14

C H A P T E R

Online Content Providers: Digital Media LEARNING OBJECTIVES After reading this chapter, you will be able to: ■ ■ ■ ■ ■ ■

Identify the major trends in the consumption of media and online content. Discuss the concept of media convergence and the challenges it faces. Describe the five basic content revenue models. Discuss the key challenges facing content producers and owners. Understand the key factors affecting the online newspaper, e-book, and online magazine industries. Understand the key factors affecting the online entertainment industry.

T h e W a l l O n l i n e

S t r e e t

J o u r n a l

T

he Wall Street Journal was founded in 1889 by the Dow Jones News Service as a blend of general international and national news, along with in-depth financial reporting. In April 1996, the Journal launched the Wall Street Journal Online (WSJ.com). With more than 575,000 paying subscribers as of January 2002, the Wall Street Journal Online has become one of very few online newspapers to successfully employ a subscription revenue model. Currently, subscribers to the Wall Street Journal print edition pay $29 a year for access to the online edition; non-subscribers pay $59. Most of the 4,400 online newspapers in the world offer free content. The common view among newspaper publishers is that most online consumers expect information to be free. Switching to subscription fees has resulted in online magazines such as Salon losing 90% of their readers. As a result, online newspapers typically are supported by advertising and sales of classified ads — just as traditional print newspapers have been for centuries — rather than monthly subscription fees. Why has the Wall Street Journal succeeded with a subscription model where others have failed? Brand is certainly one reason. The Wall Street Journal has strong brand recognition among American investors. It is well known for its stock quotation services and in-depth reporting on business and general news issues. However, many newspapers such as the New York Times, Los Angeles Times, and Washington Post also have strong national brands but do not charge subscription fees. Perhaps one key to the Journal’s success is that a subscription gives users access to premium content in the form of 25,000 in-depth background reports 787

788

CHAPTER 14

SOURCES: “WSJ.com Explores New Products, Fees,” by Christopher Saunders, Internet Advertising Report, January 28, 2002; “Why the Journal Uses OmniMark Content Engineering,” www. stilo.com, December 20, 2001; “The Wall Street Journal Launches Expanded Online Company Research,” www.ccbn.com, December 2001; “Wall Street Journal Waives Online Fees,” by Owen Gibson, www. mediaguardian.com.uk, September 13, 2001; “Wall Street Journal Online Doubles Subscription Revenue,” www. onlinepublishingnews.com, January 29, 2001.

Online Content Providers: Digital Media

on companies, an archive of news articles going back to 1996, and access to the Dow Jones Publication Library, which features current and past articles from 7,000 newspapers, magazines, and business-news sources. If you are a stock analyst or an individual investor looking for information on a specific company, this archive of material may be well worth the relatively small annual subscription fee. Coupled with a fine-grained search engine, the Journal’s archives are unique and differentiated from most other online newspaper offerings. Readers of the Journal are also attracted to its timeliness and Web suitability. Using a structured markup technology provided by OmniMark’s Content Engineering system, writers and editors are able to simultaneously author articles for both print and online editions, and then automatically generate Web pages that conform to the Journal’s unique print style. This system also permits them to make dynamic changes in news story content, shortening or lengthening stories as needed, without costly page redesign. Writers and editors can post hundreds of up-to-date articles around the clock, and the key page elements such as size of headlines, space between articles, positioning of navigation buttons, and placement of advertisements are all generated by the OmniMark system. The same system creates a consistent content archive of news and opinion that can be searched by subscribers. The new technology has transformed the newspaper experience for online consumers. Instead of having content trapped on static print pages that are updated daily, the online edition can offer timely breaking news much like a television or radio news show. On January 28, 2002, WSJ.com unveiled a number of new personalization features designed to make its content even more compelling. Subscribers will now be able to create a personalized WSJ.com homepage with user-selected columnists, stock portfolio updates, and company news. The Journal hopes to leverage this new functionality into higher subscription fees, perhaps as high as $70 a year for non-subscribers and $35 a year for subscribers. Whether subscribers will continue to flock to the Journal at those rates remains to be seen.

Online Content

T

he Wall Street Journal Online case illustrates how traditional media companies are adapting to the new opportunities of the Web by developing content experiences for online consumers that would be impossible offline. Although most online content companies are not yet profitable, the future is headed in the direction of online publishing and online entertainment. Established media giants are continuing to make extraordinary investments in unique online content, new technology, new digital distribution channels, and entirely new business models. In this chapter we will focus primarily on the publishing and entertainment industries — book, newspapers, feature films, and music — as they attempt to transform their traditional media into Web-deliverable forms and experiences for consumers.

14.1 ONLINE CONTENT As a communications medium, the Web is, by definition, a source of online content. In this chapter, we will be focusing on publishing (newspapers, books, and magazines) and entertainment (music, film, and television). These industries make up the largest share of the commercial content marketplace, both offline and online. In each of these industries, there are powerful offline brands, significant new pure-play online providers, consumer constraints and opportunities, a variety of legal issues, and technology constraints on rapid deployment of online content.

CONTENT AUDIENCE AND MARKET: WHERE ARE THE EYEBALLS AND THE MONEY? The average American adult spends over 3,500 hours each year consuming various media, about 1.5 times as much time spent at work (2,000 hours/year) (see Figure 14.1). By 2005, this amount is expected to grow to 10 hours per day or 3,650 hours per year. Media revenues in 2000 were approximately $242 billion, and they are expected to grow at a compound rate of 5.5% (Suhler, 2001).

Media Utilization The most popular medium is television, followed by radio and recorded music. Together, these three media account for over 80% of the hours spent consuming various media. While the Internet is currently a distant fourth, Internet utilization has been growing so rapidly (the time users spend on Internet-based media is expected to double from current levels by 2005) that soon it is expected to overtake recorded music, especially as recorded music moves to Internet distribution. If the time spent with text-based media (books, magazines, and newspapers) were combined, it would exceed that spent on recorded music. Surprisingly, non-television-based

789

CHAPTER 14

Online Content Providers: Digital Media

FIGURE 14.1

Hours / year

MEDIA UTILIZATION

1800 1600

1605

1400 1200 1003

1000 800 600 400

300 168

200

150

98

79

66

64

14 s ter ea

ies ov M

Ho

me

Ho

in

th

me

ga eo vid

vid

me

eo

s

es zin ga

ma

Co

ns

um

er

um ns Co

ne

er

pa

bo

pe

ok

s

rs

et ws

Int ily Da

um

er

ed ns Co

rd co Re

ern

sic mu

dio Ra

vis

ion

0 Te le

790

Media Channel

Americans spend over 3,500 hours consuming various media, mostly television, radio, and recorded music. However, time spent on the Internet is growing rapidly and will soon overtake time spent on music. SOURCE: Statistical Abstract of the United States, 2001.

entertainment (home video, video games, and theater movies) consumes only 144 media hours per year.

INTERNET AND TRADITIONAL MEDIA: CANNIBALIZATION VERSUS COMPLEMENTARITY To some extent, time spent on the Internet reduces consumer time available for other media. A recent UCLA survey found that Internet users view television only 12.3 hours per week, compared to 16.8 hours per week for non-users of the Internet — a significant and large difference — suggesting that time online means less time for television. In general, Internet users spend 15% to 20% less time reading books, newspapers, and magazines, and less time on the phone or listening to the radio. On the other hand, Internet users consume more media of all types than non-Internet users. This reflects the demographics of the Internet user as more literate, wealthier, more technically savvy, and more media aware. In addition, Internet users multitask when

Online Content

using the Internet, frequently listening to music, watching television, and using instant messaging while working on other tasks. Multimedia use reduces the cannibalization impact of the Internet for some visual and aural media, but obviously not for reading books or newspapers. And even for these print media the Internet is simply an alternative source; Internet users are increasing the time they spend online reading newspapers, magazines, and even books. (UCLA Internet Report, 2001).

Media Revenues An examination of media revenues reveals somewhat different patterns (see Figure 14.2). Total media revenues were $242 billion in 2000. Entertainment (box office events, movies in theaters, home video, video games, and recorded music) garnered the largest share of revenue (39%) even though this category consumes only 5% of consumer media hours. Television remains a major producer of media revenues (26%), while newspapers generate a surprisingly large 14% of revenues. Compared to other media, the Internet generates a small absolute amount of revenue. The Internet constitutes only 3% of total media revenues — a little less than the 5% of the media hours it generates. Once again, the Internet has grown in a few short years from a zero base to a substantial but small share of media revenues today. However, as we see below, paid content and archived content revenues will increase five to ten times by 2005, making the Internet the fastest growing media for content revenues. Paid content is the key to the future of Internet media expansion. In the next section we describe the current and emerging online content marketplace. FIGURE 14.2

MEDIA REVENUES BY CHANNEL

Magazines Books 4% (consumer) 2%

Radio 4%

Internet 3%

Books (education) 8% Newspaper 14%

Entertainment 39%

Television 26%

Entertainment, television, newspapers, and other text publishing dominate media revenues. SOURCE: Statistical Abstract of the United States, 2001.

791

792

CHAPTER 14

Online Content Providers: Digital Media

GROWTH OF THE ONLINE CONTENT AUDIENCE In 2001, total direct consumer paid online content revenues in the United States were approximately $1 billion, and are expected to grow to over $5.7 billion by 2005 (see Table 14.1). Nearly 16 million Web users — about 12% of the 138 million individuals online in December 2001 — went online and paid for content in 2001. The estimates in Table 14.1 include only “direct consumer expenditure for current content,” and, in addition, report only e-learning expenditures at private, adult online companies. Not included in Table 14.1 are significant expenditures for e-learning provided by secondary and higher education institutions. The secondary and higher education online markets are estimated to produce $150 million in annual

TABLE 14.1

DIRECT CONSUMER PAID ONLINE CONTENT FORECAST

Figures in millions unless otherwise noted

1999

2000

2001

2002

2003

2004

2005

Total content revenues

$436

$683

$1,074

$1,708

$2,686

$4,026

$5,733

General content

$366

$533

$740

$1,002

$1,320

$1,700

$2,122

$61

$97

$141

$194

$258

$330

$413

Revenue

General news & archives Filmed entertainment Adult-oriented

$0

$5

$24

$67

$142

$245

$369

$148

$185

$219

$254

$286

$305

$319

Financial & business news

$56

$83

$115

$154

$198

$246

$298

Kids

$20

$33

$50

$70

$95

$139

$191

Health information

$18

$34

$51

$71

$93

$114

$133

Sports

$11

$17

$25

$34

$45

$65

$89

Consumer/shopping aids

$15

$22

$29

$37

$46

$56

$65

Other

$36

$58

$86

$119

$158

$200

$244

$0

$9

$39

$151

$468

$920

$1,511

$0

$9

$34

$88

$189

$339

$531

Music digital downloads Á la carte Subscription

$0

$0

$5

$63

$278

$581

$980

Online games

$41

$90

$170

$298

$447

$711

$1,120

$4

$13

$74

$187

$359

$574

$826

$4

$13

$72

$176

$317

$495

$705

e-books Á la carte Subscription eLearning

SOURCE: Jupiter Media Metrix, 2000.

$0

$1

$2

$11

$42

$79

$121

$25

$36

$52

$70

$93

$121

$154

Online Content

revenues in 2001, growing to a $5 billion market in 2005. However, the largest chunk of current content revenue missing from Table 14.1 is the revenue produced by selling access to digital archives. In 2001, digital archives — mostly for newspapers and magazines — generated about $800 million in revenue, an amount that is expected to grow to about $4.6 billion by 2006 (Jupiter Media Metrix, 2001b). Considering these other factors, the total online content market (both current content and archived material) in 2001 generated approximately $2 billion, and is expected to grow to over $15 billion in 2005. In comparison, revenues for online retail in 2005 are expected to be approximately $269 billion, online travel $65 billion, and online career sites $7 billion. While the total online revenues from both current and archived content are not huge when compared to other categories of online commerce, going online for content is now and will be in the future the single most common use of the Internet. In May 2001, 92% of all Web users in the United States visited portal sites, mostly for deep and rich content as well as free services such as e-mail. In the same month, entertainment sites rose to the third most frequently visited type of site — about 69 million users visited entertainment sites (Macaluso, 2001). Refer to Table 7.2 (page 337) and note the frequency of visits to sites with online content, including movie sites, television show sites, local content, and research sites. Clearly, going online for content is the single most popular Web activity even when no direct revenue-generating e-commerce occurs. Examining Table 14.1 more closely, we can see a six-fold growth rate for general content from 2000–2005, with online musical downloads the fastest growing component, increasing by a factor of 38. The next fastest content category is filmed entertainment, projected to grow by a factor of 15 between 2001 and 2005. But perhaps the most surprising is the expected growth in e-books. Between 2001 and 2005, e-books are expected to expand by a factor of eleven, from $74 million in 2001 to a predicted $826 million in 2005.

Free or Fee? Given the popularity of content on the Web, why are projected revenues from Web content low relative to other sources of revenue such as travel services, financial services, and general retail? Ironically, content is one element of the Internet and Web that is truly unique and difficult to commodify — at least for some content. There is only one Stephen King, only one Disney, only one New York Times, and only one CNN. These strong content brands, backed up by strong copyright protections, should, in theory, be able to charge customers for content regardless of the delivery vehicle — text, film, or Internet. Here lies an important element in understanding the challenges facing the online content industry. Most content on the Web is free, and most Web users expect it to be free. However, even this free content influences offline purchases of content, from

793

794

CHAPTER 14

Online Content Providers: Digital Media

theater visits to CD purchases to video rentals. For instance, a recent survey of Internet users found that 17% of Internet users have been asked to pay for content that used to be free. Of these, 50% found a free alternative source, 36% stopped getting the information or service, and only 12% agreed to pay for the content (Rainie, Spooner, et al., 2001). As we shall see, overcoming this expectation of free content is a major challenge for the content industry. The movement toward paying for content will require a significant enhancement to content providers’ customer value propositions: More highly valued content is needed online in a convenient form. Aside from offering free content — usually in the hope that visitors will purchase content offline — one response from the content industry has been to lower prices. Because the manufacturing and distribution costs for Web content are very low (but certainly not zero), lower prices for online delivered content may enlarge the audience and produce solid revenues and even profits.

MEDIA INDUSTRY STRUCTURE The media content industry prior to 1990 was composed of many smaller independent corporations specializing in content creation and distribution in the separate industries of film, television, book and magazine publishing, and newspaper publishing. During the 1990s, after an extensive period of consolidation, huge entertainment and publishing media conglomerates emerged (see Table 14.2). The media industry is still organized largely as separate vertical stovepipes, with each segment dominated by a few key players. Even within media conglomerates that span several different media segments, separate divisions control each media segment. For instance, AOL/TimeWarner is organized into six independent divisions (cable networks, publishing, music, film, cable programming, and digital media/Internet), each with its own separate production, marketing, distribution, and sales arrangements. However, the growing use of digital creation tools and the growth of the Internet as a delivery vehicle offer the promise of convergence toward a more unified creation and distribution platform. A convergence of media segments offers media companies the promise of significant cost reduction in content creation and distribution, and equally significant revenue enhancement potential through the development of entirely new types of content. In the next section we describe the potential of convergence for print, film, television, and music media.

MEDIA CONVERGENCE: TECHNOLOGY, CONTENT, AND INDUSTRY STRUCTURE Media convergence is a much used but poorly defined term of the E-commerce I era. There are at least three dimensions of media where the term convergence has been

Online Content

TABLE 14.2

795

MEDIA TITANS 2000 REVENUES

Entertainment AOL/Time Warner

$40 billion

Vivendi Universal

$28 billion

Walt Disney/ABC

$25.4 billion

Viacom/CBS

$20 billion

Bertelsmann

$15 billion

FOX

$8.6 billion

Publishing McGraw-Hill

$4.3 billion

Pearson PLC

$2.1 billion

Thomson Corporation

$1.6 billion

Newspapers USA Today/Gannett Co. Inc.

