Monday, October 1, 2007

Online Music and Video Sales Continue to Grow

From the desk of Lee Distad's Professional Opinion:

I was going to title this, “The Challenge of Online Music Sales” but then I realized that by excluding video, I was being hopelessly 2001.

Paid downloads are here. They’re bigger than ever, and some retailers and content owners (we used to call them Record Labels when I was a kid) have embraced the new business model, while others have reluctantly ducked their toes in the water. More and more, consumers are using these services, and online music and video sales continue to grow, at the same time that hardcopy sales in traditional retail stores continues its slow, stately decline.

But none of that is news, I’m just pointing out the obvious. What’s worth talking about is why some companies are doing fantastically well, and others have been struggling.

On the winning side, you’ve got 800-pound Gorillas like iTunes and Wal-mart who sell huge amounts of downloadable entertainment. In fact, I’d say that iTunes is practically synonymous, Kleenex-like, with the whole business. Along for the ride are smaller content providers, whether resellers like MusicGiants, or labels like Naxos, the specialty classical label, which have found the online sales world to be very much to their liking. In fact, Naxos founder Klaus Heymann was recently quoted as saying “We could live comfortable [sic] if from tomorrow we never sold another CD.”

Then you’ve got the losers, like Sony’s Connect service, and Virgin Digital, each of which has announced that it’s rolling up its operations.

So what’s the difference? Why are some online download services floundering, while others flourish?

My bet is that it is how the audio and video is delivered to the customer. The winning sellers offer content in common formats, such as mp3 or WMA. Due to Digital Rights Management, the content is not 100% wide open once it’s on your computer, but once it’s on your hard drive, it’s yours, more or less. Compare that to Sony Connect, which made use of their ATRAC format, which locked you in to using a Sony portable player, or Virgin Digital, who charged a monthly licensing fee to maintain access to your music. Former Virgin Digital customers will no longer be able to access their music files once their current licences run out.

It appears that customers are voting with their wallets, and are resistant to business models that exert too much control over how they enjoy their entertainment. DRM remains a contentious issue, but my impression is that the groundswell against it is gaining momentum: more and more content is being offered DRM free. In the face of that, will locking content with DRM remain viable in the marketplace? (For more of Lee Distad's Professional Opinion)

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