecedented media industry innovation that would finally recast the mould of media business models in the post-meltdown world.  The alternative is media industry failure.  Though they might not realize it, the media industry lobbyists are currently on track for hastening their industries’ demise, not safeguarding their futures.

Is the Music Industry Going the Way of the Newspaper Industry?

The newspaper industry has had to grapple with a seismic shift in user behaviour over the last 15 years: people just aren’t buying newspapers in the numbers they used to and crucially newspaper buyers are getting older, to the extent that the long term prognosis is for the bulk of newspaper buyers to die off….literally.  The irony (in a cosmic irony Alanis Morissette-type usage of the word rather than literal irony) is that more people are consuming more news than ever before, and young people too.  But most of that consumption is online and free. What newspapers haven’t yet figured out is how to turn this into a business, and all the while (to mix my clichéd metaphors) watching their cash cow whither on the vine.  The reason for this potted history of the 21^st century newspaper industry is that it is looking increasingly the case that the music industry is arriving at a worryingly similar place.

Another year of digital stasis.  With 2011 sales figures beginning to come in, the scale of digital music’s recent underperformance is becoming increasingly clear.  In the UK overall music sales continued to decline with digital some way off yet from being able to pick up the slack.  The UK’s record label trade body the BPI reported that digital growth wasn’t enough to prevent a 5.4% decline in total album sales.  The picture was more positive in the US with Nielsen reporting that album sales actually grew for the first time since 2004, up 1.3% on last year.

But the US and UK numbers aren’t quite all they seem.  Both the BPI’s and Nielsen’s numbers are for unit sales.  One of the consumer benefits of the music industry meltdown has been aggressive discounting, with labels and retailers having to slash prices to persuade us to buy in numbers.  While this is great for music fans it means weaker profits for labels and that revenue sales trends are weaker than volume trends.  And that means that the UK revenue decline will likely be worse than 5.4% and that US revenues may well be down on 2011 despite the positive performance in units terms.  With a decade of digital sales already behind us this is the stage where digital sales growth should be rocketing and lifting the whole market with it.

The continued dominance of the CD. Albums are by far the most valuable component of music sales and despite positive digital growth the album remains largely unaffected by digital.  76% of album sales in UK are CDs and in the US the rate rises to a whopping 82%.  When the CD hurts the music industry hurts.   Nearly half of the growth in US albums sales came from increased CD sales.  Perhaps even more concerning is that three quarters of all US albums sales are offline.   Thus the music industry is depending on non-net-savvy consumers who don’t even buy online for the lion’s share of their income.  And CD buyers aren’t spring chickens either: nearly 40% of them are over 45.  On either count that is not exactly future-proofed revenue.  The echoes of the aging newspaper audience are depressingly obvious.

The CD: the Music Industry’s Heroin (and not in the female hero sense of the word).  Another similarity between the newspapers and record labels is their addiction to their respective dying formats. The direct consequence of poorly performing digital revenue strategies is that physical revenues become all the more important which in turn makes labels and newspapers less willing to pursue ambitious digital strategies that might hurt physical sales.  Which of course results in digital sales underperforming further and the whole thought process starts again.  This circular logic begets strategic paralysis.  Unless the record labels learn how to kick their CD habit they’re going to find themselves presiding over perennial long term decline.

The danger of ‘the Adele Effect’.  Both the UK and US sales numbers were dominated by Adele, with her landmark album ‘21’ topping charts in both markets and selling over 13 million copies (becoming the biggest selling album in a single year in the UK).  Uniquely well-performing albums like ‘21’ have a habit of creating reality distortion fields.  As I explained in a previous post Adele, along with Coldplay, is an increasingly rare breed: an album artist.  Adele and Coldplay both appeal to the older album buyer (which is exactly why Coldplay won’t let ‘Mylo Xyloto’ go on Spotify until sales have peaked).  The strong performance of both these artists’ albums in 2011 has helped boost albums sales, but more importantly they lend a veneer of vitality to the album market that is not accurate.  More typically 21^st century artists – the likes of Pitbull, Rihannna, Katy Perry and LMFAO – will be measuring their 2011 success in terms of singles sales, live sales, merchandize revenue, YouTube views and Facebook likes.