$6.2 billion

New York Times

$3.5 billion

Knight Ridder

$3.2 billion

Washington Post

$2.4 billion

Dow Jones/Wall Street Journal

$2.2 billion

SOURCE: SEC filings.

applied: technology, content (artistic design, production, and distribution), and an industry as a whole.

Technological Convergence Convergence from a technology perspective (technological convergence) has to do with the development of hybrid devices that can combine the functionality of two or more existing media platforms, such as books, newspapers, television, radio and stereo equipment, into a single device. Examples of technological convergence include PDAs (personal digital assistants) that can also be used as cell phones and book readers, digital interactive television sets that can also surf the Web, video game machines that can also surf the Internet, PCs that play and record music, and cell phones with Web access.

technological convergence development of hybrid devices that can combine the functionality of two or more existing media platforms into a single device

796

CHAPTER 14

Online Content Providers: Digital Media

Content Convergence content convergence convergence in the design, production, and distribution of content

A second dimension of convergence is content convergence. There are three aspects to content convergence: design, production, and distribution. There is a historical pattern in which content created in an older media technology migrates to the new technology largely intact, with little artistic change. Slowly, the different media are integrated so that consumers can move seamlessly back and forth among them, and artists (and producers) learn more about how to deliver content in the new media. Later the content itself is transformed by the new media as artists learn how to fully exploit the capabilities in the creation process. At this point, a content convergence and transformation has occurred — the art is different because of the new capabilities inherent to new tools. For instance, European master painters of the fifteenth century in Italy, France, and the Netherlands (such as van Eyck, Caravaggio, Lotto, and Vermeer) quickly adopted new optical devices such as lenses, mirrors, and early projectors called camera obscura that could cast near-photographic quality images on canvases, and in the process they developed new theories of perspective and new techniques of painting landscapes and portraits. Suddenly, paintings took on the qualities of precision, detail, and realism found only in photographs (Boxer, 2001). A similar process is occurring today as artists and writers assimilate new digital and Internet tools into their toolkits. On the production side, new tools for digital editing and processing (for film and television) are driving content convergence. Given that the most significant cost of content is its creation, if there is a wide diversity of target delivery platforms, then it is wise to develop and produce only once using technology that can deliver to multiple platforms. Generally this means creating content on digital devices (hardware and software) so that it can be delivered on multiple digital platforms. Once captured on digital devices, the same content can be archived, sliced into atomistic units, and re-purposed for a wide variety of other platforms and distribution channels. On the distribution side, it is important that distributors and ultimate consumers have the devices needed to receive, store, and experience the product. For instance, Hollywood studios currently deliver copies of new films to thousands of theaters across the country in trucks. A feature-length film can require six large, heavy canisters containing reels of 35mm film. In order to move to digitally download the film via satellite to local theaters, the theaters must be equipped with servers and large hard drives to receive the film, as well as new digital projection equipment. This will take many years to achieve, and it is unclear who will pay for it — the studios or the retail theaters. Figure 14.3 depicts the process of media convergence and transformation using the example of books. For example, consider this book. The book was designed from the beginning as content to be delivered using both traditional text and the Internet. In that sense, this book is in the media transformation stage. In subsequent years, this

Online Content

FIGURE 14.3

797

CONVERGENCE AND THE TRANSFORMATION OF CONTENT: BOOKS

MEDIA MIGRATION

Publisher’s brochures on the Web

MEDIA INTEGRATION

Books converted to PDF format for Web display

REFORMATTING

1995

1998

MEDIA TRANSFORMATION

“Book” designed as an interactive E-Book with both print and Web components

MEDIA MATURITY

A new “standard” book evolves that involves the seamless integration of Web and text components on new devices that integrate functionality of multiple platforms.

REPACKAGING

2001

RE-DESIGNING

2005

The Internet is making it possible for publishers and writers to transform the standard “book” into a new form that integrates features of both text and the Internet, and also transforms the content of the book itself.

same book will be available both as a purely digital work and as a mixed book+Web product. Eventually, it is likely that this book will be available mostly as a purely digital product with substantial visual and aural content that can be displayed on many different digital devices. By that time, the “learning experience” will be transformed. Traditional bound books will probably still be available (books have many advantages), but most likely, print editions will be printed on demand by customers using their own print facilities.

798

CHAPTER 14

Online Content Providers: Digital Media

Industry Convergence industry convergence merger of media enterprises into synergistic combinations that create and cross-market content on different platforms

A third dimension of convergence is the structure of the various media industries. Industry convergence refers to the merger of media enterprises into powerful, synergistic combinations that can cross-market content on many different platforms and create new works that use multiple platforms. Traditionally, each type of media — film, text, music, television — had its own separate industry, typically composed of very large players. For instance, the entertainment film industry has been dominated by a few large Hollywood-based production studios; book publication is dominated by a few large book publishers; and music production is dominated by five global firms. However, the Internet has created forces that make the merger of traditionally separate firms in separate media industries a plausible — perhaps necessary — business proposition. Media industry convergence may be necessary to finance the substantial changes in both the technology platform as well as the content. Traditional media firms by themselves generally do not possess the core competencies, financial heft, content ownership, or channel ownership to bring about Internet media convergence. The best-known example of media industry convergence is the merger of AOL and Time Warner (described in detail in the Chapter 7 Case Study). Time Warner was the largest media conglomerate in the United States, but had no Web content per se, and had experienced an early failure in attempting to build a Web presence. AOL brought to the merger the largest online audience in the United States (nearly 40% of U.S. Internet users), a substantial ISP operation with a monthly billing relationship with the consumer, and a successful track record in providing Internet and Web services and content. The two companies working together provide a single corporate platform for the creation and distribution of high-value content. AOL/Time Warner combines content with distribution, and this is the current direction of entertainment media titans. In this single corporate environment, presumably, new works will be created for distribution on both traditional and new media such as the Internet, and the process of transforming media and content to optimize the new Internet technology will begin in earnest with financing provided by successful traditional media such as cable subscriptions and feature film and television production revenue.

CHALLENGES AND RISKS IN MEDIA CONVERGENCE For the most part, meaningful media convergence has not yet occurred along any of the dimensions described above, although some large media titans are investing heavily in convergence. Most commentators in the E-commerce I era believed that media convergence would happen very quickly — indeed in a matter of a few years — as huge traditional media conglomerates in New York and Hollywood merged with equally huge pipeline owners (broadband cable and telephone carriers), Internet portals, and ISPs. Yet with the exception of AOL/Time Warner, Vivendi Universal, and Primedia, there have been few mergers of large traditional content creators (film and television

Online Content

production studios, publishing firms, and music labels) and the new Internet audience ISPs or portals. Indeed, the landscape is littered with failed efforts of media content owners who tried to move to the Web directly. Time Warner ended the Web’s first large-scale media migration effort (Pathfinder.com) in 1999 after years of losses and after the failure of its efforts to charge customers a fee for content. Disney ended its Go.com site, and NBCi significantly reduced the budget of its online efforts. Primedia (a magazine publisher) acquired $2.6 billion of Internet media assets in 1999–2000, including Brill Media Ventures (publisher of an online media industry magazine, Brills Content), About.com, Inside.com, CMGI stock (an Internet media holding company), and Liberty Digital (an interactive television firm). By October 2001, Primedia was near bankruptcy and was selling assets, and its stock price was about $2.00 (Fabrikant, 2001). Pearson PLC, one of the world’s largest publishing firms, increased investment in online Internet properties such as the Financial Times Online, Learning Network (educational portal), and National Computer Systems (an online testing firm), only to see its earnings plunge 17% in 2001 and its stock fall to half its high value, as it relies on traditional educational print publishing to stabilize earnings (Kapner, 2001). The financial history of corporate media convergence is not encouraging. Even within AOL/Time Warner, media convergence has not yet occurred in part because of the difficulties of merging the activities of independent corporate baronies in text, film, and video, and Internet distribution. In other words, the internal forces within a media conglomerate can be just as conflict-ridden and confusing as the external world of competing companies, alliances, and technologies. Nevertheless, the premise of the merger between AOL and Time Warner is that the value of all the subsidiary companies is far greater than the value that could be attained by all the businesses as separate entities. It remains to be seen if this premise will prove valid. Currently, AOL/Time Warner appears to be working as a business model only because its constituent businesses are each very profitable. Instead of rapid convergence, most large media companies are very slowly migrating content to the Web with support sites and brochureware; some are beginning to integrate the Web into traditional content channels by distributing some repackaged content on the Web. Why has progress been so slow? From the perspective gained by looking back on E-commerce I, it is possible to understand why media convergence most likely will take a long time and experience many failures before it achieves many successes. First, consumers still prefer traditional media — books, film, video, CDs, and even newspapers and magazines — for consuming content rather than the Internet or mixed-media hybrid devices such as Web TV. Even in music there are contrary trends: While downloading of free music soars, sales of CDs have increased at above historical rates. Listening to a $19 CD on a $49 portable CD player is still more convenient than listening to “free” downloaded music on a $200 MP3 portable player (not to mention the $1000 PC needed to download the music and a $200 CD burner to store the music). Reading a book is easier,

799

800

CHAPTER 14

Online Content Providers: Digital Media

more convenient, and more enjoyable than reading large amounts of text on the Internet. Second, the technology is not quite ready. The Internet still cannot distribute or display Hollywood films, television shows, or books very well, and hybrid devices are too complicated to use and lack functionality (we discuss technology issues below). Hybrid devices have not sold well in the marketplace, and the wireless broadband network (3G) is not yet widely deployed. Third, content firms’ artists, writers, and producers are still uncertain as to exactly which features of the new technology consumers would be willing to pay for, and they remain predominantly in their pre-Internet creative stance, creating content for separate media firms. This is a period of experimentation where television news shows direct viewers to their free Web sites for more information (media migration); however, once they are there, viewers cannot pick up the threads of the news show, but instead must go back to the TV. In addition, the television network gives the supplemental content away for free. This makes the Web operation a cost center, not a revenue center. Fourth, media convergence requires a revenue model (and associated business processes) that can generate the revenue needed to transform media into a new experience. Although shareholder value could be ignored in the E-commerce I era (when the focus was on “customer value proposition”), in E-commerce II, shareholder returns on investment will be calculated for each new Web venture, slogans about a revolutionary future cannot replace revenues and profits, and there is little inclination among investors to subsidize one distribution channel while ignoring profitable channels. Briefly, what’s needed to make media convergence work are:

• • • •

a change in consumer preferences, new technology platforms and delivery systems, substantial creative re-design of content products, and corporate environments that merge broadband channel control (cable or DSL), a regular billing relationship with the customer, and control over content creation.

These four challenges to media convergence pose a dilemma for corporate managers: Either invest in Internet media now (and reduce current earnings) or defer investment until the artistic and business issues are resolved (and risk being too late to market).

ONLINE CONTENT REVENUE MODELS AND BUSINESS PROCESSES With more than two billion Web pages in existence, content is in copious supply. The question is: How can anyone make money (i.e., a profit) with online content so abundant? For each media the answer is a little different, and we describe the publishing

Online Content

and entertainment industries in separate sections later in the chapter. However, there are some common revenue models — each with challenges — that can be used by any media firm. The five basic content revenue models are: marketing, advertising, payper-view, subscription, and value added (see Table 14.3). In the marketing revenue model, media companies give away content for free in the hope that visitors to the site will purchase the product offline or view a show offline. The Web site is intended to generate interest, develop word-of-mouth viral marketing, and deepen the emotional experience for offline product users. Television shows and Hollywood films, book publishers, and newspapers with online sites use this model in part. The revenues produced by this model are difficult to measure directly. Costs of operating the site can be hidden in larger marketing budgets and to some extent recovered through the sale of product-related paraphernalia, such as T-shirts, caps, and toys. This model appears to be effective in deepening the emotional involvement of consumers with the product, thereby engendering loyalty. In the advertising revenue model, content is free to the consumer; advertisers are expected to pay for the cost of the site through placement of banner ads. In general, the advertising model has not worked to cover costs of content sites, although very large offline-branded content providers such as the New York Times and the Wall Street Journal generate substantial revenues from advertising to defer costs of operation. For the most part, pure online media efforts to support content using advertising alone have failed.

TABLE 14.3

ONLINE CONTENT REVENUE MODELS

TYPE OF REVENUE MODEL

DESCRIPTION

COMMENTS

Marketing

Free content drives offline revenues or viewership.

May work for strong brands or niche products. Used to deepen customer experience.

Advertising

Free content is paid for by online advertising.

Insufficient revenues to pay costs, but may work for targeted audiences.

Pay-per-view/Pay-for-download

Charge for premium content is either on a per-view basis or for entire works, e.g., e-books.

Consumer resistance reduces viewership, but may work for niche, high value, and deep content to targeted audiences.

Subscription

Monthly charge assessed for services and content.

Consumer resistance reduces viewers, but may work for high value services, niche content, and deep content.

Value-added

Charge assessed for supplemental Web content.

May work for branded traditional media, but faces consumer resistance.

801

802

CHAPTER 14

Online Content Providers: Digital Media

In the pay-per-view/pay-for-download revenue model, content providers charge for each viewing of premium content such as a video, book, archived newspaper article, or consulting report. In general, this model is not attractive to the general consumer, but does work for targeted audiences looking for niche content that is very rich or deep. For instance, the general Internet user may want to read the New York Times online every day for free, but would never use — or pay for — the newspaper’s archives. However, a stock analyst for a Wall Street investment bank preparing a report on a company for investment recommendations would probably gladly pay to read articles in the Wall Street Journal archive. In general, the online pay-per-view model works only for high-perceived value content that is unique and targeted. This model is currently hindered by the difficulty of using the Internet to view sporting events, feature films, and video content, all of which require substantial download times and resources. In other words, if there is little to view, there is no reason to pay for anything. However, in the future, if the Internet can deliver television-quality video or live coverage of sports events, new films, or music concerts, then the payper-view revenue model might work for these high-bandwidth media as effectively as it works for cable television. In the subscription revenue model, content providers such as the Wall Street Journal and Consumer Reports charge a monthly or annual fee for bulk access to online content. Music companies are also moving toward subscription models of $9.95 per month for access to digital music archives. In general, as noted in the opening case, the subscription model has not worked very well because of competition from free content on the Web and wide-ranging consumer resistance to paying for content. However, the subscription model may work for niche content available nowhere else, for high value content, and for targeted audiences. For instance, true music aficionados who want the most recent musical tracks from a specific group even before they are sold in the general market might pay a monthly fee for this focused, niche content and for exclusive access to new sounds. In the value-added revenue model, content providers add to the price of a traditional product by charging an access fee at the Web site for the right to view premium content on the site. This is a price discrimination model. For instance, textbooks today are often sold with a “value added” CD pasted into the book. The CD adds perceived value and adds to the price of the book, justifying a higher price. In some instances purchasers are given a choice: a lower price without the CD or a higher price with the CD. Similarly, a Web access code can be pasted into a book and users can access premium content on the Web site. Non-users may have to pay to view the same content. Revenue is generated by the publisher when more users purchase the book because of the Web content, or the price of the book is higher than what it would have been otherwise. This model is unproven, and measuring the revenues generated is difficult. Much depends on the customer’s value perceptions and the quality and value of the content.

