Media Companies: Your Nightmare Piracy Scenario has Arrived, And Its Called Popcorn Time

Two years ago I said that the nightmare piracy scenario for the media industries would be when the pirates gave up trying to fight enforcement and turned their attentions to build great user experiences.  Now with the arrival of Popcorn Time that scenario has come to pass.  However bad piracy might have been for media companies, it is just about to get a whole lot worse.  This is the new era of Experience-First Piracy.

Popcorn Time is an open source interface that sits on the top of pirated video content on torrents.  Instead of downloading the video Popcorn Time streams them to the end user, with titles selected from a neat Netflix-like interface.  In fact one might argue a ‘Netflix clone’ interface (see figure) but with new releases that Netflix does not even have.  On top of all this Popcorn Time is open source, with installer and project files all hosted on developer collaboration site GitHub, and with the app built on a series of APIs.  With multiple development forks already this is an entirely new beast in the piracy arena.  Forget whack-a-mole, this is potentially a drug-resistant, mutating contagion.

popcorn time

In fact Popcorn Time looks exactly like what I envisaged two years ago:

“What if 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 thought the paid content market was struggling now imagine how it would fare in the face of that sort of competition.”

Piracy for the Mainstream Consumer 

Until now, piracy was largely the domain of youngish tech savvy males (69% male, 50% under 35). Popcorn Time and the inevitable coming wave of new Experience-First piracy apps will give piracy truly mainstream appeal.  It looks and feels just like the real thing, only for free and with even better content.  What’s not to like?  Worse still – for media companies, not consumers – these sites might – even have a legal defense as they do not actually host any of the files.  The emphasis there is on the ‘might’ as it is an argument that ultimately the Pirate Bay was not able to defend in court.

Three Ways to Hit Back at Experience-First Piracy

So what can media companies do to respond to Experience-First Piracy? Legal action will be the first port of call but ultimately it is a pain killer, not a cure.  The problem itself needs addressing with three key strategic focuses:

  • Windowing: Netflix can only dream of having the content Popcorn Time has, just as early licensed music services could only dream of having the catalogue Napster had in 1999/2000.  The movie studios need to learn that lesson fast, and treat Netflix and Amazon Prime etc. as tier 1 release window partners.  As soon as a release is ready for its first post-theatre window it should go straight onto the paid video services.  BlueRay and DVD are fading yesteryear technology, the media industries’ most engaged and valuable audiences are online and using online services.  It is time to treat them as first class customers, not second class ones.
  • User Experience: Before Experience-First Piracy, the retort to media companies was that all they needed to do in order to stay ahead of piracy was to create more compelling alternatives.  Now the ante has been well and truly upped.  There will never ever be the user experience gulf again.  That time has gone.  This means licensed services have to be continually pushing the user experience envelope, using their capital to hire the very best designers and developers.  Which means that content companies need to saddle them with as little up front rights acquisition debt as possible, freeing them up to spend big on development and design.
  • Pricing: The harsh reality of the internet economy is that when something is widely available for free you have to make your paid-for product even cheaper than it was intended to be.  For Netflix and Spotify et al, that means getting below $5 a month.  Ironically this happens at just the time that Amazon increases its pricing for Prime and Netflix is considering increasing its pricing in order to cover higher rights costs.  Media companies have a crucial decision to make: do they want to get more revenue per user out of a user base that will quickly lose share to Experience-First Piracy, or instead do they want to take a near-term revenue hit in order to shore up their digital service partners’ longer term future?

The fact that piracy has spent so long locked in a user experience quagmire is testament to the media industries’ counter measures: pirate sites were just too busy figuring out how to evade enforcement to focus on user experience.  But now that era has come to a shuddering halt.  It is difficult to over state the dramatic effect Experience-First Piracy will have on the paid content landscape unless media companies do everything within their powers to help the nascent licensed services respond in kind.  The smart companies realized long ago that content is not the product, experience is.  Unfortunately the pirate’s just figured this out too.

