Commentary: Digital denial

By George F. Colony, Chairman and CEO

Digital media will transform the music and film industries--whether they like it or not.

The entertainment industry is full of so-called "rebels" who pray for the status quo. The industry uses lobbyists, lawyers, PR and politicians to fight for the perpetuation of its safe and very profitable business models.

And entertainment business models have worked phenomenally for the past 75 years. Edwin Booth, the superstar stage actor of the mid-19th century, had fame and a modicum of wealth. But he was compensated, inflation adjusted, in his lifetime, at less than what Mel Gibson brings in per movie. John Phillip Sousa was renowned for musical compositions and performances at the turn of the century, but his career take was less than what Eminem made in 2002.

What created this flood of money for today's artists and the companies that sponsor them? In a word, technology. Radio, records, film, tape, home audio, television, VCRs, CDs, and DVDs opened up avenues for syndicating music and film and drove high compensation. The U.S. Constitution doesn't guarantee Harrison Ford $25 million per movie. Technology got him to that figure.

Technology can create extraordinary business equations as it did with entertainment. And technology can rewrite the formula. There are three inexorable factors that are changing the equation for entertainment.

First, in the future there will be no medium--no piece of plastic, no spool of tape--that will contain film or music content. The DVD is the last digital medium for film. Beyond it lies no medium. Music or film will be just another pile of bits sitting undifferentiated alongside bank account statements, credit card information, voice mail, e-mail and other data that will freely slosh around in a consumer?s life. There will be no "there" there.

Second, consumers want liquidity in their entertainment product. Much of the MP3 ripping and burning that infuriates the Recording Industry Association of America is devoted to achieving mobility--getting tracks onto CD compilations or into computers that travel with listeners. The great-grandson of Wi-Fi will link your car, home and work locations. When you park your car at your house, the digital music system in the car will replicate with your house system--so that all music in those two locations is synced. When you drive to work, your work systems will be synced. Bits will migrate with you as you move through life.

		Related story Licensing labyrinth The studio battle over protecting copyrights is worthy of a Hollywood script.

• What it means No. 1: The entertainment world?s compensation will fall back to earth. Aerosmith makes $5 million a year from its recorded library. Would the band still be in the business if it only made $1 million? The world of entertainment production is riddled with $3 million-per-year screenwriters who never get their movies made, key grips getting paid $175,000, and assistant assistant production managers making seven figures. It?s a world that has become recklessly overpaid and vastly inefficient because the business model lets it. There will still be a lot of money around even after the rules change. The Grateful Dead welcomed taping at their shows. Jerry Garcia died rich.

• What it means No. 2: The liquidity of entertainment will explode. I was recently talking with Hitachi executives in Japan about how disk drives are about to start popping up in lots of consumer products--refrigerators, projectors, television sets, CD players, boom boxes and cars. The first wave of this trend is, of course, personal video recorders like TiVo's. The next front is radio, with the ability to easily record digital music. Satellite radio and digital television will prove to be a much bigger problem for the entertainment industry than Napster ever was.

• What it means No. 3: New entertainment moguls will get minted in the next five to 10 years. The new David Sarnoffs and Sam Goldwyns will embrace the new reality and codify workable business models. I thought that Steve Case or Thomas Middelhoff might have had a shot. But the interests of AOL Time Warner and Bertelsmann won't stand for revolution. They?ve got too much to lose when the rules change.

Lawyers and lobbyists can't stop these trends. End the denial. Get over it, get on with it, figure it out. Or end up in the dustbin of history with sheet music publishers.

© 2003, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.