Online Content

803

Making a Profit With Online Content: From Free to Fee Online content companies must continually calculate the revenues they receive by offering free content (from advertising and e-commerce transactions and offline sales of registration data to marketing firms) versus the revenue they might receive by charging for content. In general, most content firms have decided there is more to be gained by offering free content than charging for it. Typically, when online companies switch from free to fee, the audience falls precipitously. In the most well-known case, the online magazine Slate switched from free to fee in 1998, when it began charging $19.98 for access. Visitors almost totally disappeared, and in 1999, Slate went back to the “free” format, saying that it expected more revenues from advertising and marketing of its registered user list. Traffic increased by 175% in a matter of days. Some firms are managing to generate meaningful revenues from content, however. There appear to be four factors required to charge for online content: focused market, specialized content, sole source monopoly, and high perceived net value (see Figure 14.4). Net value refers to that portion of perceived customer value that can be attributed to the fact the content is available on the Internet. Net value derives from the ability of consumers to instantaneously access the information on the Web, search large and deep historical archives, and move the online information to other documents easily. For instance, Hoover’s Online, a source of detailed information on businesses and executives worldwide, charges $2995 for an annual subscription to its archives. Hoovers’ content addresses a focused market (business analysts and executive search firms); it has specialized content (data gathered by its own reporters and other sources); it is the sole source for this information; and it has high perceived value because it can be quickly accessed, searched, and downloaded into other documents and made a part of business decision making. In general, the opportunity for paid content varies by the nature of the content and the audience.

KEY CHALLENGES FACING CONTENT PRODUCERS AND OWNERS While finding a revenue model that works has been the primary business challenge facing online content companies, there are other challenges as well.

Technology Online content delivery faces two primary technology challenges: bandwidth and platform. Full motion video is bandwidth-intense. Feature films or videos, for instance, display at 30 frames per second. With full color, each frame can easily require 1 Mb of information. With MPEG or DVD compression, this can be reduced by a factor of 11 to about 100 Kb per frame, but still this will amount to 4 Gb of compressed video. One of the two leading streaming technologies, Microsoft Windows Media Video, claims to stream DVD-quality video at 500 Kbps, well within the range of home cable and DSL lines. Even so, online distribution to millions of consumers remains a

net value that portion of perceived customer value that can be attributed to the fact that content is available on the Internet

CHAPTER 14

Online Content Providers: Digital Media

FIGURE 14.4

REVENUE AND CONTENT CHARACTERISTICS

Revenue Potential (dollars)

804

General Content + Focused Market + Niche Content + Sole Source + High Net Value Additive Characteristics of Content

As content becomes more focused and more specialized, is controlled by a single source, and provides real value to consumers for an Internet delivery (i.e., speed, searchability, and portability), the prospects for charging fees for access increases.

technical challenge. It is estimated that if 100,000 users simultaneously streamed a 30minute DVD video over the Internet, it would consume 5% of the Internet’s bandwidth (Kontzer, 2001). Moreover, a substantial number of Internet consumers remain without the technical capability to view high-bandwidth content. While there is plenty of long-haul, high-speed optical bandwidth available (less than 5% of the installed long-haul optical fiber is being used), there are critical bottlenecks in home bandwidth, and total throughput across the current Internet platform from Web servers to the home or business can be less than 100 kbps. In general, bandwidth limitations do not affect online magazines or e-books, but they might affect more advanced e-books in the future that use substantial video and audio. A second technology challenge is the client platform. Efforts to marry the TV and the PC have not succeeded, although portable PCs are suitable for playing DVD

Online Content

videos. The PC screen is not ideal for reading large amounts of text, and special purpose e-book readers are expensive. PDAs are suitable only for short text messages; and wireless cell phones have not yet been accepted in the United States or Europe as suitable Web access devices. In short, regardless of media, there are substantial technology issues facing the online content future that will require many years to solve.

Cost Internet distribution is far more costly than anticipated. Media companies face substantial costs of migrating, repackaging, and ultimately redesigning content for online delivery. The simplest and least expensive first-step approach is to simply migrate existing content to the Web. Even this step requires new staff with new skills, a delivery mechanism, Web designers, and technicians. The costs of migrating can only be justified by increasing sales of offline units. Repackaging content requires substantial creative input and management. The most cost and effort occurs in the third level of media transformation — the redesign of content. Here creative costs can explode as artists, writers, producers, directors, and editors spend thousands of hours designing a “new” content product that optimizes Internet technology while still using many traditional writing and video techniques. For instance, the transformation of traditional film-based movie-making into computer-animated graphical experiences such as Harry Potter and the Sorcerer’s Stone requires tens of millions of dollars, and large creative staffs.

Consumer Attitudes In general, consumers have thus far strongly resisted paying for Web content, although this may not always be the case as media companies learn how to use the Web.

Distribution Channels and Cannibalization Many traditional media companies stumble when they try to repurpose their content to the Web. Short of merging with companies that have large Web audiences — as in the AOL/Time Warner merger — media companies are often tempted to strike alliances with intermediaries such as portals or redistributors (see Insight on Business: NetLibrary vs. “the Tower of Dead Trees” for a discussion of one such intermediary, NetLibrary.com, an online aggregator and distributor of e-books). Such alliances carry the risk that the media company’s brand name might be displaced by the portal or aggregator’s brand name; in addition, whatever revenues are generated must be shared with the intermediary. A related and perhaps more vexing challenge is cannibalization of existing channels. What happens to bookstore or music store sales when books and music are available online for half the price — or even lower? What happens to movie theaters when

805

806

CHAPTER 14

Online Content Providers: Digital Media

INSIGHT ON BUSINESS NETLIBRARY VS. THE “TOWER OF DEAD TREES” You didn’t need a library card to read any of NetLibrary’s 40,000 e-books available at over 5,500 academic, corporate, school, and public libraries. All you needed was a login name and password. NetLibrary was the largest creator, packager, distributor, and seller of e-books in the United States. NetLibrary converted books into digital e-books and sold these digital versions to libraries and consumers. In some cases, NetLibrary simply scanned works in the public domain whose copyrights had run out. For more contemporary titles, NetLibrary purchased copyrights from traditional publishers. In addition to converting works, NetLibrary also provided publishers with digital copyright management tools. For instance, if a library purchased only one electronic copy of a book, a user could gain access to the book only through a secure NetLibrary server and only one reader could read the book at a time. Printing was also controlled: NetLibrary’s software would permit users to print only a few pages from a book, making on-demand printing impossible. Users could view book pages, but not download them for further uncontrolled distribution. Timothy Schiewe founded NetLibrary in June 1998, in the hopes of revolutionizing the concept of the modern library. Rather than being what one commentator called a “tower of dead trees,” in Schiewe’s view, the modern library would be a digital repository of books, journals, and magazines that people could access from anywhere on earth through the Internet.

The company concentrated on sales to scholars, students (textbooks), and professionals because of Schiewe’s view that “most people will not take a computer to bed with them to read books. But we do believe that if you are searching for a piece of information, you will come to NetLibrary, find what you need, read it, and move on.” Perhaps the biggest part of Schiewe’s revolutionary concept of the library was that it would no longer be a physical place but rather a digital space where scholarly information would be instantly available, searchable, and cheap — although not free. But, after three venture capital investment rounds that raised over $100 million, NetLibrary declared bankruptcy in November 2001. In the three years of its existence NetLibrary had experienced success in digitizing books, buying rights, and selling entire digital libraries to universities such as the University of Texas and the University of California. Yet NetLibrary was never able to make enough money in these activities to show a profit. There are several reasons for its business failure. In early deals with traditional publishers, NetLibrary agreed to pay the costs of digital conversion rather than have the publishers deliver a digital product. For titles already in the public domain and for which NetLibrary paid the costs of conversion, demand was not very high because of the availability of cheap paperbacks. For hot new titles, popular (and expensive) textbooks, and academic journals, NetLibrary had little inventory because traditional publishers refused to sell

Online Content

the rights for fear of cannibalizing sales of the printed book. Where NetLibrary could obtain rights to popular titles, it was unable in negotiations to obtain sufficient revenue. But NetLibrary’s assets — its e-books, licenses, and digital rights management software — are not gone, and neither is the vision of an electronic online library where scholars and students can find just about anything they want to read from the comfort of their office or dorm room. Concurrent with its bankruptcy filing, the Online Computer Library Center (OCLC) agreed to purchase all of NetLibrary’s assets, including

its MetaText division that creates, hosts, and manages Web-based digital textbooks for leading textbook publishers. OCLC is a 34year-old non-profit organization serving 40,000 libraries around the world with cataloguing tools and other professional librarian services. The purchase price for NetLibrary’s assets was not announced. OCLC will add NetLibrary’s titles to its collection of 48 million catalog records and enter a new business of providing e-books to libraries and students around the world at prices substantially less than printed editions.

SOURCES: “NetLibrary in Discussions With Potential Buyers,” by Paula Hane, www.infotoday.com December 27, 2001; “OCLC Makes Offer to Purchase Assets of NetLibrary,” OCLC press release, www.oclc.org, November 15, 2001; “Writing a New Chapter: Libraries Aren’t Going Away; But They Are Going to Be Very Different,” by Rebecca Buckman, Wall Street Journal, March 12, 2001; NetLibrary Inc, Form S-1, filed with the Securities and Exchange Commission, August 17, 2000.

feature films can be downloaded or streamed off the Internet? Here content producers must be very careful about pricing and value. The Internet prices of content direct from the producers cannot be so low as to choke off higher priced channels that currently produce the largest share of revenues. Often media firms make the online version of the content less convenient to use and of lower quality to support the offline product channels and prices.

Rights Management Once digitized, content can be easily stolen, duplicated, and distributed among users on peer-to-peer networks that are difficult, but not impossible, to control. While one problem with online content is the lack of truly high-quality content delivery (described above), an even more daunting challenge is preventing the high-quality content from being stolen and distributed for free by interlopers and hackers. Even though technology offers some partial solutions, all reasonable encryption schemes can be broken by hackers. P2P networks can operate on the margin of laws by running offshore servers in countries that are not signatories to international conventions, and thus drain revenues from online media ventures. Laws that make it illegal to break encryption codes protecting content, enable the shut-downs of ISPs that distribute stolen content, and force device makers to include encryption schemes that

807

808

CHAPTER 14

Online Content Providers: Digital Media

prevent the playback of stolen content are partial solutions (see Chapter 9). Nevertheless, the uncertainties of content protection are clearly one of the reasons why more high-quality content is not available online. A different rights management issue concerns royalties to artists and writers. Authors and publishers are currently engaged in a battle over royalties for electronic editions. However, it is likely that these disputes among artists, writers, and their publishers will ultimately be resolved because of the shared interests of both parties in developing a new online distribution channel.

14.2 THE ONLINE PUBLISHING INDUSTRY: NEWSPAPERS, BOOKS, AND MAGAZINES Nothing is quite so fundamental to a civilized society as reading text. Text is the way we record our history, current events, thoughts, and aspirations, and transmit them to all others in the civilization who can read. Today, publishing of newspapers, magazines, and books is a $50 billion industry. The Internet offers the text publishing industry an opportunity to move toward a new generation of newspapers, magazines, and books that are produced, processed, stored, distributed, and sold over the Web.

ONLINE NEWSPAPERS In 2000, 54 million households in the United States received a daily newspaper, down from 62 million households in 1990 (Statistical Abstract, 2000). Offline newspaper readership of physical papers is declining and newspaper readers are moving online.

Audience Size and Growth There are more than 4,400 online newspapers in the world, about 3,161 in North America (Chyi and Sylvie, 2000; Editor and Publisher Interactive, 2000). About 17 million Internet users regularly visit one of the top seven online newspaper sites (see Figure 14.5). The UCLA Internet survey reports that 79% of Internet users — about 109 million users overall — spend about 30 to 45 minutes on average each week reading an online newspaper (UCLA Internet Report, 2001). Given this huge online newspaper audience, it is clear that the future of newspapers is the online market even as traditional print newspapers continue to be published. In terms of total online audience, newspapers are the most successful form of online content to date. The Internet provides existing branded newspapers the opportunity to extend their brands to a new online audience, and also gives entrepreneurial firms the opportunity to offer services — such as classified job listings — on the Web that were previously delivered by newspapers.

The Online Publishing Industry

UNIQUE VISITORS AND WEB REACH OF MAJOR ONLINE NEWSPAPERS

5.0

5.0%

4.5

4.6

4.0

4.0%

3.5

3.7

3.0

3.0% 2.9

2.5 2.0

2.0%

2.1

1.5 1.4

1.0

0.9

1.3

1.0%

0.5 0.0% kP os

t

e

Yo r w Ne

nG sto

ee

Bo

tJ

ou

rn

lob

al

es Str W all

Lo

sA

ng

hin

gt

ele

on

sT im

Po s

t

ay To d US

A W as

w

Yo r

kT im

es

0.0

Ne

Percentage Adult Internet Audience (Reach)

Unique Visitors (in millions)

FIGURE 14.5

About 20% of Internet-connected adults read some online newspaper. SOURCE: Jupiter Media Metrix, 2001b.

Content The Internet has had a significant impact on the content that newspapers can offer. Four content changes are apparent: premium archived content, fine-grained search, timeliness, and reach and depth of content. Branded offline newspapers have migrated their offline content to the Internet, and focus on delivering news and editorials — both local and national — on current events, along with sports, local weather, and stock prices. In addition, newspapers have migrated their classified ads to their online sites. Online newspapers continue their offline community-oriented services such as guest editorials and letters to the editor. The online environment permits considerable extension to traditional newspaper content. For instance, newspapers can offer access to premium archive content by permitting users to search back issues. The inherent fine-grained search capability of

809

810

CHAPTER 14

Online Content Providers: Digital Media

the Internet platform increases ease of access to news and archival information for consumers. The most significant change in content is timeliness: The Internet frees newspapers from the time-bound character of paper and printing presses and allows for instant updates to breaking stories. In this sense, online newspapers can for the first time compete directly with television and radio for reporting breaking stories. Firms have moved aggressively to develop online classified ads for jobs, automobiles, and real estate, while others have developed deep and rich content in specialized areas such as automobiles, computers, cameras, and other hobbyist topics. These new firms did not change newspaper content as much as they greatly expanded the reach and depth of the content and made it available to national and international audiences. The impact of these E-commerce I ventures on the newspaper industry has been challenging, but not devastating. These new online content sites compete directly with traditional online and offline newspapers for delivery of specialized content to consumers. Many new ventures failed, but others such as Monster.com, Autobytel.com, and CNET.com drained significant readership from newspapers for specialized, deep content; created nation-wide marketplaces that did not exist before; and put a significant dent in local newspaper classified revenues. Historically, newspapers have been slow to respond to Internet opportunities and challenges.

Online Newspaper Revenue Models and Results Traditional newspapers make money by selling subscriptions for regular delivery and by selling advertising space, both fine-print classified ads as well as traditional ads placed on pages. Newspaper ads typically are paid for by local merchants selling goods and services in the area of a newspaper’s circulation. Advertising accounts for 41% of newspaper revenues, up from 30% in 1980, and subscriptions account for 50% of revenue, with other miscellaneous income coming from printing legal notices (Newspaper Association of America, 2001). Online newspapers predominantly rely on an advertising revenue model: Free content is delivered online and paid for by advertising. Free content newspapers have sought to supplement revenues by using a pay-per-view model for premium or archival content. The Atlanta Journal Constitution, for instance, sells passes to archival content and charges for electronic reprints, posters, books, and even mugs and t-shirts. In general, the advertising revenue model has not been successful for online newspapers; the costs of producing the content and operating the Web site have far exceeded advertising revenues. For instance, the Washington Post, one of the most successful online newspapers (it reaches 20% of its Washington D.C. area readership through its online edition, far exceeding the typical online newspaper reach of 5% to 10%), spent $85 million in 1999 on Web delivery, but produced only $17 million in

The Online Publishing Industry

revenues, and continues to experience similar losses in 2000 (White, 2000). The digital unit at the New York Times (Times Co. Digital) similarly reported losses of $40 million in 2000, and reduced staff by 116 employees in 2001 (Barringer, 2001). Only a very few newspapers with strong offline brands such as the Wall Street Journal have been able to profitably use a subscription model (see the opening case). In response to the challenge posed by pure-play online classified job sites, the newspaper industry has sought industry-wide alliances to develop competing sites and to move toward a value-added revenue model for this segment. To compete against TMP’s Monster.com, the New York Times, Times-Mirror Company, the Tribune and the Washington Post have created a territorial model called CareerBuilder.com. The idea is to sell advertisers a package offering online classifieds for free to those buying print ads. The companies divide up the national circulation base into regional territories and offer advertisers a choice of regions with each newspaper monopolizing a territory. Advance Publications, the Hearst Corporation, and nine other media companies have joined together to create a company called PowerOne Media that offers a national classified site called Abracat.com offering boundary-less national classifieds for both offline and online. Both types of online responses offer users value-added services. When searching for cars, for instance, users can find information on national prices, consumer reports, financing rates, and insurance information for their region and city. It is unclear at this time if the value-added model of newspapers can compete profitably against focused pure online sites such as Monster.com and Autobytel.com.