Why Radio is Stuck in the Middle of a Streaming Pincer Movement

2014 will be another year of growth and of controversy for streaming, with much of the debate set to focus on how streaming may, or may not, cannibalize download sales.  The evidence from Sweden and from the US so far suggests that streaming revenues may indeed grow at the direct expense of downloads.  But while we may be some way off from a definitive judgment on that issue, there is one cannibalization threat that is looking increasingly incontrovertible, yet has got far less attention: the cannibalization of radio.  In fact radio faces a two-pronged attack on its two heartlands, the home and the car.

The Home Front

There are many forms of streaming service and each sub-segment is eager to declare its uniqueness.  Spotify and Pandora practically fall over themselves to explain how different they are.  And indeed, in many ways they are, but what they have in common is that they are both direct competitors for radio listening time.  While they do not compete for all radio listening, nor for all radio listeners, they compete for much of the listening of some of the most valuable listeners.    Indeed streaming is looking more like radio with every passing day. The intensifying focus on curation as a means of making sense of 30 million songs is leading to on-demand services delivering a richer suite of lean-back, programmed and semi-programmed experiences.  In doing so the competitive threat to radio intensifies.  Whereas radio broadcasters can rightly claim that radio delivers a low effort, lean back listening experience, streaming services now wear those clothes too and they are not going to relinquish them.

Where things have really heated up though is the surge in streaming playback technology for the home.  Companies like Sonos and Pure have pioneered in-home streaming technology and CES saw this whole sector upping its game.  Music hi-fi is disappearing out of the home and these companies plan to bring it back with streaming at its core.  While radio is a key component of these devices, any hardware that gives a user the choice between traditional radio and interactive streaming is going to mean that radio is directly competing for listening time on that very device.  The home is one of radio’s heartlands, and broadcasters are now having to fend off the unwanted attentions of streaming music services establishing an in-home beachhead with consumer adoption of home streaming devices.

Digital Radio Fragmentation Plays Into the Hands of Streaming Services

Dedicated digital radio devices such as DAB and satellite radio players have only found traction in a handful of markets, with the US and UK notable exceptions at the forefront.  But international and domestic squabbles over competing digital radio standards mean that the global digital radio landscape is a fragmented mess of half-baked trials and aborted roll outs.  All the while internet streaming adoption accelerates on smartphones and tablets.  Radio may even buckle under the weight of this app invasion.  The more radio broadcasters rely on internet streaming for digital strategy, the more they put themselves directly in competition with streaming services, both on-demand and interactive radio.

The Battle for the Car

If the onslaught on the home was not enough, the growth of interactive car dashboards means that streaming services are getting straight into the car too.  In the US SiriusXM has long been held up as a standout success story for digital content with 25.6 million paying subscribers outshining any on demand music service by a country mile. But the same app invasion that is threating radio on smartphones and tablets is now pouring into the car via interactive dashboards. Car manufacturers are striking up deals at a bewildering rate with streaming providers with Pandora and Spotify being particularly active.  SiriusXM had a decent run at things, offering a truly national radio experience in the US, but now more and more consumers will start wondering why they need to pay $15 a month when they can get Pandora and Songza for free.

streaming pincer movement

The Free Music Land Grab

Thus radio finds itself locked in a streaming music technology pincer movement that threatens it like never before.  Radio broadcasters have countless assets at their disposal – talk radio, DJs, market-leading programming expertise – but they cannot rely on these alone anymore.  They have to up their innovation ante posthaste.  They also face a further and utterly crucial disruptive threat from streaming: the free music land grab.

Spotify and Apple only offer free music as a means to sell their core products.  Advertising revenue is a nice way of covering some costs but is not their lifeblood in the way it is for commercial broadcasters.  This means that they can be more cavalier in their ad sales strategies and undercut radio broadcasters for business with rates that might not be sustainable for a commercial broadcaster.  2014 will see these two powerhouses pursue aggressive advertiser strategies and when coupled with Pandora’s burgeoning ad sales record, traditional broadcasters may find themselves becoming collateral damage in the free music land grab.

Is 2014 a Napster Year for Radio?

2014 will be an important year for streaming, but it will be even more pivotal for radio.  It is far too early in the development of streaming to say that this is a make or break year for radio, but it is fair to say that 2014 looks and smells for radio a lot like 1999 did for the music industry.  Back then the labels failed to respond to Napster with innovation and they spent the next decade paying the price.  Radio broadcasters would be well served to –learn from the labels’ mistake.

