Originally Published on CNBC.COM on February 21, 2012
Everyone knows who murdered the record labels. Not Professor Plum in the study with a wrench, but Napster on the internet with piracy.
Although this case was solved over a decade ago, I’ve been scouring the cobwebbed files and I believe Napster had an accomplice that got away scott free. Who is this accomplice, you ask? The end of obsolescence.
Once upon a time, if you liked a musical artist you purchased their records. Then eight track players came into fashion. Then cassette tapes. Then CDs. Even when you had the CD, it could get scratched. Then you bought a new CD. Then came iTunes.
This allowed consumers to purchase a perfect digital copy that never degrades and never needs replacing. I downloaded Steely Dan’s opus “Aja” in 2006 via iTunes. Six years later, the sweet jazzy rock of “Deacon Blue” sounds just as good today as it did the first day I bought it.
Ostensibly, the hole in the dam that was music piracy is largely plugged. Yet, record labels have never really come back. Their power has been usurped by touring juggernaut Live Nation [LYV 10.42 -0.09 (-0.86%) ]. Why? In part, because labels have lost the reoccurring revenue from new musical formats and Live Nation profits from a perpetual stream of concerts.
While I have bought “Aja” only once, I have seen the Dan live four times and will happily shell out another $80 next time they play the Gibson.
Now it seems that the end of obsolescence is back for more blood. This time its unwary victim is the film industry.
The “Ultraviolet Alliance” consists of a number of media and technology titans including Warner Brothers, Sony, Paramount, Fox, Comcast/NBC Universal, Best Buy, Blockbuster, Cisco, Microsoft, IBM, and Adobe. Amazon seems to be dipping their toes in to test the Ultraviolet waters as well. Noticeably absent from this cabal: Disney, Netflix and Apple .
In essence, the Ultraviolet service allows a consumer to make a one time purchase of a film and have perpetual access to it on a number of devices. A consumer can download this film, stream the film or purchase a hard disk which also provides a code allowing the user to add the film to their Ultraviolet library. The film may be viewed on a tablet, internet television, smart phone, laptop, console and/or Blu-ray player.
The downloaded copy may be shared between Ultraviolet enabled devices and accessed by up to 6 family members. The streaming ability is only guaranteed for one year, but use and transfer of the downloaded version is guaranteed to be perpetual.
Filmed home entertainment has evolved from VHS to DVDs to Blu-rays to perfect digital copies that never degrade, accessible anywhere. The end of obsolescence.
Davids and Goliaths
For a time, Netflix was the David that knocked the lumbering studio Goliaths on their collective behinds. When Netflix was primarily a hard unit distribution mechanism, they did not need studio cooperation pursuant to the precedent established in the watershed 1984 Sony v. Universal Decision .
The convenience and huge selection of Netflix was the death knell of the traditional studio home entertainment business. However, the sleeping studio giant has had its skinny half café latte, a wave of brutal layoffs precipitated by declining DVD sales and is presently wide awake.
The growing prominence of streaming and downloading films has provided studios an opportunity to change the tide of the battle. Studios own virtually all the content that Netflix rents to consumers. Why share with Netflix when they can keep all the revenue for themselves? Netflix’s volatile stock price over the last year seems to indicate that the balance of power is shifting.
Studios are Goliaths relative to Netflix, but they are Davids when compared to Apple. At the time of writing this article, Apple’s market cap was over 10x that of Time Warner.
Apple’s business model is firmly based on the principle of obsolescence: specifically hardware obsolescence. You buy the iPhone, then iPhone 2, then iPhone 3 and so on.
On top of this, add a reoccurring yearly fee ranging between $20 and $100 for use of Apple’s “optional” iCloud service depending on the size of your digital library. Of course, Apple wants people to download more content through their ecosystem, but unlike studios and record labels their earnings driver is the hardware not the content.
Studios are still reeling from a precipitous drop in the home entertainment business and are placing a large coordinated bet on Ultraviolet to save the day. Perhaps, Ultraviolet will be a shot in the arm for revenue, a way to compete with Apple’s Goliath ecosystem and a solid value proposition for consumers.
However, a long term concern is that by embracing the end of obsolescence the studios may solve a temporary problem by creating a permanent one: patching the current earnings gap by sacrificing the long term ability to monetize their film libraries.