Convergence In terms of our schema of convergence — technology, content, and industry structure — there has been only slight movement toward convergence.

Technology The movement of published text to the Web is a first step toward technology platform convergence. However, the next movement toward wireless mobile devices for news delivery has not yet occurred, although the top ten newspapers are investing in this area despite overall losses. Content There has been limited content convergence, primarily in the production and distribution areas. Online newspaper sites look unmistakably like newspapers and online editions of televised new programs such as CNN.com look unmistakably like television news shows with both test stories and streaming video news casting. Most online classifieds look like offline classifieds. The core competency of newspapers is reporting and writing news stories and editorials. Hence, newspaper content has changed little although leading papers such as the Wall Street Journal are developing personalized news pages allowing users to

811

812

CHAPTER 14

Online Content Providers: Digital Media

define the news they want to see. Production teams have increasingly merged into singular content creation groups under the pressure of financial losses, and flexible distribution systems using advanced page layout software have created a singular distribution system that permits content to be re-used easily in both text and online versions of the newspaper.

Industry Structure

While the newspaper industry has gone through a period of consolidation, with local and regional papers either disappearing or being purchased by larger newspaper conglomerates, there is nevertheless no movement toward crossmedia convergence. Entertainment companies in film and television production have not purchased newspapers, and newspapers have made very few media purchases that are not directly related to their core businesses.

Challenges The newspaper industry faces significant challenges and opportunities in the next five years. The online audience for newspapers will continue to grow in both sheer numbers and sophistication, demanding higher quality online delivery and more services. The industry has made significant investments in technology for Web content creation and delivery, but faces new technology challenges and costs in developing wireless mobile delivery platforms. Under the pressure of continuing losses, online divisions of newspapers have significantly reduced their operating costs by cutting staff, merging digital staff with print staff, and using new software tools for dynamic page layout of online content. Consumer attitudes that demand free content have been difficult to change for any media, including newspapers. However, online newspapers are slowly learning to add value to their content by providing additional services, content, and depth. In addition, use of micropayment systems such as that offered by QPass at the New York Times provides a mechanism for charging for single low-cost articles. Some newspapers are facing issues of cannibalization. The Christian Science Monitor, for instance, reports that its online edition has eight times as many readers as its print edition, and that many avid readers have stopped paying for the print edition because they can get it free online. The Wall Street Journal has an opposite experience: Most new online subscribers have never subscribed to the Journal, and only 31% of online readers also read the print version. The value of a newspaper is largely the intellectual content created by its writers and the classified listings created by advertisers. Like all traditional media, newspapers face difficulties in controlling access to their valuable premium content and services that they charge for. For instance, once an archive article is paid for and downloaded from the New York Times (a nominal fee of $2.75 is charged for a downloaded article), it can be saved, digitally distributed via e-mail, or posted to a Web site where millions of people can view the same article for free. This “digital leakage” involves substantial revenues. Ideally, newspapers would be able to charge $2.75 to

The Online Publishing Industry

each additional reader of the article. Current digital rights management software does not conveniently permit this level of security. The Digital Millennium Copyright Act (DMCA), however, does provide some protection against the large-scale commercial unauthorized exploitation of copyrighted material by requiring that ISPs remove or block access to such material if requested by the copyright holder.

BOOKS: THE EVOLUTION OF E-BOOKS In April 2000, Stephen King, one of America’s most popular writers, published a novella called Riding the Bullet. This novella was only available as an “e-book.” King was the first major fiction writer to create an e-book-only volume of a new work. King’s publisher, Simon & Schuster, arranged for sales online through online retailers such as Amazon.com. In the first day, there were 400,000 downloads, so many that Amazon’s servers nearly crashed several times. More than 500,000 downloads occurred in the first week, for a price of $2.50 for a 66-page novella — about the same price per page as a standard King hardcover novel. While Amazon gave the book away for free in the first two weeks, when it began charging for the book, sales continued to be brisk. King’s successful experiment with Riding the Bullet popularized the idea of e-books and raised for the first time the prospect that e-books might be a commercially viable form of book publishing. The essential question facing the book publishing industry is: If people are willing to buy physical books, would they also be willing to buy electronic versions of books? The next question is, “How much would they be willing to pay for an e-book?” And finally, “What changes to the concept of the book itself might be necessary to encourage people to buy e-books online?” The Internet already has brought about significant change in book sales and distribution, and is beginning to have an impact on the design, creation, and production of books. The book itself, and the reading experience, is starting to slowly morph into a truly different product. Online books (e-books), online print-on-demand books, and mixed media books are beginning to appear and are changing the concept of the traditional book from a passive form of entertainment to a more interactive form of engagement. The modern book is not really very different from the first two-facing page, bound books that began to appear in seventeenth century Europe. The traditional book has a very simple, non-digital operating system: text appears left to right, pages are numbered, there is a hard front and back cover, and text pages are bound together by stitching or glue. In educational and reference books, there is an alphabetical index in the back of the book that permits direct access to the book’s content. While these traditional books will be with us for many years given their portability, ease of use, and flexibility, a parallel new world of e-books is expected to emerge in the next five years.

813

814

CHAPTER 14

Online Content Providers: Digital Media

E-books

Web-accessed e-book an e-book stored on a publisher’s server that consumers access and read on the Web

Electronic books were around for many years before the Internet. In 1971, Michael Hart began Project Gutenberg at the Materials Research Lab at the University of Illinois. Hart began by typing in the Declaration of Independence, and proceeded to put more than 2,000 classic books online at the University’s Computer Center. The books are all in ASCII plain text without traditional book fonts or formatting. While not a joy to read, they were free. In 1990, Voyager Company, a New York-based media company, began putting books such as Jurassic Park and Alice in Wonderland on CDs. However, with the exception of encyclopedias and large reference texts, popular books on CDs never were a commercial success. They were expensive to produce and distribute, and appeared in the marketplace before most PC users had CD-ROM drives. The development of the Internet and the Web greatly changed the possibilities for e-books. The Web offered publishers much lower distribution costs (each “copy” on the Web can be downloaded for almost no cost), and unlike the early computer-based e-books, all the formatting, fonts, and colors used by publishers in high-quality books could be preserved when Adobe’s portable document format (PDF) is used to create the text. There are many different types of commercial e-books (see Table 14.4.). The two most common e-books are Web-accessed or Web downloadable. Web-accessed e-books are stored on the publisher’s servers and purchasers pay a fee for reading the book on-screen; in some cases there is no fee. The most successful Web-accessed

TABLE 14.4

TYPES OF E-BOOKS

E-BOOK TYPE

DESCRIPTION

Web-accessed e-books

E-book remains on publisher’s Web site and is read only on the site. Purchasers pay a fee for metered access.

Web-downloadable e-books

Contents of e-book can be downloaded to client PC for reading. Printing may or may not be possible. Purchaser pays for initial download and reading. Subsequent use may be metered or free.

Dedicated e-book reader

Contents of e-book can be downloaded only to dedicated hardware device either directly connected to the Web or through a PC connection.

General-purpose PDA reader

Contents of e-book can be downloaded from the Web to a general-purpose handheld personal digital assistant (PDA) such as a Palm.

Print-on-demand books

Contents of a book are stored on a Web server; they can be downloaded on demand for local printing and even binding.

The Online Publishing Industry

e-books are online encyclopedias such as the abridged edition of the Encyclopedia Britannica. Web downloadable e-books are a more user-friendly e-book that can be downloaded from the Web, stored as a file on the client PC, and in many cases printed, although some e-books have security locks that prevent printing. The largest library of downloadable e-books is NetLibrary’s e-book collection of approximately 40,000 titles. Dedicated e-book readers are a much less common form of e-book even though they have received enormous publicity. Dedicated readers are single-purpose devices that have proprietary operating systems that can download from the Web and read proprietary formatted files created for those devices. Each dedicated reader makes available to customers several thousand generally popular titles. There are two major brands of dedicated readers currently available: the Gemstar REB line and Franklin eBookMan. Prices range from a low of $129 to a high of $700 retail. Dedicated e-book readers have not been popular and fewer than 50,000 of the devices have been sold by 2001 (Austen, 2001). General-purpose PDA handheld devices such as the Palm, HP Journada, and Sony Clie offer publishers a much larger potential market for e-books. There were approximately 20 million PDAs in daily use in the United States in 2001; using special software such as Microsoft’s Reader for the Pocket PC, PDAs can display exceptionally clear text using operating systems that are more general purpose. The Microsoft Reader, for instance, is compatible with Windows 98 and 2000, and book files can be moved easily from client PCs to client handheld devices using the Windows CE operating system.

815

Web-downloadable e-book an e-book that can be downloaded from the Web, stored as a file on the client PC, and perhaps even printed dedicated e-book reader a single-purpose device with a proprietary operating system that can download from the Web and read proprietary formatted files that can be read only on that device

816

CHAPTER 14

print-on-demand book custom-published book

Online Content Providers: Digital Media

Print-on-demand books are less well known, but arguably the largest form of electronic publishing. According to Forrester Research, the digital delivery of customprinted books will generate $7.8 billion in revenues in 2005, compared to only $251 million predicted from the sale of e-books on the Web in 2005 (Forrester, 2000). Sometimes called “custom publishing,” print-on-demand books are usually professional or educational titles that are stored on mainframe storage devices ready for printing in small print runs on demand. For instance, most college publishers have a “custom book” program that allows professors to put together digitally stored chapters from many different books, along with articles from scholarly journals, and to publish a small print run of, say, 400 books for a single class. Generally, these books are no less costly to produce or purchase, but they have the advantage of flexible content that can be changed to meet the specific needs of users.

Book Audience Size and Growth In 2000, consumers spent about $17 billion for books: $3 billion on consumer trade books, and $14 billion for professional and educational books. Altogether, about 60,000 new book titles appear each year in the United States, including imports, down from 70,000 new titles in 1995. In general, trade book sales, including fiction, have been flat since 1990, while revenues for professional and educational titles are growing rapidly at about 7% annually. By raising prices, publishers have kept revenues stable in spite of declining titles. Per capita spending for trade books was about $98 in 2001, far exceeding video games ($29), theater movies ($35), or even recorded music ($68). In

The Online Publishing Industry

other words, books are a substantial element in the consumer’s time and revenue budgets, and for professional and educational titles, book publishing is growing more than twice as fast as the general U.S. economy (Statistical Abstract of the United States, 2000). Unlike newspapers, reading books on the Internet is not a popular activity. Internet users report spending only 6 minutes per week reading books online, compared to 40 minutes reading newspapers. Online e-book sales — both reading online and downloading e-books for offline reading — generated about $74 million in revenue in 2000. However, buying books online is one of the most popular activities of Internet users: 40% of experienced users, and about 50% of all Internet users — about 70 million people a year — report buying books online (UCLA Internet Report, 2001; Jupiter Media Metrix, 2001c). This huge online audience for published books has had a significant impact on the book distribution and sales business, and represents an extraordinary opportunity to introduce new electronic editions of books in the future. It raises the first question: “Will people pay for e-books and how much will e-book sales grow?” Figure 14.6 describes the estimated future growth of e-book sales on the Web. There is no single catalog of e-books, and therefore it is difficult to estimate the total

E-Book Revenue (in millions)

FIGURE 14.6

THE GROWTH OF E-BOOK REVENUES TO 2005

1600 1413

1400 1200 1000 787

800 600

429.5

400 218.5 200 0

99.5 2001

2002

2003

2004

2005 Year

There is considerable variance in the projections for e-book sales. Our figure reflects an average of several different industry estimates developed by Forrester Research, Andersen Consulting, Seybold, and Jupiter Media Metrix.

817

818

CHAPTER 14

Online Content Providers: Digital Media

number of new e-book titles each year. However, it is likely that between 2,000 and 3,000 new commercial e-book titles appeared in 2001, not counting several thousand self-published e-books. The market for e-books depends greatly on how rapidly the traditional trade book and academic textbook publishers move existing and new works to the e-book format. In July 2000, Random House, a division of Bertelsmann A.G., the huge German media conglomerate and the largest trade book publisher in the world, announced the creation of a complete list of original e-books. The books are being commissioned expressly for e-book formats and may never appear in print. Academic textbook publishers are also moving toward the use of the Web as a distribution channel. Thomson, the Canadian electronic and information publishing giant, estimates that in 1999 only 3% of its revenues for college learning came from electronic media. This figure grew to 10% to 12% in 2000 and is expected to grow to more than 50% of revenues by 2005. Other academic and professional publishers expect a similar transition in revenues toward electronic distribution (White, 2001).

Content: Advantages and Disadvantages of E-books E-books offer many advantages compared to traditional published works. Among these are:

• • • • • • • • • • •

Reduced transaction costs for the user: Instant downloading Increased accessibility to entire libraries from the home or office Searchable text Easy integration of e-book text with new text by cutting and pasting Modularization of the book’s content down to the sentence and word level Easy to update or change Lower production and distribution costs Longer lasting Increased opportunities for writers to publish Increased availability of out-of-print books and increased value of book archives Reduced cost of library functions, further democratizing access to books

While this is a formidable list of advantages, e-books also have many disadvantages that have reduced their market acceptance. Among the most important disadvantages of e-books are:

• • • •

They require expensive and complex electronic devices to use Less portability than print books Reduced quality of print on screen, making them more difficult to read Multiple competing standards

The Online Publishing Industry

• Uncertain business models • Copyright management and royalty issues with authors As one commentator noted, reading an e-book is just like reading a regular book except that it requires an expensive machine, it is not portable, and it is difficult to read. The publishing industry and technology research labs are seeking to address each of these issues. The prices of dedicated readers are falling, and the size of their libraries is increasing. Moreover, as Web access becomes as ubiquitous as telephone and television access, the cost of machines required to read e-books will decline. As we describe below, new standards and technologies are being developed to improve readability and portability across devices.

E-book Industry Revenue Models The e-book industry is composed of intermediary retailers, traditional publishers, technology developers, and vanity presses. Some of the key players in the new e-book industry are listed in Table 14.5. Together, these players have pursued a wide variety of business models and developed many alliances in a collective effort to move text onto the computer screen. In the traditional commercial book business model, publishers pay authors advances against earnings to write books. Publishers provide editorial, marketing, and sales expertise. Publishers sell these works to national distributors or directly to large retail book chains. In the case of noncommercial books, authors pay so-called vanity presses to publish and sell their books, receiving very little if any editorial or marketing assistance. The development of e-books has brought about several changes in this traditional model. The primary e-book revenue model is pay-for-download, a model that involves traditional publishers and authors creating electronic editions of books, and publishers selling these works in their entirety through new online bookstore intermediaries such as barnesandnoble.com and amazon.com. E-books have not changed the traditional revenue model significantly. In general, publishers have not begun to sell e-books directly to the online audience simply because publishers have chosen not to develop these online capabilities — although in the future they could. Barnesandnoble.com is a special case: It began as a subsidiary of the largest retail book chain in the United States, but is now a separate corporate entity that occasionally acts as a publisher by commissioning new e-works at the same time it is a retailer of those e-works. Even hardware companies are becoming involved in e-book distribution. In November 2001, Palm’s newly formed subsidiary Palm Digital Media (formed after the purchase of Peanutpress.com, an early but unsuccessful entrant to the e-book publishing business) obtained the rights to distribute publishing giant HarperCollins’s “Perfect Bound” line of e-books to Palm owners. Palm owners can now download from the Palm site more than 3,000 titles from e-book

819

820

CHAPTER 14

TABLE 14.5

Online Content Providers: Digital Media

EXAMPLE E-BOOK INDUSTRY FIRMS

C O M PA N Y

E-BOOK ACTIVITIES

Distributors FatBrain.com

Distributor to corporate training programs (Barnesandnoble.com).

