Creative destruction in the digital value chain

I’ve blogged this before with respect to music, but I have been struck again today by the thought that in the digital world many media industries will simply be much smaller than they have been before.

You can argue this from the price side – the wide availability of illegal free copies of music and TV/films (and soon books) means consumers will only pay so much for a legitimate copy.

And also from the cost side – in the internet era the cost of distribution is zero, so whereas previously the industry had to make a margin on the costs of physical production, transport and retail distribution of media that is no longer necessary.  Whole swathes of middle men and production and logistics companies are simply no longer required.  The internet also dramatically reduces the cost of finding and test marketing new content – it is no longer necessary to employ armies of scouts looking for new bands/movies/talent/art when artists can publicise themselves for free to a certain level using social media and production companies can simply pick off the ones that have already proven a degree of popularity and help take them to the next level.

For consumers and the world economy at large this is all great news.  New efficiencies have been unleashed reducing the price we have to pay for digital media and increasing global productivity generally.

For existing players in the relevant industries it creates pain and dislocation, as well as opportunity.  For many traditional media businesses the choice is to embrace the new order or face the risk of extinction.  The difficulty of course comes in deciding how aggressively to cannibalise your main business.  That is particularly difficult when there is a large chance that the ‘new’ business will only be a fraction of the size of the one it is replacing.  Worse, you can envisage scenarios where the profits you cannibalise are greater than the discounted value of all the future profits you hope to replace them with.

Small wonder then, that traditional businesses are usually reluctant to adopt cannibalisation strategies.  Even if there was unanimous agreement around the board on how the new world will look (which is unlikely) there would be legitimate disagreement on how aggressively to transition the company.  This is doubly true when there are lots of tools you can use to slow the pace at which the market moves from old to new – e.g. copyright law.

The old media companies that are most caught up in this dilemma are record labels, broadcasters and publishers and their distribution channels.  These are therefore promising areas for startups. 

  • Nic, its a very interesting area – I’ve been doing a project on this for the last 2 months, am going to present some early findings at the Telco 2.0 Initiative on Tuesday. In short, I believe the “illega, free world is meium term unsustainable – but it is very unlikely that the Old Order becomes the New Order without fundamental change, for reasons you note above.

    What is interesting, in hulu and BBC iPlayer, is seeing how the Old Order in video is more interested in playing early compared to the music industry. Its also interesting looking at services like Phreadz, which can potentially be nodes around which a new order can coalesce.

  • Nic, its a very interesting area – I’ve been doing a project on this for the last 2 months, am going to present some early findings at the Telco 2.0 Initiative on Tuesday. In short, I believe the “illega, free world is meium term unsustainable – but it is very unlikely that the Old Order becomes the New Order without fundamental change, for reasons you note above.

    What is interesting, in hulu and BBC iPlayer, is seeing how the Old Order in video is more interested in playing early compared to the music industry. Its also interesting looking at services like Phreadz, which can potentially be nodes around which a new order can coalesce.

  • ‘many media industries will simply be much smaller than they have been’ – with the publishing industry in mind, I think the opposite is true. Publishing houses and literary agents are about to get whacked, yes, but these are the guys who have been restricting both innovation and the supply of content to the market. There’s going to be a lot more content and the opportunity to monetise the content of the publishing industry is phenomenal IMO. Very different to music, photos verticals etc. Certainly agree it’s a promising area for startups.

  • ‘many media industries will simply be much smaller than they have been’ – with the publishing industry in mind, I think the opposite is true. Publishing houses and literary agents are about to get whacked, yes, but these are the guys who have been restricting both innovation and the supply of content to the market. There’s going to be a lot more content and the opportunity to monetise the content of the publishing industry is phenomenal IMO. Very different to music, photos verticals etc. Certainly agree it’s a promising area for startups.

  • "And also from the cost side – in the internet era the cost of distribution is zero, so whereas previously the industry had to make a margin on the costs of physical production, transport and retail distribution of media that is no longer necessary."

    That is seriously inaccurate… who pays for the bandwidth to distribute the content, who pays for the storage to store it, who bears the cost of ingestion, who bears the cost of quality assurance, who merchandises it, who develops the recommendation algorythm etc?

    While I agree that digital distribution reduces the costs, they are NOT zero… plus if we constantly think about copyrighted content as somthing that should be distributed for free there will no longer be any incentives to produce it. I have heard people argue that music producers should make their money from concerts and live performances which is fine if you’re Madonna or Coldplay but if you’re starting out, you need music sales revenue. Also, most of Madonna’s music is not actually written by her so without some sort of reveneue derived from the sale of master recordings, how will the composers make a living…

  • "And also from the cost side – in the internet era the cost of distribution is zero, so whereas previously the industry had to make a margin on the costs of physical production, transport and retail distribution of media that is no longer necessary."

    That is seriously inaccurate… who pays for the bandwidth to distribute the content, who pays for the storage to store it, who bears the cost of ingestion, who bears the cost of quality assurance, who merchandises it, who develops the recommendation algorythm etc?

    While I agree that digital distribution reduces the costs, they are NOT zero… plus if we constantly think about copyrighted content as somthing that should be distributed for free there will no longer be any incentives to produce it. I have heard people argue that music producers should make their money from concerts and live performances which is fine if you’re Madonna or Coldplay but if you’re starting out, you need music sales revenue. Also, most of Madonna’s music is not actually written by her so without some sort of reveneue derived from the sale of master recordings, how will the composers make a living…

  • nic

    Guys – tks for the comments and apologies I have been slow to respond.

    James – with regard to written content, my gut is that there will be a lot of long tail content produced, but that much of it will be monetised in ways other than advertising/cash – a bit like TheEquityKicker. I guess that means a view of whether the market has grown or shrunk will depend on what you measure, but by some measures you are right that there will be growth.

    Guy – you are of course right that bandwidth and storage costs will remain, and I am guilty of simplification in saying that they will be zero. Simplification, but probably not gross simplification. These costs are only a small fraction of physical distribution costs and they are trending towards zero over time.

  • nic

    Guys – tks for the comments and apologies I have been slow to respond.

    James – with regard to written content, my gut is that there will be a lot of long tail content produced, but that much of it will be monetised in ways other than advertising/cash – a bit like TheEquityKicker. I guess that means a view of whether the market has grown or shrunk will depend on what you measure, but by some measures you are right that there will be growth.

    Guy – you are of course right that bandwidth and storage costs will remain, and I am guilty of simplification in saying that they will be zero. Simplification, but probably not gross simplification. These costs are only a small fraction of physical distribution costs and they are trending towards zero over time.

  • Pingback: Finance Geek » How the transition to digital shrank the encyclopedia market()

  • Pingback: Finance Geek » How the transition to digital shrank the encyclopedia market()