February 8, 2007 4:00 AM PST
Perspective: Working past Internet file-sharing frustrationSee all Perspectives
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The entertainment industry is all about change and is usually pretty agile when it comes to adapting to new developments, but file sharing has been an endless source of frustration. Reeling from the initial shock of seeing profits drop, the entertainment industry's first response was reactionary. Even a novice marketer should have known that lawsuits were not only an unsustainable strategy, they would alienate the fan base--never a good idea. Seeking new ways to promote and protect old mechanisms such as CDs hasn't worked, either.
Apple rallied with iTunes, a solution dependent on sharing content through one vehicle, the iPod. File-sharers thought it was cute, for about a minute. Today, consumers want access to all portals (Web, cell phone, MP3 players) and all media. They refuse to be locked down to one platform. While iTunes continues to be the best-known site for downloads, its popularity may have peaked.
According to analysis by Forrester Research, iTunes experienced a collapse in sales revenues in 2006. From January to December, monthly revenue plummeted 65 percent, and the average transaction size reportedly dropped 17 percent. If consumers are not turning to services like iTunes for their music, where are they going? The store? Hardly. CD sales have fallen 20 per cent over the past five years.
The good news for the industry is that a huge fan base with a potential for extraordinary profit has emerged. Opportunities for profit lie within the P2P distribution model, including an inexpensive path to market for lesser-known groups and new music.
Entertainment companies need to start where any good business model begins--with the consumer. To find profit in the realm of super-distribution, media providers have to follow the one thing that crosses all media and all portals, and that is the file itself.
As music and video files travel from Web sites to social networks, and from phones to file-sharing services, there are means to track it every step of the way. Like an electronic E.T., a digital media file can phone home at each new location, providing a data portrait of the types of consumers who have an interest in that particular medium. The information captured creates a clear picture of a market and allows companies to develop campaigns to reach specific target audiences. Advertisers, for instance, will pay big bucks for a well-defined market like that.
Here's an example. Let's say a college student downloads a music file by 50 Cent to his cell phone. At the beginning of the file, a screen pops up that offers some other value-added media that might appeal to a 50 Cent fan. This could be a preview of an album by Jay-Z or a review of Dreamgirls. The names of the movie and the other artists will at least be glimpsed by the consumer. This is focused and in-your-face advertising to the extreme.
Unlike lawsuits and decoy files, ad-supported downloading is just one of the many promising ways to bridge the digital divide. The super-distribution model carries content from one consumer directly to more similar consumers. This opens the door to a new breed of advertising, promotions and even targeted selling. Advertisers won't have to conduct surveys to determine where they should send a piece of direct mail or in which cities to purchase airtime.
The Internet continues to be a very good place to do business. The top five global online market leaders (Google, Amazon, Yahoo, Yahoo Japan, and eBay) have a 46 percent higher market value than they reported in 2000. The peer-to-peer (P2P) market, however, has barely been tapped. If P2P is the next big thing, investing in a new advertising and distribution channel at the beginning of its growth curve could be more profitable than the entertainment providers have yet imagined.
Entertainment companies looking for a way to monetize their content need to stop chasing the consumer dollar. That ship has sailed. As consumers become more comfortable morally and technologically about file sharing, they will be less and less willing to part with their cash for content. However, market opportunity abounds for those who adapt and embrace two criticl strategies: First, embrace file sharing and adopt creative new business models, unlocking adjunct revenue from sources with deep pockets. Second, be willing to pay for an innovative inroad into increasingly well-defined markets.
The future of music is peer-to-peer file sharing. Consumers have opted out of the old system, which they found cumbersome, slow and expensive. They will never return.
Les Ottolenghi is CEO of Intent MediaWorks.
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