Amazon.com

General audience online retailer. Alliance with Microsoft to sell MS Reader books.

Barnesandnoble.com

General audience online retailer of books and e-books.

NetLibrary.com

Largest online e-library, now owned by OCLC.

GemStar Inc.

E-book publishers and online distributors.

Adobe eBook Store

Online sales of e-books demonstrating the Acrobat platform.

Publishingonline.com

Online retailer of e-books and print books.

Technology Developers Adobe Systems Inc.

Owners of Acrobat and PDF file format for e-book display on PC, CRT, and LCD screens.

Glassbook Inc.

Technology developers and vendors.

InterTrust Technologies

Digital Rights Management (DRM) software tools.

Microsoft

MS Reader software for e-book display on PDAs and PCs; supporter of OEB standard.

Palm

Most popular PDA hardware and operating system; can be used for e-books.

Sony

Manufacturer of PDA hardware.

Hewlett Packard

Manufacturer of Journada PDA that uses MS Reader.

Traditional Publishers Pearson PLC

Developing new models of online e-books for educational books.

Thomson Learning

Educational publisher that plans to derive 50% of its revenue from e-materials by 2005.

Random House

Largest trade book publisher has developed a separate division to develop e-book titles.

Vanity e-Presses xLibris (Random House)

Self publishing online.

ebooks-online.com

Online sales and publishing.

publishers such as HarperCollins, Random House, Simon & Schuster, and Time Warner Trade Books. (Boulton, 2001). A second e-book revenue model involves the licensing of entire e-libraries of content. Licensing is similar to a subscription model; users pay either a monthly subscription fee or a flat fee for annual access to hundreds of titles. The licensing model is exemplified by NetLibrary, described in Insight on Business earlier in this chapter.

The Online Publishing Industry

821

While the library licensing model is not new, having been used by archive owners such as Lexis-Nexis, Compuserv, and others since the 1960s, NetLibrary was the first large-scale experiment that involved the licensing of entire electronic libraries to universities and colleges. Neither the pay-for-download nor library licensing models is profitable at this time. The large traditional publishers involved in this market see at least a five-year development period to 2005, at which point profits are expected.

Convergence The publishing industry is making steady progress toward media convergence in terms of technology platform, content, and industry structure.

Technology One would think that it would be a simple matter to merge the world of text and books with that of the Internet and the Web, which originally were both textbased media. However, four technology-based difficulties have slowed this aspect of convergence: poor computer screen resolution, the lack of portable reader devices that can compete with the portability of the traditional book, the absence of a powerful digital rights management technology that can protect the copyrights of digital works, and the lack of standards to define cross-platform e-books. As noted above, the most likely solution for portability of e-books are PDAs such as the Palm and HP Journada. However, the screens on current PDAs are too small for comfortable text reading. The printed page has a resolution of 1200 dots per inch compared to computer displays with resolutions of about 72 to 96 dots per inch. Display of text on standard PC screens also produces eyestrain because of low resolution. Microsoft’s Reader uses ClearType and Adobe’s e-book Reader use CoolType, both of which are sub-pixel display technologies that enhance resolution by dividing the screen into sub-pixels and filling in sub-pixels with grey color to form a more uniform image of each letter. Horizontal resolution is increased by about 30% over traditional display software. ClearType and CoolType can be downloaded for free from Microsoft and Adobe Web sites. Several technology firms have developed digital rights management (DRM) software, server software that helps prevent illegal distribution of paid content over the Web. Adobe’s Acrobat comes with limited DRM that can control printing and copying of downloaded matter. Intertrust is an industry leader in this field. Hackers can break most of these DRM technologies, and hence, many publishing firms have been reluctant to publish works on the Web. Table 14.6 describes the leading standards for e-books that are just emerging. The most widely adopted standard is the Adobe Acrobat PDF file format. Tens of millions of computer users have downloaded this file-formatting software. It preserves fonts, formatting, and graphics information and can be used on almost any computer including Macintoshes, UNIX-based computers, and PCs. Open e-book (OEB) is an

sub-pixel display technologies technologies that help enhance resolution of e-book reader display screens digital rights management (DRM) software server software that helps prevent illegal distribution of paid content over the Web

822

CHAPTER 14

TABLE 14.6

Online Content Providers: Digital Media

STANDARDS FOR E-BOOKS

E - B O O K S TA N DA R D / S O F T W A R E

DESCRIPTION

Screen Display Microsoft Reader “Clear Type”

Free software for improving LCD text display through sub-pixel rendering on MS CE PDA devices.

Adobe CoolType

Free software for improving LCD text display through sub-pixel rendering on PDAs.

E-Ink

Electronic ink display for LCDs.

Formats Open e-book (OEB and OEB.LIT)

Microsoft-supported industry group to define e-book formatting. OEB.LIT adds digital rights management capabilities.

Adobe Portable Document Format (PDF)

Adobe’s free viewer software for PC and PDA screen display of rich text, complex fonts and formatting. Works best on PC screens. New versions contain rights management capabilities.

TK3 (NightKitchen)

CRT and LCD display of text, images, sounds, and video.

Book Industry Product Description ONIX

Universal, international industry standard for describing book products and contents based on XML.

emerging industry-formatting standard that is supported by publishers and software firms such as Microsoft. OEB provides a specification for representing the content of e-books, and is based on HTML and XML, making it universal across all platforms and types of screens. Currently, OEB supports only minimal formatting and is best for simple text, not complex graphics combined with text. ONIX (Online Information Exchange standard) is an industry-wide standard for transmitting information about books, so-called “meta data.” For instance, a book jacket may contain review comments, description of contents, a picture of the author, and author biography. Currently there is no way to communicate this information electronically from the publisher to the online book store that wants to display this meta data on a Web page. ONIX is an XML-based set of approximately 200 tags (e.g., Scribner’s) that can easily be read and communicated to book distributors and retailers (www.editeur.org, 2001; Book Industry Study Group, 2001).

The Online Publishing Industry

Content

E-books today have made little progress toward content convergence. Most e-books contain only text and graphics, and often are simply PDF versions of files sent to the printers to run the physical presses. E-books can be placed along a continuum of transformation (and cost). E-books currently are in the media integration stage where text is being re-formatted for electronic display. This is a low-cost beginning, allowing publishers to focus their attention and budgets on building their online distribution networks. As described in Insight on Society: The Evolving E-book, however, some firms are beginning to experiment with more interactive experiences that eventually will transform e-books into multimedia events containing lectures, interviews and speeches with the authors, online polls and quizzes, online updates of content, and videos to support the experience. In the production and distribution dimensions of content convergence, however, more progress is being made. The Internet has transformed the writing and editing environment for books by expediting the flow of manuscripts among writers and editors, and the movement of completed book files from publishers to printers. The development of XML and its increasing use in publishing, and the development of large-scale online text/graphic storage systems have transformed the entire book production process and made it much more efficient. Table 14.7 summarizes some of the more important developments in the knowledge-production process brought about by the Internet and the Web. In distribution of book content, the Web has obviously had an enormous transforming impact on book sales by opening an entirely new distribution channel used by more than 40% of Web users.

TABLE 14.7

THE EFFECTS OF INTERNET PUBLISHING

EFFECTS OF INTERNET PUBLISHING

EXAMPLES

More efficient knowledge processes

Online search of articles; full-text downloading; 24x7 availability.

New knowledge representation

Hypertext; animation, video, graphics.

Interdisciplinary integration

Hyperlinks among journals, books, and articles.

Transformation of production process

Online editing; direct link from authors to editors and reviewers; lowered the cost of self-publishing.

Transformation of consumption process

Digital libraries bypass conventional libraries; direct online publishing by authors.

SOURCE: Adapted from Zhao and Resh, 2001.

823

824

CHAPTER 14

Online Content Providers: Digital Media

INSIGHT ON SOCIETY THE EVOLVING E-BOOK In the mid-1990s, the e-book was a stunning idea: individuals reading popular books on the Internet, maybe even paying for them. But this idea of the e-book is dated. Think about the first automobiles. Everyone knew in 1900 what an automobile should look like: It would have three or four wheels, use a tiller for steering, leaf-springs for cushioning, and a carriage to hold the people. It would be a horseless carriage! But just as the horseless carriage evolved over a hundred years into what we now see as a proper automobile, so also will the e-book evolve. In fact, it already has evolved. The future direction of e-books is evident today by looking at online content sites as diverse as CNN.com and Amazon.com, as well as efforts by publishers to develop Web-unique experiences. Why, for instance, should a book have just a single author or a few authors, and why should books be read alone? Sagas — lengthy stories of an entire people shared through an oral tradition — had multiple authors. It is possible on the Internet to have a community of readers contribute to both the authorship of the online e-book and the experience of reading the book. For instance, Prentice Hall, a Pearson PLC higher education publisher, is currently developing a product called “Active Books.” Active Books have both a text and a Web component. The text component is a short, inexpensive, black and white version of the larger four-color, full-priced textbook. The four-color graphics, tables, and

cases that support the textbook are placed on the book’s Web site. Users of the Active Book — students and professors alike — are encouraged to contribute content, feedback, and queries to the Web site. This community content could be in the form of new case material, news, views, and reviews of related events. When a student “uses” the book, more than reading text on screen is involved, and more than one author will contribute to the learning experience. Also, when students use the Active Book, they will be interacting with students and professors at other schools who are using the book that semester. But let’s take e-books one step further, say out to 2005. E-books most likely will evolve into much richer learning environments with substantial audio, video, and community participation than is true of today’s text-only e-books. Since the late 1970s, the Perseus Project at Yale has developed e-book matter on ancient societies that includes extensive bibliographies, art albums, and related articles. Voyager Corporation in New York pioneered the first CD-ROM-based e-books that included interviews, bibliographies, and video that transformed the traditional notion of a book into a multimedia experience. The Web site for this book contains short summary lectures written and delivered by the author, summaries of recent research, breaking news, career information, and business planning information. In the future, full-length lectures might be available to everyone using the book. Community feedback could be organized as a part of the streaming lecture, with students submitting e-mail to the lec-

The Online Publishing Industry

turer and sharing instant messages with one another about the contents of the lecture. A subject such as e-commerce is so broad that other scholars might contribute sections of the learning experience, making the project more of a joint effort of scholars across the world rather than the product of just a single author team. It is difficult to foresee if this open-ended, community-based and authored model for textbooks could apply meaningfully to fiction, or non-

fiction works in, say, history. But as we see throughout this chapter, the Internet is changing the consumer’s sense of entertainment and even education. Heightened expectations for participation, involvement, engagement, and self-control are driving consumers toward Web sites and content providers that can provide these kinds of experiences, creating new opportunities for innovative publishers.

SOURCES: “The Battle to Define the Future of the Book in the Digital World,” by Clifford Lynch, www.firstmonday.dk, May 28, 2001; “Brave New e-Books,” by Craig Offman, www.salon.com, March 27, 2001.

Industry Structure The book publishing industry and the creation, production, and distribution of e-books is dominated by a few titans, with the level of industry concentration increasing as large media companies such as Bertelsmann, and large text publishing companies such as Pearson PLC, Thomson, and McGraw Hill, absorb smaller presses. Nevertheless, the Internet has created many new opportunities for authors, publishers, distributors, and specialized book retailers. Entrepreneurial startup firms such as NetLibrary demonstrated that a market existed for inexpensive digital libraries. Entrepreneurial online book distributors from Amazon.com and Barnesandnoble.com to much smaller, specialized topic, boutique online distributors have demonstrated a huge marketplace for online distribution of traditional books. Online book distributors such as Barnesandnoble.com have commissioned new e-book titles and moved into publishing. Authors have published works directly to the public without the intervention of publishers, and publishers such as Random House have simultaneously moved into direct distribution to the public of selected works (while continuing to utilize online distributors such as Amazon). Technology providers such as Adobe have begun limited distribution of e-books, and Palm has purchased the ebook assets of peanutpress.com and begun selling e-books directly to the public. MAGAZINES: ONLINE “ZINES” Online magazines began appearing in 1995 with creation of Salon and Slate magazines as purely online “zines” — Web lingo for online magazines. Since 1995, all of the top fifty offline printed magazines have developed Web sites to extend their brands to the Web. Online magazines have become an online consumer success story with more

825

CHAPTER 14

Online Content Providers: Digital Media

FIGURE 14.7

Online Population (in millions)

826

GROWTH OF ONLINE MAGAZINE READING AND INTERNET POPULATION

160 Series 2

140 120 100 80

Series 1 60 40 20 0

1995

1997

1999

2001 Year

Growth of online magazine reading initially lagged behind the growth of the Internet as whole but it has accelerated rapidly to parallel the growth rate of the Internet itself. Series 1 is the number of people who read online magazines; Series 2 is the online population. SOURCES: Magazine Publishers of America, 2001; “FCB Media Research Report Magazines in the Information Age,” www.magazine.org (Spring 1998); Jupiter Media Metrix, October 2000.

than 50 million Internet users visiting online magazines in 2001 (UCLA Internet Report, 2001). However, as with newspapers and books, few if any online magazines have turned a profit even though they may contribute substantially to the offline branded print magazines these sites often support. The challenge facing the online magazine industry is to become profitable revenue centers.

Audience Size and Growth Next to newspapers (150 hours per year) and books (98 hours), online magazines are the most common form of online content, with Internet users spending on average about 79 hours per year reading magazines. The growth of online magazine readership trailed the growth of the Internet, but once consumers became aware of online magazine benefits, they increased their visits (see Figure 14.7). Other online magazine facts:

The Online Publishing Industry

• 62 million individuals visited a magazine site in 2001 — about 45% of the 138 million individuals online.

• 2% of the online population — about 2.76 million — spend more than 10 hours a week reading online magazines.

• The primary motivation for visiting magazine sites is exclusive content and convenience, not low cost.

• 75% of online magazine visitors also purchase the offline print version (Jupiter Media Metrix, 2001d). Figure 14.8 summarizes the readership of top online and offline magazines in 2001. In general, online magazines have converted very few of their offline readers to the Web editions, suggesting there is ample room for growth in online subscriptions.

Population of Readers (in millions)

FIGURE 14.8

READERSHIP OF LEADING ONLINE MAGAZINES

25 20 15 10 5

Illu lon s l G trat eo ed Be grap tte hic rH om es Sla te Tim e T Re V G ad uid ers e Di g Go od New est Ho sw us ee ek k ee pin g P l a Co y sm bo M opo y ar th lita aS n tew ar t

ple

Na

tio

na

Sa

Sp o

rts

Pe o

AA

RP

0

Note: AARP, the American Association of Retired Persons, publishes three magazines offline and online: My Generation, Modern Maturity, and AARP Bulletin. The number in the chart reflects the combined circulation of all AARP publications. SOURCES: Magazine Publishers of America, 2001; “FCB Media Research Report Magazines in the Information Age,” www.magazine.org (Spring 1998). Updated to 2001 using Web site data and annual reports.

827

828

CHAPTER 14

Online Content Providers: Digital Media

Content While the content of online magazines is often repurposed from the print edition, there are many advantages that online magazines have over their print counterparts. Online magazines offer searchable archives, cover breaking news stories, contain exclusive content, offer convenience, and allow users to share ideas with others who read the magazine through chat groups and bulletin boards. For example, in addition to content written exclusively for the magazine, Slate offers users general, financial, sports, arts, and political news; discussion groups; and e-commerce opportunities provided by advertisers that are appropriate to Slate’s audience. One of the more interesting features is political cartoons that you can send to your friends as greeting cards for free. In general, online magazine articles, like newspaper stories, are short and often can be printed for free. Unlike e-books, readers of online magazines rarely complain about the difficulties of reading the stories.