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For those of you at Midem next week I will be giving a presentation on Monday entitled ‘Making Streaming Add Up’.  See you there.

What the Music Industry Can Teach Book Publishers and Authors About Subscriptions

The launch of eBook subscription service Oyster has set the proverbial cat among the pigeons in the publishing world.  Publishers and authors are frantically trying to work out just what on-demand subscriptions will mean for their business and whether Spotify or Netflix provides the best analogue for them to benchmark against.  It is an intriguing turn of events. Five years ago book publishers looked to the music industry for lessons to learn about digital and they studied voraciously.  More recently many book publishers have been of the opinion that are making digital work in a way the music industry has not, and that the roles of student and teacher should be reversed.  Now we’ve turned a full 360 degrees.   Regardless, this is a fantastic opportunity for the book publishing industry to get subscriptions right at first attempt and to skip many of the painful mistakes the music industry made.

Book Subscriptions Offer a Much Clearer Path to Additive Revenue than Music

There are obviously many, many differences between books and music, but some of these differences actually build a more compelling business case for books:

  • Books take longer to read: as with any form of media consumption, there are multiple different types of consumer, and if your content does too good a job of attracting the binge eater then your all you can eat buffet will start loosing money.  But if, for argument’s sake, we assume that the average book subscription service user reads a title a week then this means that the approximately $2.30 of a month’s $9.99 subscription is allocated to each title (before all deductions and revenue shares etc.). This might not sound a lot but compare that to music: if an average subscriber listens to around 2,000 songs a month and, for argument’s sake, we consider those to all be album listens, the per-title value is just $0.06.  (The share is actually even lower because so much of streaming is single track and playlist based).  So because books take longer to read than a CD does to listen, authors and publishers will see the $9.99 split into much larger chunks than for music.
  • Increasing readership: $2.30 per title is obviously far below a standard eBook list price, but the business case for subscriptions is based upon growing the overall pie, not slicing it.  Ideally subscriptions should both increase the number of people paying and increase the amount people consume. Let’s call the combination of these two metrics the ‘Consumption Quotient’*.  The current average price of the Top 10 best selling eBooks is $5.41, so the book service Consumption Quotient only has to be a factor of 2.3 to be delivering just as much industry gross revenue as eBook sales.
  • Per-reader value versus per-title value: in theory book subscriptions should encourage readers to read more regularly which could push the $2.30 per-title value down.  But the key question publishers and authors need to be able to answer is whether subscriptions will make more readers spend more on books per month. If an average engaged reader only buys 1 top ten title a month then a subscription is already double that value.  So the per reader value has doubled while the per-title have more than halved.  Thus ARPU (Average Revenue Per User) has gone up while ARPT (Average Revenue Per Title) has declined.  This is where the oft-mooted scale argument comes into play.  If an author or publisher is simply think in terms of 1 sale becoming 1 rental then it is a net-loss scenario. But if just over twice as many people read the book then it is a net-gain scenario.  The more people that subscribe and the more that read more books – the Consumption Quotient -the more likely that subscriptions will become additive rather than substitutive.

Simply because books take longer to read, it is possible to see a much clearer route to a net-positive outcome for book subscriptions than for music.  This is a great asset that the book industry should embrace and cherish. 

Starting With a Blank Slate

The book industry also has another great advantage in that it can learn from the travails of music subscriptions and start with a blank slate:

