Escaping the Internet Commodity Trap

Winnovation: Rowan Gibson's March Column The Internet is like a black hole that relentlessly sucks in, digitizes and democratizes content of every kind. While that may be generally good news for consumers (hey, look at all the great stuff we can now get for free), it has turned out to be unbelievably bad news for the content providers.

Ask anyone in the print media business, or the music business, or the movie business. For at least the last decade, industries that primarily produce content have been struggling hard to find a viable new financial model in a world where internet users (particularly the young generation) don’t expect to pay for anything they read, listen to, or watch. As one popular mantra puts it: “Content is no longer king”. The fact is, content distribution is now king. Power has shifted to the content aggregators – think Google, YouTube, Digg.com or iTunes – and to new media platforms like Amazon’s Kindle reader or the Apple iPad. So how exactly are content providers supposed to make money in an era of rampant digital commoditization? The only option they have left is to innovate like never before; to reinvent their industry business models before they become obsolete.

I remember talking to Kevin Kelly, co-founder of Wired magazine, back in 1995 about the future of the Web. He told me he viewed the Internet as a “planetary-sized copying machine” and added that “trying to stop copying on the Net is impossible.” Indeed, within a week of my latest book “Innovation to the Core” being published in Chinese, there were at least two websites in China offering a digital version of the book for illegal download. Consumers clearly win – why buy the physical book when you can get the digital file for free? But in terms of book sales and royalties, the author (i.e. me!) and the publishers lose out entirely.

That’s why the book publishing industry is feverishly exploring a variety of new business models. One option is to sell eBooks direct to customers, cutting out middlemen like distributors and retailers, and building a community around the books and authors. Since eBooks have a relatively low price tag, the hope is that consumers will be willing to pay for the genuine article (à la iTunes) rather than download an illegal copy, especially if it comes with social-media-enabled tools that help them discuss and share the book with others. Another option is to make the eBook itself a richer multimedia experience (with audio, video, hyperlinks and so forth) rather than just a text-based medium. Instead of embedding all of these media in a single digital file (which would still be relatively easy to copy and distribute illegally), publishers could give consumers a code when they purchase the book that offers exclusive access to a dynamic, integrated online application environment.

A similar challenge faces today’s music business. Over the last decade, music labels, retailers, and the artists themselves have seen their revenues fall off a cliff in an era when teenagers can – and do – get all the music they want for free. Last year, 95% of music downloads were still from illegal file-sharing sites. And although Apple is now the world’s biggest music retailer, its iTunes store has never been a massive revenue producer. Instead, it simply serves as a provider of low-cost content for the iPod, helping to drive sales of Apple’s premium-priced music player. So far, the latest trend – cloud-based, streaming music sites like Spotify, Rhapsody and Pandora – has not been very helpful to the music industry either. Until now, these sites have employed a free-to-users, ad-supported model which doesn’t generate much money for the labels or the artists. As an example, it’s estimated that a million plays of Lady Gaga’s popular song “Poker Face” on Spotify only earned her a paltry $167.

Frankly, I’m not too worried about the artists because most of them make their money these days on concert revenue and merchandising, not on the sale of recordings. And since people go to live concerts to hear artists performing songs they already know, it’s actually in the artists’ interests to have their music distributed as widely as possible, even if it’s for free, in order to generate a lot of fans. Yet what about the music labels? How can they possibly compete against free downloads? Only by finding innovative new ways to add value. That’s what MusicDNA is all about. It’s a new digital file format that contains not just music but additional content such as lyrics, images and interesting info like interviews, tour schedules, or updates to the artists’ social network pages. Anyone who downloads the file illegally would miss out on all these extras. So MusicDNA offers hope that the industry can open up new revenue streams. It may also point the way forward for Hollywood studios as they look for ways to battle illegal movie downloads.

Another victim of the Internet commodity trap has been the traditional news media industry. According to a new survey by the Pew Internet and American Life Project, more Americans now get their news from the Internet than from newspapers, and three-fourths say they primarily learn of news via updates on social media sites like Twitter. So as readers (closely followed by advertisers) make a mass exodus from print to digital media, “The Press” as we know it seems to be going the way of the dinosaur. In the face of mounting bankruptcies, mass layoffs and plunging advertising sales, some publishers have already thrown in the towel. As an example, McGraw-Hill recently signaled their despair by selling off BusinessWeek at the bargain basement price of less than $5 million.

So is there any hope for this ailing industry? Some think it might still be possible to go back to the old “paid content” model. Rupert Murdoch, illustrious media mogul of News Corporation, has been making headlines over the last year with his plans to erect a pay wall around his media. And, if it works, others will almost certainly follow. An analogy could be the advent of cable TV in the 1960s and ’70s. At first, very few believed that anyone would be willing to actually pay for TV shows and movies after spending decades watching them for free. But today the average household in North America pays about $50 a month for Pay-TV, so why shouldn’t the same principle work for the Internet? There is also new hope on the horizon in the form of emerging digital media platforms like Kindle and Apple iPad, that promise to bring fresh revenues to the news industry by charging readers to access publications in an exciting new way.

Gordon Crovitz, former publisher of the Wall Street Journal, has co-founded a company called Journalism Online to help newspapers find new payment models. These range from micropayments—where readers pay for individual stories—to “freemium” models like the one used by the Financial Times, where readers can view 10 free pages every 30 days.

One of Rupert Murdoch’s properties, The Wall Street Journal already charges readers US$119 a year for an online subscription. The WSJ is also experimenting with a new kind of media mix that takes it beyond the written word. Last September, its Digital Group rolled out News Hub, a twice-daily video news series. In January The Wall Street Journal Network delivered a record 5.5 million streams, with about a million or so views being generated by News Hub. This February the group launched Digits, a video series focused on technology which streams live each weekday, and plans are now in the works for several other original live series.

As whole industries see their traditional business models sucked into the Internet commodity trap, their only hope of escape has become radical innovation. For content providers of every stripe, success and survival in the future will be based on the ability to fundamentally rethink, re-imagine and reinvent themselves by innovating around who they serve, what they provide, how they provide it, how they make money, and how they differentiate from the rest. Stewart Brand’s maxim may have famously stated that “information wants to be free”, which is at the heart of utopian Internet democracy, but the cold reality is that every business has to make money. That means that whether you produce books, newspapers, magazines, music, movies or TV shows, somebody somewhere somehow has to pay. Figuring out who that could be – and how the financial model would work – is one the greatest business battles of our age.

© Rowan Gibson 2009
www.rowangibson.com

Rowan Gibson is a global business strategist, a bestselling author and an expert on radical innovation. He is also one of the world's most in-demand public speakers. Rowan's books have been translated into over 20 languages. His latest book Innovation to the Core is published by Harvard Business School Press. He is co-founder of Innovation Excellence. He may be contacted at [email protected]