Online Magazine Revenue Models In E-commerce I, the objective of early entrepreneurs was to create a new online magazine that would attract millions of visitors with free and exclusive content, and derive revenue from selling advertising to major offline corporations. This advertising

The Online Publishing Industry

model failed for two reasons: not enough online readers appeared, and online advertising experienced severe cut-backs beginning in 2000 as advertisers could not correlate expenditures with sales. Online-only magazines using an advertising model have disappeared, cut back significantly, attempted to move to a new revenue model, or, like Slate magazine, merged with a larger corporation such as Microsoft that can afford to finance continued losses while building readership and advertising over a long period of time (Blair, 2001). It would be wrong to conclude that the online advertising model will disappear in E-commerce II, however. In fact, online advertising is expected to triple from its current $7.6 billion in 2001 to $23 billion in 2005, and online magazines for the most part will depend on advertising to survive just like their print counterparts. As online magazine readership increases greatly in the next five years, ad space revenue will increase. The online magazine audience has excellent demographics: it is young to middle age, educated, and wealthy — an ideal target audience for upscale products. A more common and successful online magazine revenue model is a marketing model where existing offline magazines develop Web site editions to extend their brand. In this model, whatever expenditures are not recovered from online advertising and e-commerce are considered to be brand-extension or marketing costs that are offset by revenues from the print edition. Successful magazines such as Time, Newsweek, TV Guide, and other top fifty print magazines pursue this model and use advertising revenues as a way to offset costs of operation. Perhaps the best-known example of an online magazine based on a marketing model is Style.com. Style.com was created by CondeNet, the online publishing arm of publishing giant Conde Nast, which publishes Vogue and W, along with many other magazines. Style.com was built to showcase and extend Vogue and W’s brand by providing online visitors with information, photography, and interviews with top fashion designers, models, and consultants. While much of the content for Style.com derives from the print editions, the site focuses on what the print editions could not provide: up to the minute coverage of fashion shows, trends, and 30,000 photographs of runway fashion shows, industry parties, and Hollywood premieres. The site derives revenue from advertising, co-branding with design houses, direct sales, and commerce. More than one-third of the visitors to the site are new to the magazine and do not subscribe to the print edition initially. Many online magazines are attempting to move toward a subscription model in which users pay for “premium” content. The premium content may be access to archives, or audio and video tracks that contain special content. For instance, Salon.com charges $6 per month (or $30 per year) for access to Salon Premium, which provides exclusive access to news and political writing, full access to Salon cover stories, downloadable and printable articles, MP3 tracks, and audio book downloads of famous novels (see the case study at the end of the chapter). The success of this model has yet to be proved. Salon’s experience indicates that only 2% to 5% of online

829

830

CHAPTER 14

Online Content Providers: Digital Media

visitors will purchase the premium edition, and magazines that charge for all content tend to go out of business rapidly. Several magazines are seeking additional revenues by developing premium content for mobile Web access. For instance, Salon.com has developed summaries of news content that can be downloaded to wireless PDAs. However, the ability to generate significant revenue from mobile applications in the next three to five years is probably quite limited.

Convergence In magazine publishing, there has been very little convergence with other media such as television, film, or music. The content of online magazines remains almost entirely text-based content delivered over the Web.

Technology

Unlike e-books, there is no readability problem and no need for special readers or software to enhance screen resolution. Online magazines have not had sufficient investment capital to merge text with audio and video clips, and only a few news magazines have begun to offer online video or audio interviews.

Content There has been convergence in areas of creation, production, and distribution. The movement of branded offline magazines onto the Web has created the

The Online Entertainment Industry

opportunity to leverage content developed for print onto the new Internet channel and to a substantial new audience. While initially the online writing staff was spunoff and separate from offline staff, for the most part these barriers have been removed and a single staff develops content that is then produced for two platforms: the print and Web editions.

Industry Structure

The magazine industry structure has not changed significantly because of the Internet. In E-commerce I, it was widely believed that an entirely new set of online magazines would quickly rise to challenge the dominance of old “legacy” magazines such as Time, Newsweek, and House and Garden. Instead, most of the pure online magazines failed, while old legacy magazines moved decisively onto the Web in 2001. Without the old magazines moving online, online magazine readership would not have accelerated as it has in 2001. In this instance, it is the offline world of national brand magazines that is driving online traffic.

E-COMMERCE IN ACTION: CNET NETWORKS, INC. CNET Networks Inc. is one of the top ten Web destination sites, with 60 million unique monthly visitors worldwide, 9.8 million registered users, and 14.6 million newsletter subscribers, making it the world’s top technology destination site. You can find an E-commerce in Action case that examines CNET Networks in-depth at www.LearnE-commerce.net.

14.3 THE ONLINE ENTERTAINMENT INDUSTRY In some versions of an ideal Internet e-commerce world, you would be able to watch any movie, listen to any music, or watch any TV show you wanted on the Internet whenever you wanted. You would be billed monthly for these services by a single provider of Internet service — either a cable or telephone company. This idealized version of a convergent media world is many years away. Yet the foundations for this future are being built today. When we think of the producers of entertainment in the offline world, we tend to think about television networks such as ABC or NBC, Hollywood film studios such as MGM, Disney, and Twentieth Century Fox, and music labels such as Atlantic Records, Columbia Records, and Warner Records. Interestingly, none of these international brand names have a significant entertainment presence on the Internet. Although traditional forms of entertainment such as television shows and Hollywood movies are not yet available on the Web, we will still discuss the five-year prospects for delivering this content over the Web simply because feature-length films and television programming will form a major element of online entertainment at some point in the future. In the absence of popular mass media on the Internet,

831

832

CHAPTER 14

Online Content Providers: Digital Media

online consumers are redefining and considerably broadening the concept of entertainment. Much of this section will focus on this new kind of entertainment. The new forms of Internet entertainment raise the question, “What is entertainment — online or offline?” For our purposes we will define entertainment as activities people self-report as fun, engaging, or expressive. We can extend these three common sense attributes into more formal categories of high levels of consumer-focus, interactivity, and self-control.

ENTERTAINMENT AUDIENCE SIZE AND GROWTH Defining the Internet entertainment audience is a complex task not simply because of the difficulty of defining entertainment but also because of the many different ways of measuring audience size and intensity. For instance, about 37 million Internet users report downloading music from a Web site — easily making the downloading of music one of the most popular Web activities — but only about 5 million do so on a regular basis, whereas 20 million people regularly view or download “general content” such as news, financial news, and health information (Jupiter Media Metrix, 2000). Moreover, the time users spend at various entertainment sites — arguably a useful measure of intensity — is not high for music sites because users typically download musical tracks and record them on CDs for later play rather than listening to streamed music off Web sites.

Traditional Entertainment Recognizing these difficulties, let’s examine first the use of “traditional” entertainment content such as films, music, sports, and games; then we will look at nontraditional online entertainment. Figure 14.9 shows the current and projected growth for traditional entertainment content such as film, music, sports, adult content, and online games. Music downloads lead the list of traditional entertainment, followed by online games, adult content, sports, and film. Figure 14.9 describes the projected revenue growth in downloaded musical revenues, and its increasing share of all online music revenue that includes the sales of CDs. Unlike music, feature films and television shows are expected to generate a very small amount of Internet revenue, given the current technical limitations of the Web.

Nontraditional Online Entertainment A different picture of online entertainment growth emerges when we consider the usage intensity at various sites. Figure 14.10 describes the most intensely used sites on the Web. Intensity of use arguably is related to enjoyment and entertainment derived from uniquely Web-based activities: The people who use these sites do so with strong engagement and they linger for some time.

The Online Entertainment Industry

Millions of Users

FIGURE 14.9

PROJECTED GROWTH IN TRADITIONAL ONLINE ENTERTAINMENT

45 40 35 30 25

Film Sports Adult Content Online Games Musical Downloads

20 15 10 5 0

2001

2002

2003

2004

2005 Year

Among traditional forms of mass entertainment, musical downloads engage the largest number of people on the Web and will grow the fastest. SOURCE: Jupiter Media Metrix, October 2000.

What do Pogo.com, a game site, eBay.com, Hotmail.com, and iWon.com have in common? These are sites that have high levels of user control and participation, and many of these sites have a user focus as well. For instance, at eBay, the sellers determine the program by putting goods up for sale, and buyers participate in the action by submitting bids. In the absence of Hollywood films and TV over the Web, consumers are defining new forms of online entertainment that do not involve the traditional media titans.

Content The Internet has greatly changed the packaging, distribution, marketing, and sale of traditional music tracks, even if the music itself is nearly the same (MP3 downloaded files do not match the quality of CD music). As in other forms of media such as print, the Web is having a major impact on the consumption of music by creating a huge online digital archive from which users can select precisely the tracks they want and receive the latest musical tracks (often before the CDs arrive in the stores). As with print media, the Internet transforms the consumer experience by providing premium

833

CHAPTER 14

Online Content Providers: Digital Media

FIGURE 14.10

Minutes per month

SITES WITH THE HIGHEST USAGE INTENSITY

300 250 200 150 100 50

CN

N. co

m

m es .co

m

Tim

NY

m

BC .co CN

Go .co

PN ES

oo .co

m

m Ya h

.co

m ail tm

Ho

iW on

.co

m ay .co eB

o.c o

m

0 Po g

834

Online users define entertainment in different ways than traditional media corporations. They spend the most time at sites where they are communicating interactively, playing games they can control, and where they are the focus of attention. SOURCE: Jupiter Media Metrix, 2001d.

archives, efficient search mechanisms, timeliness, and enormous reach and depth of content. FastTrack.com, an Amsterdam-based free music service network similar to Napster, makes thousands of music tracks available to users through a peer-to-peer network that is averaging 1.57 million logged on members each day, and a registered user base of approximately 20 million (Richtel, 2001). FastTrack has replaced Napster as the Web’s most popular “free” music site. While FastTrack’s P2P system is no more “legal” than Napster’s centralized directory, it has temporarily evaded the music industry’s legal arms. FastTrack’s software is used by other networks such as Grokster, MusicCity, and KaZaA. FastTrack describes its P2P software as a “self-organizing” network beyond legal attack by the recording industry, a network that requires no central servers to exchange any digital content from music to videos, but instead relies on peer-to-peer exchanges of information and files. Services such as FastTrack change the

The Online Entertainment Industry

content of the music experience by creating a worldwide community of musical aficionados. However, these networks are difficult for novices to use, can result in extended download times (as with Napster), can include files with occasional viruses, and suffer frequent download failures. FastTrack makes money by selling its P2P expertise to corporations for file sharing, while other P2P sites such as Grokster, KaZaA, and MusicCity have unclear revenue models. The long-term viability of these sites is questionable. The traditional music industry is creating its own massive online archives of downloadable music. Subscription services such as Listen.com’s Rhapsody, MusicNet (Bertelsmann, AOL/Time Warner, and EMI Group), and Pressplay (Vivendi Universal and Sony Music) will be charging users $10 per month for access to digital archives containing over 100,000 songs each. Why are online music services among the most popular on the Web? Free music is one attractive feature for many, but the music sites and networks also allow users to become their own music packagers and distributors (sharing with friends or thousands of others on the P2P network). In this sense, online music creates a new musical experience for the consumer (Rainie and Graziano, 2001). When we look at distinctly Web entertainment activities such as game sites, eBay, Hotmail, MyYahoo, and even online newspapers that allow users to define their own front pages, a common theme emerges: Users spend more time at sites that are interactive, communicative, under user control, and where they are the producers in the sense of controlling content. Figure 14.11 characterizes different types of Web entertainment experiences along two dimensions: user focus and user control. Figure 14.11 suggests that online entertainment sites are unique when compared to traditional entertainment not only because they afford access to large digital archives, promote fine-grained searching, and enable users to create their own archives, but also because they permit users high levels of control over both the program content and the program focus.

ONLINE ENTERTAINMENT INDUSTRY REVENUE MODELS Online entertainment sites have adopted many different revenue models. Television and movie sites typically use a marketing model in which they seek to extend their brand name and the audience for the offline product. Early online music sites used an advertising model in which they attracted large online audiences in return for free content paid for by advertisers. In general, this model has not worked. Most contemporary entertainment sites are moving toward subscription models. For instance, the three industry-sponsored and legal music distribution sites are offering access to hundreds of thousands of music tracks that can be conveniently and reliably downloaded from corporate servers for a $10 per month subscription fee. Future movie and television sites will probably use the subscription model also.

835

836

CHAPTER 14

Online Content Providers: Digital Media

FIGURE 14.11

USER ROLE IN ENTERTAINMENT

USER CONTROL HIGH

HIGH

LOW

Internet Programming Music download networks Auction sites

Reality TV shows TV game shows

Traditional fan clubs MTV music shows

Traditional media programming

USER FOCUS LOW

Popular Internet entertainment sites offer users high levels of control and user focus. Traditional media programming content is determined by programmers and has a celebrity focus. Traditional media has moved to become more participatory and more user focused, but cannot match Internet levels of interactivity and user contribution to content.

Convergence While there is clearly a movement toward convergence in technology platform, content, and industry structure, this movement has been slow because of both technological and market forces.

Technology In musical entertainment, the technology platform has converged as PCs and handheld devices such as Apple’s iPod become music listening stations playing MP3 tracks. The PC has also become a game station capable of playing highly interactive rich media games with the same alacrity as dedicated game stations. In turn, many dedicated game stations such as Microsoft’s XBox and Sony’s Playstation can be connected to the Web for interactive play and downloading new game software. For movies and television, technology convergence has been hampered by the lack of standards and the slow acceptance of high bandwidth Internet connections to the home, and even insufficient Internet backbone capacity. Two industry sponsored ventures, MovieFly (supported by the five largest Hollywood production studios) and Movies.com (supported by Walt Disney Co. and News Corporation) still lack the technology to deliver high-quality movies to Internet users. Both services hope to develop

The Online Entertainment Industry

an Internet-based on-demand movie service. Movies.com will base its service on delivery through digital cable television systems for play on consumer televisions (digital cable can operate at 100 mbps), while MovieFly plans to use the consumer’s PC as the streaming download and viewing platform. MovieFly’s Internet distribution strategy faces significant hurdles. If millions of Internet users chose to view a very popular movie on a specific Saturday night, more than 50% of the Internet’s total capacity would be consumed, leading to significant “brown outs” and server crashes in local service areas (Kontzer, 2001). Standards are also an issue for video on-demand Internet services. There are two competing video streaming standards: Microsoft’s Windows Media Video and RealNetworks Real System IQ. Microsoft currently can deliver DVD-quality digital video at 500 kbps, which is within the range of most of the 10 million high-bandwidth households with cable or DSL Internet service. However, the Microsoft system requires the Windows operating system on client machines, whereas RealNetworks can play on Macintosh, Linux, and Windows machines. Both standards are installed on most Internet-connected PCs, but studios will have to decide which of the two standards to use because encoding in both standards may be prohibitively expensive. Movies and television shows are inherently more difficult to encode, store, and download than music tracks. Therefore, the film and television industry may never experience the loss of control over digital video distribution similar to that experienced by the music industry with MP3 musical tracks. At 30 megabytes per minute, a full-length DVD film of about 6 gigabytes of compressed video would take about 200 minutes to download with a 500 kbps DSL connection. (This is an ideal situation. The actual throughput on the Internet may be considerably slower.) However, by 2006, many homes may be equipped with multi-megabit connections to the Internet, making streaming or downloads of entire films convenient. At that point, the film and TV industries will face significant digital rights management issues if they permit downloading of entire shows (as opposed to streaming techniques that cannot be locally captured and stored on a hard drive).