  • Be transparent: instead of getting skewered on the transparency and fairness debate, publishers should work with the services to provide self-serve author analytics right away.  It is a case of when, not if, that this will happen with music, so this is a chance to get ahead of the game and to get authors onside in a way record labels have not yet managed to with artists.
  • Don’t talk discovery and curation, do it: if book subscriptions are built form the ground up to drive immersive discovery journeys, then they can avoid the current music service trap of struggling how to guide users through unfeasibly large catalogues.  Build these services around discovery narratives that create journeys around authors, genres, periods, countries etc and they will thrive.
  • Don’t price out the mass market: $9.99 is a great price for book aficionados, much less so for passive readers.  Lower price points are needed for those readers who simply do not want to commit to paying that amount a month (obviously usage caps will be needed).  And for those who don’t like the idea of being tied into monthly spending (because most people don’t like to spend a set monthly fee on any media other than TV) get Pay As You Go (PAYG) packages into the market as quickly as possible. Beat the music industry to it!
  • Don’t ignore product strategy: music subscription services are an e-commerce mechanism, a billing paradigm.  If you get curation right they can be a programming mechanism too.  But they are not a product, they are simply a means of getting the core digital product to consumers in a frictionless manner.  Which is why the books industry should heed the music industry’s lesson and work with subscription services to ensure that the product itself is innovated too. This means that any video and other multimedia e-book functionality is supported native and that publishers prioritize building such content for these services, where they will become a natural extension of the subscription experience, rather than an under-used novelty in an e-book title.

Subscriptions are clearly the best product set media companies currently have for monetizing the consumption era.  For the music industry they continue to raise as many questions as they answer, but for books they might just be the ticket to genuine digital prosperity.

*’Quotient’ in the figurative sense, not the mathematical sense

Making Freemium Add Up

Today at MIDiA Consulting we have released a new report on the digital content sector entitled ‘Making Freemium Add Up’.

The report combines an unprecedented appraisal of key freemium service metrics with market analysis and recommendations to create a definitive assessment of the freemium marketplace.  In the report we analyse an intentionally diverse selection of consumer web services, looking at the distribution and scale of their user bases and the relationship of these with their business models.  Services tracked range from music services like Slacker, through utility services like Skype to social services like Google+.  It also includes long term data trend analysis of Spotify, Deezer and Pandora.

The report is available for free to all subscribers to Music Industry Blog (to subscribe just add your email address in the Email Subscription box to the right of this post.  If you are already a subscriber but have not yet received a copy of the report by email please email mark AT midiaconsulting DOT COM).

Here are some of the key findings of the report:

  • Inactive users: inactive user rates range from 13% to 77%.  Social services have the highest rates (77% for Instagram and 66% for Twitter).  Inactive users are a key characteristic of all registration based services with free-to-consumer tiers, but the registered-to-active rate is below average for all freemium services However freemium inactive users are also often highly interested customers who simply need hooking up with the right pricing and product. In short, freemium inactive user bases are priceless qualified marketing lead databases.  The challenge is to separate the wheat from the chaff, to differentiate between disinterested freeloaders and potentially valuable paying customers.
  • Paid users: paid user rates range from less than 1% to 90%.  But both ends of the scale are outliers.  At the low end Soundcloud’s premium tiers are aimed at the smaller audience of creators that are just a small subset of its 180 million active users. While at the other end Valve’s gaming platform steam is more digital retail store than pure freemium destination.   The risk for all freemium services is ensuring the free tier isn’t too good, unless free users are your key revenue source (cf Hulu and Pandora). Spotify and Deezer appear to have hit a conversion sweet spot, a solid balance between compelling free tiers and better enough paid tiers.
  • Scarcity counts: a music service user risks little by churning because he can still easily get all the same music elsewhere if he cancels his Spotify subscription.  But if you stop playing Angry Birds you’ll find few other places where you can hurl bad tempered feathered missiles at egg-stealing green pigs.  Similarly churning out of a social network carries a high ‘churn risk’ for consumers as they will weaken their ability to connect with extended social circles online
  • The free-to-paid divide needs narrowing: the gap from free to paid is high, a significant leap of faith is required from the user.  Whereas the gap from zero to $0.99 for Angry Birds free to paid is a modest step, from zero to $9.99 for Spotify or Deezer portable is a much more sizeable hurdle.  Thus converting to paid for music subscription services is a more sizeable achievement than for low priced gaming apps. More needs to be done to bridge the divide.  This can be achieved in through bundles and innovative pricing. Though this must be set against the risk of cannibalizing full price tiers.

making freemium add up

What Angry Birds Teaches Us About the Future of Media Products

Angry_Birds_promo_artAt 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 21st Century content product build for 21st 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):

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.