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Creative destruction in the digital value chain

By October 30, 2008 10 Comments

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.