Content In a convergent world, the creation, production, and distribution of entertainment content would be entirely digital, with few, if any, analog devices or physical products and their physical distribution channels. To a large extent, this has not happened. For instance, music is predominantly sold in the form of CDs, television is predominantly an analog delivery vehicle using cable and analog broadcasting (both very old technologies), and feature films are still delivered to local movie theaters in multiple heavy canisters containing six or more reels of film. However, these physical and analog distribution channels are under increasing challenge from digital and Internet-based distribution. For instance, MP3 music files downloaded off the Internet — either for free or for a subscription fee — are predicted to account for $1.6 billion of a $5.5 billion online music sales market, or over 30% of all online music sales (includ-

837

838

CHAPTER 14

Online Content Providers: Digital Media

ing CDs) by 2006 (Jupiter Media Metrix, 2001a). This will be approximately 10% of the overall $18 billion market for all recorded music sold in all channels in 2006 (Statistical Abstract of the United States, 2000). Still, that leaves 90% of the recorded music market dominated by physical delivery media. In the areas of content creation and production, there has been significant progress for digital tools. Hollywood filmmakers are increasingly using digital cameras for selected movie scenes, and digital effects have come to play a larger role in many movies. Much of the editing of film is currently performed on digital editing computer workstations before the images are returned to analog 35 mm film for distribution to theaters. In television, digital cameras are beginning to be used, while editing and production is almost entirely digital. Likewise, in music, recording is performed on digital devices and mixed using digital mixers before production of digital CDs. In the future, music may move directly from digital mixers to the Internet, skipping the CD production stage entirely. Composers, arrangers, and music educators have widely adopted two digital notation programs, Finale and Sebelius, to create music scores.

Industry Structure For all content industries, including entertainment, the emerging corporate model appears to be the merger of content and distribution (Harmon, 2001b). This effort is driven largely by the music labels and the content owners. Content owners and producers in general are seeking to own their distribution channels, capturing the profits of distributors, resellers, and retailers, rather than giving up those profits to intermediaries (i.e., portals such as Yahoo, online retail aggregators such as Amazon, video rental chains such as Blockbuster, cable owners such as Cablevision, and perhaps even retail local film theaters). Firms with strong Internet content and popular portals, such as AOL, Microsoft, and Yahoo, are themselves investing in cable ventures to ensure they have a distribution channel for their content. For instance, in December 2001, the number two cable television system Comcast purchased AT&T’s cable assets with financial backing from Microsoft. The belief appears widespread that successful media companies will need to capture and own the entire industry value chain from content creation to consumer viewing, listening, or purchase. Figure 14.12 illustrates some of the dynamics in the entertainment industry. The entertainment industry has never been a neat and tidy industry to describe. There are many players and forces — including government regulators and courts — that shape the industry. In the existing model, creators of entertainment such as music labels sell to distributors, who in turn sell to retail stores, who then sell or rent to consumers. In the film industry, court decisions in the 1930s and 1940s forced production studios to give up ownership of local theaters on antitrust grounds, fearing the large Hollywood production studios would monopolize the film industry. The Internet offers entertainment content producers the opportunity to dominate the industry value

The Online Entertainment Industry

chain by eliminating the distributors and retailers and selling direct to the consumer. The industry-backed consortia in music (Pressplay, and MusicNet) will attempt this consolidation. These efforts face both congressional and judicial scrutiny on antitrust grounds (Harmon, 2001a). However, the Internet also offers new opportunities for powerful Web-based intermediaries such as Yahoo, Amazon, and MSN to sell music directly to their audiences through their financial alliances or by outright ownership of cable distribution channels. Finally, Internet innovators such as Grokster, FastTrack, and others have the opportunity to move into content creation by selling the music of new groups not signed by major studios directly to their consumer audiences (Lam and Tan, 2001).

E-COMMERCE IN ACTION: DISNEY The Walt Disney Company is the world’s premier family entertainment company, with over $25 billion in annual revenues. You can find an E-commerce in Action case that examines Disney’s attempts to leverage its well-known brands, content, and distribution capabilities onto the Internet in depth at www.LearnE-commerce.net. FIGURE 14.12

ENTERTAINMENT INDUSTRY VALUE CHAINS

PRODUCERS

PACKAGERS

DISTRIBUTORS

RETAILERS

CONSUMERS

Current Value Chain MAJOR PRODUCTION STUDIOS New Internet Media Industry Model Internet Aggregator Model Internet Innovator Model

LARGE DISTRIBUTORS

TRADITIONAL RETAILERS

AOL / Time Warner / Bertelsmann / Sony Records

Sony Records

Yahoo! / Amazon / MSN

FastTrack / Grokster / KaZaA / Morpheus

There are a variety of possible entertainment industry value chains in the near-term future.

839

840

CHAPTER 14

INSIGHT

Online Content Providers: Digital Media

ON TECHNOLOGY A MOVIE FOR YOUR HANDHELD?

While Internet delivery of Hollywood films to the consumer is a few years off, the infrastructure to deliver these movies is already under construction. When it comes to backend technology for delivering digital movies, there are only two alternatives: Microsoft’s Windows Media Player and RealNetworks RealSystem IQ. But where will consumers watch movies? Traditionally, consumers watched movies in theaters, at home using a DVD or VHS player, or on the road using a PC with a DVD drive. But the future of Internet video is about to take a leap to the 20 million users of handheld devices utilizing several emerging telecommunications and encoding technologies. Filmspeed is a Hollywood-based syndicator of streaming and secure downloadable film content. Currently Filmspeed offers several full-length films such as “The Chinese Connection” starring Bruce Lee, and the silent horror film “Nosferatu,” “Dracula,” “Charlie’s Angels,” and other titles. In January 2001, Filmspeed entered into an alliance with Microsoft to develop streaming content downloads for handheld PCs using Windows CE. Microsoft simultaneously announced a Pocket PC edition of Windows Media Player 7. Consumers can use a variety of communications media to hook up to the Filmspeed service, including 802.11b (WiFi at 11 mbps) and the emerging 2.5 gbps cellular phone 3GPP networks that are appearing in Europe and planned for the United States in the next few years. Currently, the Microsoft and Filmspeed alliance is focusing on the distribution of film

trailers, the short clips from movies that production companies use to market movies. Today, film studios and independent filmmakers must send out hundreds of movie trailers on videotape to Web sites that want to post trailers as part of their regular content. Each Web site has to have a professional staff to encode, host, and integrate this content on their sites. Filmspeed simplifies this process by making fully optimized Internet video content available by simply inserting a link to the Filmspeed servers at filmspeed.com. The video content is served instantly without taking the user away from the Web site that provided the link. The Windows Media Player enables secure pay-per-download and flexible digital rights management. Microsoft’s Media Player has an installed base worldwide of over 60 million users. In a test of the system the Sundance Film Festival placed independent filmmaker trailers on the WindowsMedia.com site and attracted 90,000 viewers in the first three days. It is a short step from the syndicated distribution of movie trailers to the distribution of full-length movies. Not to be outdone, in December 2001, RealNetworks RealSystem IQ announced an alliance with AT&T Wireless, Sonera, StarHub Mobile, and Telefonica Espana to begin testing of film distribution over the next generation 2.5G data networks. These networks use a technology called GPRS (General Packet Radio Services) that provides mobile consumers with an “always-on” connection to the Internet. About 30 million copies of RealNetworks’ media player have been downloaded, and RealNetworks supplies the media delivery software for

The Online Entertainment Industry

industry giants such as ABCnews.com, CNN.com, Fox Sports, Warner Music Group, EMI, Bertelsmann, and many more. RealNetworks also distributes corporate and commercial video via satellite to ISPs who then re-sell the video to corporations or consumers. RealNetworks is also making inroads into Microsoft’s dominance among PC manufacturers. Compaq — the second largest manufacturer of PCs in the United States

— recently agreed to ship all future PCs with RealNetworks’ media player as the default player. These new technologies offer the promise of greatly extending the locations where consumers might watch movies. No longer encumbered by a 5-pound laptop, consumers will be able to enjoy movies while waiting for a plane or train, doing the laundry, or waiting in line at the supermarket.

SOURCES: “Compaq and Realnetworks Announce Agreement to Feature Realone Player and Realone Subscription Services on Consumer PCs,” Press Release, www.realnetworks.com, December 12, 2001; “Worldwide Wireless Leaders Working With RealNetworks Mobile Digital Media Technology,” Press Release, www.realnetworks.com, December 10, 2001; “Filmspeed Launches Pocket-size Movies,” by Mike Mayor, www.WirelessNewsFactor.com, December 29, 2000.

841

842

CHAPTER 14

14.4

Online Content Providers: Digital Media

CASE STUDY

O l i g o p o l y The Future of the Internet Content Industry?

I

n August 1891, the Edison Manufacturing Company filed several patents for the first motion picture camera (Kinetograph) and the first motion picture viewer (Kinetoscope). By 1908, there were 8,000 “nickelodeons” in the United States — small storefront theaters that projected films on screens all day long, charging a nickel for the entire day. In December of the same year, Edison Manufacturing, Eastman Kodak, and several licensees of Edison’s patents formed the Motion Picture Patents Company. This organization became known as “The Trust” and established interlocking agreements among theaters, film studios, film distributors, and the Eastman Kodak Company that amounted to a monopoly of the American film market, from production of the celluloid film, to production studios, to display in local theaters. Briefly, no one could make film or movies, or display them in theaters unless they were members of the Trust. Federal courts began action against the Trust in 1912 by weakening Edison’s hold on movie production. This led to a proliferation of competing movie studios such as Paramount and Warner Brothers. Unable to shed its image as a maker of cheap nickelodeon movies, by 1918, Edison left the film business and sold its studios. But the Trust continued until the 1930s, when a series of antitrust rulings by federal courts broke it up and severed the agreements linking celluloid film production, movie production, and movie distribution. After these decisions, movie production studios could not also be owners of movie distribution channels. Flash forward to 2001. Faced with rising production expenses and huge expenses for developing Internet distribution, the leading film production studios have formed two corporations to provide video on demand to consumers at home: Movies.com and MoveiFly.com, which were described in Section 14.3. In music, the top five music companies in the world, which account for over 90% of commercial recorded music worldwide, have banded together into two Internet distribution firms: Pressplay and MusicNet. Pressplay is backed by Sony Music Entertainment and the Universal Music Group. MusicNet is backed by Warner Music Group, Bertelsmann’s BMG, and the EMI Group. Content and distribution firms have three ways to gain digital access to American homes: cable, telephone, and satellite. In 1996, the Federal Communications Commission deregulated the communications industry and announced a new “multi-pipe” world where multiple digital signal carriers would compete with one another for delivery of home service. Regional Bell operating companies (RBOCS) were allowed

Case Study

into the long distance markets of ATT, Sprint, and MCI (TELCOS); cable system owners could deliver local phone service; and eventually TELCOS could enter the lucrative local phone market as well. Satellite companies were historically unregulated, but were seen then as a viable alternative for television, pay-per-view entertainment, and Internet access. But the multi-pipe vision has failed, and the telecommunications pipeline business is dominated by a few huge players. In December 2001, AT&T sold its cable business to Comcast Cable Communications, creating a monster cable company with access to 65% or about 24 million of the nation’s homes. In November 2001, Echostar Satellite Communications Corporation successfully outbid The News Corporation for the Hughes Satellite Communications Corporation DirecTV satellite system, creating a monster satellite company with a 90% market share in the United States. As the distribution end of the content industry becomes more concentrated, content producers face the risk of being shut out of distribution. One result has been the emergence of what appears to be the most efficient business model: content firms purchasing in whole or in part their own distribution channels. The first move in this direction was the merger of AOL with Time Warner in 2000. In December 2001, Vivendi Universal (Universal film studios and records) invested $1 billion in EchoStar Satellite, purchasing five satellite channels for distribution. Vivendi also purchased USA Network, the fifth largest cable channel in the United States, in the same month. With the marriage of content and distribution in the Internet age, regulators and society as a whole are faced once again with some difficult choices. Left on their own, the content and distribution industries will each become more heavily concentrated into a few top players, and mergers such as AOL/Time Warner and Vivendi that merge content with distribution oligopolies will become common. In this oligopolistic environment, consumer interests may not be well protected. In the absence of competition, satellite and cable firms are free to impose monopoly prices on consumers and extract monopoly rents. Likewise, they will be able to charge monopoly prices for access by content producers they do not own. Firms such as Disney that have no cable access may be charged exorbitant rates for Internet audience access. Independent film and music producers could be shut out completely. Distribution firms will inevitably form exclusive agreements with content producers, denying access to other content producers. Comcast Cable may continue an exclusive relationship with a single ISP (as AT&T had with Excite@Home for its broadband cable service and as AOL has with Time Warner’s ISP RoadRunner). If a consumer purchases cable service from a sole cable provider in his or her locality (a typical situation), that cable service will come with only one ISP service — the one owned by the cable network. This provides another opportunity for charging monopoly prices and restricting consumer choice. It is unlikely that regulators will step in at this time. The precise nature and extent of harm to consumer interests is not yet clear. It is difficult for regulators to reg-

843

SOURCES: “U.S. Inquiry Is Raising Speculation in Hollywood,” by Laura Holson, New York Times, December 29, 2001; “01 Media Model: Content and Distribution Go Together,” by Amy Harmon, New York Times, December 15, 2001; “Comcast Deal Cements Rise of an Oligopoly in the Cable Business,” by Deborah Solomon and Robert Frank, New York Times, December 12, 2001.

844

CHAPTER 14

Online Content Providers: Digital Media

ulate without evidence of some palpable harm. While regulators may force open access as a remedy (as they did in the AOL/Time Warner merger concerning Internet ISPs and open standards for instant messaging), these provisions are difficult to enforce. Structural solutions that worked in the past — as in the movie industry in the 1930s with the separation of content and distribution channels — are unlikely to work in an environment of technological and content convergence. For instance, a blanket proscription preventing content owners from also owning distribution channels would be extremely costly and disruptive of investment in both digital content and distribution. Moving to the Internet as a major new distribution channel for content will be very expensive and will require sustained investment by profitable companies. Moreover, at this stage in history, it would be exceptionally difficult to separate content and distribution that might involve, for instance, the breakup of existing conglomerates such as Time Warner that already have combined content with distribution. There are no simple solutions to what appears an inevitable domination of content and distribution on the Internet by a few large firms. Yet democracies are selfcorrecting. If these oligopolies begin to harm consumer interests, new laws and regulations will emerge to correct the abuses. In the absence so far of clear consumer harm, the best policy may be to allow these companies to move forward with extensive investments in Internet content and distribution and speed the arrival of the Internet’s potential to deliver just about any content — books, music, film, and news — anywhere and anytime on demand.

Case Study Questions 1. What negative effects do you believe oligopolies in the music business have on consumer choice and access to a variety of music? 2. Do you think that consolidation in the cable industry is going to increase consumer adoption of broadband services, or will it further stifle the arrival of broadband? Should broadband deregulation be undertaken? 3. With the marriage of content and distribution in the Internet age and the concentration of these industries into a few top players, do you believe the harm to consumer interests is already manifesting itself and/or is there potential for long-term damage?

Review

14.5 REVIEW KEY CONCEPTS Identify the major trends in the consumption of media and online content. Major trends in the consumption of media and online content include the following: • The average American adult spends over 3,500 hours per year consuming various media; this is expected to grow to 3,650 hours by 2005. The most hours are spent viewing television, followed by listening to the radio and recorded music. The Internet is currently fourth, but is the fastest growing in terms of hourly exposure. • Recent studies have suggested that television viewing among Internet users is lower than among non-users and that Internet users spend less time reading books, newspapers, and magazines, and less time on the phone and listening to the radio, supporting the view that Internet usage cannibalizes other media distribution channels. However, Internet users also consume more media of all types than non-Internet users, in large part because they often multitask using multiple media. • In terms of revenue, entertainment garners the largest share even though it accounts for only 5% of the consumer media hours. Television garners the next largest slice, followed by newspapers, educational books, consumer books, magazines, radio, and finally the Internet. Television and newspapers are the largest generators of advertising revenues, followed by radio. • Total direct paid online content revenues in the United States were approximately $1 billion in 2001 and are expected to grow to $5.7 billion by 2005. If revenues from e-learning and selling access to digital archives are included, the total online content market generated $2 billion in 2001, with an expected growth to over $15 billion by 2005.

