The disruptive impact of the Internet on the content industry – Music, movies – is now a known fact. The nature of the disruption, however, is not so well understood. Music majors and large media groups have grown out of the necessity to manage limited bandwidth and related resources. Up until recently, physical constraints had limited the number of TV channels and radio stations, which meant that those stations acted as de facto gatekeepers and could select who would go on air and who would not. They worked hand in hand with the majors, who performed the same function upstream. In a world of plastic, launching a new song was very expensive: expensive studio material had to be used, discs had to be physically created and distributed, so artists had to be selected and only a few could be produced. The business was about how to fill available physical slots in the most profitable way. Thanks to these industry players, people in the twentieth century were able to enjoy music, as they had not been able ever before. Radio stations and majors played the indispensable role of gatekeepers and, logically enough, could set up tollbooths to be rewarded for their service.
Enter the Internet. Bandwidth becomes massive, to the point where just about anybody can be a broadcaster for 20 dollars per month, the cost of duplicating a song drops to zero, and so does the cost of distributing it. All physical constraints that had made gatekeepers necessary have now disappeared. Only the tollbooths are left standing. Add to this the falling cost of electronic equipment that now allows an individual to create his own recording studio for a few thousand dollars and one additional need for major, i.e. the need to share expensive recording infrastructure, simply disappears.
As a result of this disruption, content owners, and more generally industry participants, need to confront a few home truths.
Firstly, at any point in time, more than twenty million users are connected on eMule, sharing about 800 millions different files. No other system today comes remotely close to offering such choice. A friend of mine was looking for a Fassbinder movie in his hometown. Of course, the local library didn't have anything like this. Neither did local music shops. Only eMule had it. The first and most important value offered by eMule is not the fact that it is "free". It is that it is the only system that offers availability of almost any content. eMule fulfills a role nobody else is fulfilling.
Secondly, teenagers have grown up finding it perfectly normal to download their songs for free, and they hate the very idea of giving money to music majors who already have plenty in their pockets. You do not pay for oxygen, so why would you pay for files on the Net?
Thirdly, law enforcement will only go so far in solving the issue. Be it for drug dealing or consumption, prostitution, gambling or alcohol drinking, the criminalization of a behavior has rarely been shown to successfully stop that behavior if it is socially accepted by a significant part of the population. On the contrary, it has always provided additional arguments by polarizing the parties and adding a militant dimension to the "criminal" behavior.
Lastly, history shows that when a function is not needed anymore in a market, no matter what, the function will disappear. Remember the gasman? What is the use of a gasman when the public lighting becomes electric? When the content becomes digitized, majors, at least in the form they have existed until today, are not needed in the market anymore for most the functions they perform, except for the rights they hold to content.
The digitization of content is a major evolution that forces industry participants to rethink their business models – they need to find new ways to monetize the content. Established players, in particular content intellectual property holders, are still reluctant to admit that things have changed and draw consequences. Internet pundits criticize them, but do not offer a viable alternative. Obviously, content providers cannot embrace the "open source" model and give away their content for free. But all the same, they must resist the "Cramming" attitude, i.e. the tendency to apply existing ways of thinking to radically new things.
To see where value could be derived in a digitized world, let's step into the shoes of your typical teenager hearing a cool song for the first time on TV. In theory, the teenager can launch eMule on his PC and get the MP3 file for free. As we have argued before, eMule will certainly have the song, and so getting it is easy and free. So why pay for it? In practice, however, experience shows that using eMule is not so convenient, and its experience is rather poor for several reasons:
Firstly, eMule is non-deterministic – You never know when, or even if, you will get the song you asked. You may get it in ten minutes, ten hours, or ten days, sometimes never. There is no time guarantee, and indeed no guarantee that you will get it. If you really want a song, that is problematic. If you want it now, it's a show-stopper. eMule is anything but the killer app in a world of instant gratification.
Secondly, there is no guarantee of quality – You may finally get the song you wanted only to discover that the record is not full length, the bit rate is too low, or worse that the file is a fake. Try to download Star Wars III and chances are that you will end up with an adult movie.
Thirdly, eMule is complex to manipulate. Despite its quality, eMule is still a techie's application. Many people are happy with it and use it, but your accountant won't use it and chances are that your 'GenY' teenager will quickly tire of it.
In sum, while eMule will always be popular with some people, it does not provide a satisfying experience for mainstream users who quickly get frustrated because it does not meet their needs, which is to listen to the music they want, when they want, which is usually now. To make an analogy, using eMule for music or movies is like going to a supermarket for shopping, never being sure that your favorite ice cream will be available, and even if it is, having to wait until you actually eat it to be sure it's really what the package claims it is.