Rumours of the CDs’s demise are much exaggerated…perhaps. Of course the album is far from dead – after all, as we have seen, the CD remains the bedrock of music sales – but it is becoming just one, weakening, part of a broader mix of artist revenues.  In some ways artists are better protected from the music industry meltdown than record labels: they – along with their managers – are rapidly acquiring new skillsets and business acumen.  Record labels however are left having to put a positive spin on the album’s apparent longevity.  However the fundamental fact remains that the CD is a dying breed.  It may have a good few years left in it yet, but the long term prognosis is terminal.

Innovate, innovate, innovate! Newspapers and record labels are both at a crucial juncture: physical format revenues will continue to pay the bills for the coming years but paradoxically they must pursue radical format and product innovation strategies that will actually hasten the demise of those same physical revenues. If they don’t, record labels and newspapers will find themselves with the lose-lose scenario of depleted physical revenues and pitiful digital income.

Next week I’ll be publishing a free report that lays out the vision for exactly what that format and product innovation needs to look like.

Ecosystems In The Age Of The API

Walled gardens, Ecosystems, Platforms, call them what you will, but the mechanisms through which our digital content experiences are managed have evolved much over the last 15 years.

In the early days of the web, ISPs tried to control our entire online lives by building proprietary walls around users.  These so-called Walled Gardens were exemplified by  AOL.  But as Internet users got savvy  they banged away at those walls until they crumbled under the weight of inevitability in much the same manner as the Berlin Wall did.  Mobile carriers briefly brought Walled Gardens back from the dead (and there’s still an extended death rattle in some parts), but these days we expect our Internet journeys to be broadly free.  I say ‘broadly free’ because of course many of the destinations on our digital journeys are not open, and some of them are harder to get in and out of than others.  In fact the journey of the digital consumer is analogous to that of a traveller in Medieval Europe.  The highways are sometimes wild and unpredictable, while the coveted destinations are walled cities and heavily fortified castles.

Ecosystems are the success stories of paid content

The reasons the walls exist in the digital realm are not entirely different from that of Medieval Europe’s mercantile cities.   Walls protect their inhabitants from unwanted external intrusion, but most importantly they guarantee those inhabitants a quality of existence that could not happen externally.  This is why ecosystems are the success stories of paid content.  The xBox, Kindle and iTunes ecosystems have all succeeded in converting portions of their users into paid content buyers at rates unachievable elsewhere.

Walls alone though aren’t enough

As many a newspaper will tell you, simply throwing a pay wall up around your content doesn’t magically create a loyal paying audience.  The reason that iTunes et al work is because the priority of their walls is to create and guarantee a quality and consistency of experience within them.   Protecting against external intrusion is of secondary concern.  Once you have created a high quality experience within those walls, then you can start thinking about leveraging revenue.  Just in the same way a successful Medieval city state that could guarantee prosperous trade and commerce within its walls could also demand greater taxes from its subjects than one that could not.

Take the example of xBox Live, the networked gaming component of xBox.  When the service was first launched it was a gimmicky extra.  But when, years after launch, Microsoft turned off access to Live to xBox users who had pirated games on their consoles there was a massive outcry from jilted (pirate) users who claimed that their xBox experience was useless without Live.  What Microsoft had done was use the confines of their ecosystem to create a unique experience that could not exist externally and of which users quickly realized the emotional and monetary value.

A new generation of ecosystems

But as successful as closed, device-based ecosystems are, things are changing, quickly.  We are seeing the emergence of a new breed of ecosystem that doesn’t have the straightforward mechanism of a device operating system to define its boundaries.  Instead this new generation of ecosystem almost paradoxically uses openness to create its closedness.  These ecosystems use software developer APIs to create vibrant platforms in which a quality of experiences exist.  Nobody exemplifies this approach better than Facebook with their Socially Optimized Web Strategy. 

The net result is that we now have three key types of Content Ecosystem Models co-existing (see chart).

• Closed Door Ecosystems: these have the most impermeable walls, typically defined by the operating system of a family of devices.  Apple’s iTunes is the best of breed example.  User experiences and all externally developed experiences (typically Apps) can only exist within the ecosystem of supported devices. 
• One Way Ecosystems: these leverage software applications to define boundaries, but unlike Closed Door Ecosystems they do not have the benefit of proprietary hardware so rely upon the quality of the experience delivered by the software.  To help achieve this, One Way Ecosystems leverage developer communities via APIs.  This enables bite sized chunks of the  ecosystem’s experience to be delivered externally, though almost always with a view to ultimately encouraging users in, or back in, to the centre. Control is exercised by ensuring that a core level of experience, and Apps, can only be experienced internally.  A contemporary example is Spotify, who already support some externalization, but last week announced the creation of an internal, closed wall API platform.  Thus Spotify aims to benefit from the external reach of the API era while simultaneously reaping the rewards of the Closed Door model.
• Revolving Door Ecosystems: these are the true child of the API era.  Typically they exist without an OS or other proprietary software to define their boundaries.  Instead they leverage APIs to deliver a subtler but highly effective ecosystem that fully supports inward and outward flows of externally developed experiences and Apps.   What protects these ecosystems from disintegrating under this laissez-faire approach is tightly policing the flow of data, so that the ecosystem’s data and context is depended upon entirely to deliver the value of Apps and other experiences.  Facebook isn’t the only example of this approach but is simply leagues ahead of anyone else.

The value of uniqueness

The secret ingredient of success of any ecosystem is uniqueness,   a monopoly on control of uniqueness.  A uniqueness that consumers know they cannot experience anywhere else.  However uniqueness isn’t just valuable for the technology companies building ecosystems, it is a crucial commodity for media companies in the digital age.  Piracy and the wider Internet swept away media companies’ monopoly on supply, so now uniqueness is the most important tool they have left to create new senses of monetary value among audiences.  Only when uniqueness has been achieved, can other important assets such as context, convenience and curation be fully brought to bear.

It is easy to fear ecosystems (indeed there is much to give cause for concern) and there are growing issues about how competing  ecosystems will co-exist (if at all).  But they are also the key to successfully monetizing content in the digital age, and they will continue to evolve.  Devices transformed Walled Gardens into Ecosystems, and APIs have transformed Ecosystems into Platforms.  Change will inevitably continue at a bewildering pace, but  the challenge which media companies must rise to, is to become active participants in, nay, catalysts for that change, not shell-shocked observers.

 

A Call For Input Into a Report!

I am currently writing a report that looks at how music fans can be pulled into the creative process and how this dynamic can then be used to transform music release cycles, formats and products.

The report will look at how artists can use emerging digital and social tools to deepen engagement with their fans and how best practices can be turned into standard practices.  This will encompass mash-ups, remixes, fan co-creation, fun-funding and fan-customization.

If you are an artist, or a provider of any such services and have experiences or case studies which you think would be valuable to include in the report then please email me at musicindustryblog AT gmail DOT COM.

The report will be available for free to readers of musicindustryblog.

Can The Music Industry Afford Pandora to be the Shape of the Future?

The music industry has been following Pandora’s IPO with baited breath and has largely been encouraged by the degree to which the financial markets value one of the few true gems of the digital music space. But it doesn’t all smell of roses. Indeed Pandora’s Tim Westergren has made no secret of his concern over how large a share of his revenues are accounted for by royalty payments: they are by far the largest single cost and following a (very) brief spike into profitability Pandora remains unprofitable, despite massive consumer adoption.

The debate about royalty payments and music service profitability is well documented – profitability remains a wishful daydream for Spotify and even Apple only just break even on iTunes. But a quote from Pandora’s CTO Tom Conrad opens up an intriguing new angle:

“The figure that surprises most folks is that about 80 percent of music consumed each week comes from music radio. Only 20 percent comes from owned music. We’re really focused on defining the future of radio. That’s the mainstream opportunity.”

If streaming is the future of music consumption it raises some big questions because there are inherent tensions and contradictions in the current situation:

1. Digital music is a low margin, often loss-making business for services
2. Streaming services (including iCloud etc.) are helping driving a paradigm shift from ownership to access
3. Yet those often ad-supported streaming services (especially semi-on-demand services like Pandora) don’t generate enough income for the music industry.

The irony is that the more successful they become in terms of listening hours and user adoption the more rights owners feel concerned about them cannibalizing higher value ownership based transactions such as downloads and CDs. And in turn the more tempted they may be to hike royalty fees.

Radio has always played a dual role for the music industry: it has been the best discovery service out there but also the single largest competitor to music sales. The paradox is that many music fans wouldn’t buy as much music if they didn’t have radio and yet also many radio listeners would buy more music if they didn’t have radio.

The future of music consumption is going to become increasingly access-based. There’s simply no escaping the fact. And yet the current digital music value chain is not prepared for it. Something needs to change, and soon. More common ground needs to be found between rights holder and services but also new types of services are required that throw the out-dated distinctions between ownership and listening out of the window.

The future of music will be access based, but access has to mean much more than streaming alone.