Let's go back to our teenager: Does the teenager want the song itself? Not really. What the teenager wants is to hear the song now, on his MP3 player. What he wants is to experience the content, not the content itself. The intangible bit over and above the bare content is what we call experience. In a fully digitized world, we contend that people do not want to pay for content anymore, but that they are ready to pay for experience. More precisely, they are ready to pay providing that paying does not disturb the experience. In most cases, the problem is not so much the transfer of money than the disruptive nature of the payment process which often makes it easier to enter through the window rather than through the door.
To reuse the supermarket analogy, we've all made the same experience: there is an expensive supermarket nearby, and a cheap one in 10-minute walking distance. Every time we shop in the expensive one, we complain about the outrageous prices. Yet, we keep coming back, because the cost of the higher prices is offset by the benefit of the shorter distance. While in relative terms, a 10 or 20% premium might seems like a high price to pay for a little convenience, when viewed in absolute terms if we buy small quantities each time, it makes sense (a few dollars more). In the end, most people will settle on a regular pattern: some will always go for the cheap shop, but most will do the occasional trip of bulk buying there, and stop by the shop nearby every other day. Some people are ready to do anything, i.e. trade quality and convenience for price, either because they are poor or because they are militant in some way ("screw the big guys"), but this is not a dominant behavior. Most people are ready to pay for convenience. They are ready to pay for all the intangible things that are added to the 'bare' product, a key insight that the marketing guru Ted Levitt highlighted by saying "People don't want to buy a quarter-inch drill; they want to buy a quarter-inch hole". People buy the result, they don't buy what creates the result even though they have to pay for it.
This analogy provides an avenue to rethink the value extraction in a digitized world along new lines: Most people don't want to pay for MP3 files. They will never pay for MP3 files. Who could be so stupid to pay for something they can get for free? They will not pay for the product. But if they are offered convenient ways to access music and movies at a reasonable price, they will pay for that experience. This is the beauty of Apple's iTunes. And it shows that value is moving from content to experience provision.
Ring tones provide a good example of how access provides greater value than content: people have been shown to be ready to pay for a ring tone that was created in a few minutes on a computer and use it on their mobile phone. That is because there is
no substitute for the experience. What this simple example highlights is that, first and foremost, value is about avoiding substitutes. You won't make money by providing MP3 files because people can get these MP3 files for free with eMule. But you can make money by allowing people to easily change the ring tones of their mobile phone, because there is no easy free substitute for that. No surprise, then, that the global ring tone market is already worth about $3.5bn a year.
Let's take another example, closer to our topic. In 1999, a voice-over Internet application called BuddyPhone was introduced. For the first time, one could call from computer to computer for free. It worked very well. Yet, when Skype was launched in 2003, it all but wiped out BuddyPhone, which in fact had never really taken off beyond a small circle of relatively computer-savvy users.
The reason? Experience. While technically Skype was not particularly superior to BuddyPhone, it had the ultimate winning feature of being usable the moment you installed it. Skype's experience was superior to BuddyPhone's. Even your mom could use it.
Sports events provide another good example of the value of access. While watching last week's match might be of interest, most fans are primarily interested in watching a match live. For sports events, the live experience indeed represents a crucial proportion of the total value, far superior to the content itself. This is why piracy of past events is very low, and why the content is not in danger of commoditization.
Based on these examples and on Levitt's insight, it is possible to establish an axiomatic blueprint:
Firstly, while most people will not pay for multimedia files, they will pay for a convenient way of enjoying the multimedia content.
Secondly, and accordingly, value has moved from content to the provision of experience for which there is no easy free substitute.
The immediate implication of the migration of value from content to experience is that the dominant players in a fully digitized world will be the ones who provide the experience. Content producers loose their dominant position not because content is not important anymore – it's even more crucial – but because digital content is commoditized. Experience providers – mobile operators, TV channels, Web sites – win because they are the experience providers.
Content producers – IP holders – must work with experience providers to create new experiences and in the process accept that they will eventually extract less value in relative terms in the digitized world than they did in the plastic world.
Let's take one last example to illustrate this. Someone was recently offered a Sony MP3 USB key. The initial excitement quickly waned when he realized that he needed to install special software to convert his MP3 files to the key. He then realized that the key could not handle podcasts. Notwithstanding the fact that the software was cumbersome, in the end, the MP3 player was complex to use, even as a bare USB key, and it ended up, literally, in the bin. Contrast this with iTunes which has pushed the quality of the user experience to such extreme that it has become a legitimate basis for a paying content experience provision.
Value in the digitized world lies in offering a convenient way to experience multimedia content, not in the content itself. What the iTunes example shows is that user interface – as the driver of the whole user experience – becomes central, and software design may well be the ultimate core competence, making it likely that experience providers, and experience creators, will dominate the new environment the way content owners have dominated the old one.