Discuss the concept of media convergence and the challenges it faces. The concept of media convergence has three dimensions: • Technological convergence, which refers to the development of hybrid devices that can combine the functionality of two or more media platforms, such as books, newspapers, television, radio and stereo equipment, into a single device. • Content convergence, with respect to content design, production, and distribution. • Media industry convergence, which refers to the merger of media enterprises into powerful, synergistic combinations that can cross-market content on many different platforms and create works that use multiple platforms. In E-commerce I, it was believed that media convergence would occur quickly; however, it has not for the following reasons: • Consumers still prefer traditional media.

845

846

CHAPTER 14

• •

•

Online Content Providers: Digital Media

The technology is not yet quite ready to distribute this content effectively and conveniently. Content creators (artists, writers, and producers) do not yet know what features consumers will be willing to pay for and are still creating content for each of the separate media types. A profitable business model has not yet emerged.

In order for true media convergence to occur, there will need to be a change in consumer preferences, new technology platforms and delivery systems, substantial creative re-design of content, and corporate environments that merge broadband distribution with content creation.

Describe the five basic content revenue models. In general, most content on the Web is free and most users expect it to remain free. Overcoming this expectation is the major challenge for the online content industry. Thus far, five basic revenue models have been employed in the online content arena: • The marketing revenue model. Content is given away for free in the hope that site visitors will purchase the product or view a show offline. This model is thought to increase brand loyalty while the costs of the site are at least partially recouped through the sales of product-related paraphernalia. • The advertising revenue model. Content is given away for free, and advertisers are expected to pay for the cost of the site through the placement of banner and rich-media ads. This model has so far not been successful, although some large offline branded content providers have been able to generate enough revenues to offset the costs of operation. • The pay-per-view revenue model. Each viewing of premium content is charged to the user. This model has not been successful with general audiences who are looking for current content. It does work for targeted audiences who are looking for deep, rich, niche content. Pay-per-view is expected to be a more prevalent and successful business model when the bandwidth capability to view sporting events, feature films, and other video content is perfected and becomes more widespread. • The subscription revenue model. A monthly or annual access fee is charged to users for access to content. So far, this model has not worked well because the competition is fierce and free content is abundant. It may work for high-value niche content that is not available anywhere else, such as music tracks that are released to these users before they are released to the general population. • The value-added revenue model. A price discrimination model in which content providers add to the price of a traditional product by charging a fee at the Web site for access to premium content. This model is unproven and measuring revenues is difficult. For the most part, content firms have decided that there is more to be gained from offering free content than for charging for it. In order to generate meaningful revenues, firms must do four things:

Review

• • • •

target a focused audience, provide specialized content, be the sole source monopoly for the content, and engender high perceived net value so consumers believe that there is value in obtaining the information instantaneously on the Web.

Discuss the key challenges facing content producers and owners. The key challenges facing content producers and owners are: • Bandwidth challenges. Although there is plenty of long-haul optical fiber bandwidth available, there are critical bottlenecks in home bandwidth. These limitations restrict both the ability for pay-per-view revenue models to develop for films and video and the development of advanced e-books using video and audio. • Platform challenges. These include the current unsuitability of the PC screen for viewing DVDs and e-books, the unsuitability of PDAs for text display, and the non-acceptance of wireless cell phones as Web devices. • Cost challenges. Internet distribution is far more costly than was originally anticipated, and substantial costs are faced by media companies in migrating, repackaging, and redesigning content for online delivery. • Consumer attitudes. Consumers have strongly resisted paying for Web content, although this may change as media companies learn how to use the Web to deliver high value, focused and deep information and content. • Cannibalization of existing distribution channels. Media companies are often tempted to strike alliances with successful portals or redistributors. The risk is that the media firm’s brand name will become diluted or displaced and that any revenues generated will have to be shared with the intermediary. • Pricing and value when redesigning content for the Web. If the price is set too low, higher-priced and profitable distribution channels could be choked off. • Rights management challenges. These include the ability to protect content from being stolen, duplicated, and distributed for free and the issue of royalties paid to artists and writers.

Understand the key factors affecting the online newspaper, e-book, and online magazine industries. Key factors affecting online newspapers include: • Audience size and growth. There are more than 4,400 online newspapers, which 79% of Internet users frequent, spending 30 to 45 minutes per week on average. In terms of sheer audience size, this makes online newspapers the most successful online content providers to date. • Content. Online newspapers offer premium archived content, fine-grained searching ability, timeliness, and content with reach and depth. • Competition. New online classified ad firms have challenged newspapers by developing deep rich content in specialized areas. While some failed, others have drained readership from newspapers.

847

848

CHAPTER 14

•

•

•

Online Content Providers: Digital Media

Revenue models and results. Online newspapers predominantly rely upon an advertising model. Some also supplement revenues by using a pay-per-view model for premium or archival content. This has not for the most part been a successful business model. The Wall Street Journal is the one standout that has successfully used the subscription business model. Convergence. Technology convergence is in its infancy, with only the first step accomplished: the movement of published text to the Web. Wireless mobile news delivery is the next step and this is currently being invested in by the top ten newspapers despite overall losses. Content convergence has occurred in a limited way in the areas of production and distribution. Industry structure has seen no movement toward cross-media convergence, although consolidation of the industry has occurred. Challenges. Technology challenges include developing wireless mobile delivery platforms and micropayment systems to provide a low-cost mechanism for selling single articles. Consumer attitudes have remained intransigent on the issue of paying for content, and some online newspapers have experienced cannibalization of their main distribution channel. Another challenge is digital leakage, which occurs when a paid for and downloaded article is redistributed via e-mail or posted for free viewing on a Web site.

Key factors affecting e-books include: • Audience size and growth. In 2000, online e-book sales generated about $74 million in revenue, compared with $17 billion overall for books. Reading books online is not a popular activity, reportedly only consuming about 6 minutes per week of Internet users’ time. Buying books online, however, is one of the most popular activities of Internet users. This huge online audience for published books has had a significant impact on book distribution and sales, and represents an extraordinary opportunity to introduce new electronic editions of books. The future market for e-books is going to depend largely on how rapidly traditional trade and academic book publishers move existing and new works to the e-book format. • Content. E-books have advantages over published books. Instant downloading can reduce transaction costs, and text is searchable and can be easily integrated with new text via cutting and pasting. They can be modularized down to the sentence and word level, and thus can be much more easily updated or changed, resulting in lower production and distribution costs and a longer lasting work. However, they also have disadvantages. E-books require expensive and complex electronic devices to use, are difficult to read onscreen, have multiple competing standards and uncertain business models, and raise copyright and royalty issues with authors. Although the prices for dedicated readers are falling and the sizes of libraries are increasing, these challenges are formidable. • Revenue models and results. The e-book industry is composed of intermediary retailers, traditional publishers, technology developers, and vanity presses. The primary e-book revenue model is pay-for-download, in which traditional publishers and authors create e-books and publishers sell these works in their

Review

•

entirety through online bookstore intermediaries. The traditional revenue model for the commercial book industry has not been changed much by the introduction of e-books, mainly because publishers have for the most part chosen not to develop online capabilities. A second revenue model involves the licensing of entire e-libraries. This model is similar to the subscription model in that users pay either a monthly or an annual fee for access to hundreds of titles. Neither business model is yet profitable, but a five-year development period is expected. Convergence. The publishing industry is making steady progress toward media convergence. Technological convergence has been slowed by the poor resolution of computer screens, the lack of portable reader devices that can compete with the portability of a published book, the absence of digital rights management technology, and the lack of standards to define cross-platform e-books so that they can be viewed on many different devices. A likely solution to the portability problem is the use of PDAs, but the current PDAs are too small for comfortable reading. Several screen enhancement solutions have been developed using sub-pixel display technologies. Several technology firms have also developed digital rights management (DRM) software to control printing and copying of downloaded materials; however, hackers have been able to break most DRM technologies, so the hesitancy of publishing firms to publish works on the Web has yet to be overcome. Some cross-platform standards are already available and new ones are beginning to emerge. Adobe Acrobat PDF files are the most commonly used standard to date; others include Open e-Book (OBE) and ONIX (Online Information Exchange standard). Not much content design convergence has yet occurred. So far, text is simply being integrated into electronic display forms, and experimentations with more interactive formats are just beginning. Content production and distribution convergence have seen more progress. The development of XML and large-scale online text/graphic storage systems has transformed the book production process and made it more efficient. In distribution of book content, the Web has opened up an entirely new distribution channel. Industry structure has not changed much. Huge publishing behemoths have long dominated the publishing industry and the 1990s saw even further consolidation of power. Nevertheless, the Internet has created new opportunities for authors, publishers, and distributors. Authors have published works directly to the public, publishers have moved into direct distribution to the public of selected works, large online book distributors have commissioned new e-book titles and moved into publishing, technology providers have begun limited distribution of e-books, and NetLibrary demonstrated that a market existed for inexpensive digital libraries that could be distributed to colleges, universities, and traditional libraries.

Key factors affecting online “zines” include: • Audience size and growth. Online magazines began with pure online “zines,” but now include all fifty of the top offline magazines. In 2001, they attracted 62 million visitors, who spend an average 79 hours per year. However, as with

849

850

CHAPTER 14

•

•

•

Online Content Providers: Digital Media

newspapers and books, few, if any, online magazines have turned a profit even though they may contribute substantially to the offline branded print product. Content. Online magazines have some of the same content advantages as newspapers. Users can search archives, and breaking news stories can be covered. They also provide access to exclusive content not available elsewhere and allow readers to share ideas with one another through chat groups and bulletin boards. Magazine articles are generally short and can be printed for free and readers rarely complain about the difficulty of reading stories. Revenue models and results. In E-commerce I, the advertising model was used unsuccessfully. Pure-online magazines using this model have collapsed, cut back significantly, moved to a new revenue model, or merged with a larger corporation. However, the advertising model may be revived as online advertising expenditures are expected to triple by 2005 and readership is expected to keep rapidly increasing. Those factors, coupled with the excellent demographics for online magazines, are expected to boost ad space revenues and allow online magazines to rely on advertising just as their offline counterparts do. Another more common and more successful revenue model is the marketing model, which is used for brand extension by large offline magazines. The subscription revenue model, in which readers pay for premium content, is also beginning to be used. The success of this model has yet to be proven. Convergence. Very little convergence with other media such as television, film, or music has occurred, and the content of online magazines remains almost entirely text-based. Technological convergence has not been necessary to address readability issues, nor is there any need for special readers or screen enhancement technology as in the e-book industry. Integration of text and audio clips has for the most part not occurred as online magazines have not had the capital to invest in these technologies. Content convergence in the areas of creation, production, and distribution have occurred as the Web created the opportunity to leverage print content to the new distribution channel and single content staffs were developed to produce content for two platforms simultaneously. Industry structure convergence has not occurred, although in E-commerce I it was believed that an entirely new set of online zines would rise to challenge the old giants. Instead, most pure online magazines failed while old national brands rose to dominance.

Understand the key factors affecting the online entertainment industry. The foundations for a future, media-converged Internet in which consumers pay their Internet service provider a monthly fee for access to any movie, music, or television show whenever they want it are today being built, although none of the offline entertainment giants have a significant Internet presence. In their absence, online consumers are redefining and broadening the concept of entertainment. • Audience size and growth. Music downloads are the most popular form of entertainment, with online games second followed by adult content, sports, and film.

Review

•

•

•

However, the amount of time users spend at music sites is not high because they typically download and store a track for future use. The sites with the highest usage levels are those that allow high levels of user control and participation. In the absence of film and TV on the Web, users are defining new forms of entertainment that do not involve the traditional media titans. Content. Packaging, distribution, marketing, and sales of music tracks have greatly changed in the Internet age. Huge online digital searchable music archives now exist from which users can mix and match to create their own personalized content. One main reason for the popularity of these services is that they enable users to become their own music packagers and distributors. This is the unique feature of online entertainment as compared to traditional entertainment. It offers users high levels of control over both program content and program focus. Revenue models and results. Television and movie sites typically use a marketing model, attempting to extend their brand influence and the audience for their offline product. Early online music sites used an advertising revenue model, which for the most part was unsuccessful. Most entertainment sites are now moving toward subscription models and future movie and television sites will likely use a subscription model as well. Convergence. Convergence has been slow due to both technological and market forces. The technology platform for music has converged PCs and handheld devices such as Apple’s iPod to become music listening stations playing MP3 tracks. The PC has also become a game station, with capabilities rivaling dedicated game stations. In turn, many dedicated game stations can now be connected to the Web for interactive play. Technology convergence for movies and television has been stalled by the lack of standards, the slow acceptance of high bandwidth connections, and inadequate Internet backbone capacity. Movies.com and MovieFly, two industry-sponsored ventures, still lack the technology to develop their Internet-based movies on demand services. Standards are also an issue, as currently there are two competing video streaming standards. Microsoft’s Windows Media Video can deliver quality digital video at speeds within the range of most high-bandwidth households, but RealNetwork’s Real System IQ is compatible with Macintosh and Linux operating systems as well as Windows. The film and television industries have not yet experienced loss of control over digital distribution, but it is expected that by 2006, many homes will be equipped with multi-megabit connections to the Internet. At that time, these industries may face digital rights management issues if they permit downloading of entire shows or films rather than just streaming video, which cannot be captured and stored on a hard drive. Complete content convergence in the entertainment industry would entail purely digital creation, production, and distribution of content with no use of analog devices or physical products with physical distribution channels. This has not yet occurred. Music is still predominantly in CD form, television uses very old analog delivery systems,

851

852

CHAPTER 14

Online Content Providers: Digital Media

and feature films are still distributed to theatres via large film canisters. This is changing as MP3 files challenge the CD market, and is likely to begin changing for films and television. Content creation and production convergence is occurring with filmmakers and television studios increasingly using digital cameras and film editing done at digital computer workstations. Music is recorded on digital devices using digital mixers before it is digitally imprinted on CDs. Furthermore, composers, arrangers, and music educators have widely adopted two digital notation programs for creating musical scores. Industry structure convergence in the entertainment industry, as in all content industries, is moving toward the merger of content and distribution. Content owners and producers are largely seeking to own their own distribution channels, cutting out the profits of distributors, resellers, and retailers. The belief appears to be widespread that successful media companies will need to own their entire value chain from content creation to consumer use.

QUESTIONS 1. What are the three dimensions in which the term convergence has been applied? What does each of these areas of convergence entail? 2. Why has media industry convergence not occurred as was predicted in E-commerce I? 3. What are the five basic revenue models for online content, and what is their major challenge? What will have to be done in order to overcome this obstacle to profitability? 4. What is the pay-per-view revenue model, what type of content is it suitable for, and when is it expected to be successful? 5. What four things must content provider firms do in order to generate meaningful revenues? 6. What are the technological challenges facing content producers and owners? 7. Identify and explain the four other challenges facing content producers and owners. 8. How has the Internet impacted the content that newspapers can offer? 9. What changes have occurred for newspapers in the classified ads department? 10. What are the key challenges facing the online newspaper industry? 11. What are the advantages and disadvantages of e-book content? 12. Has technology platform, content design, or industry structure convergence occurred in the online magazine industry and in what ways? 13. How has the Internet changed the packaging, distribution, marketing, and sale of traditional music tracks? 14. What are the factors that make nontraditional, distinctly Web entertainment sites so popular with users? 15. What would complete content convergence in the entertainment industry look like? Has it occurred?

Review

PROJECTS 1. Research the issue of media convergence in the newspaper industry. Do you believe that convergence will be good for the practice of journalism? Develop a reasoned argument on either side of the issue and write a 3- to 5-page report on the topic. Include in your discussion the barriers to convergence and whether these restrictions should be eased. 2. Go to Amazon.com and explore the different digital products that are available. Prepare a PowerPoint or other form of presentation to convey your findings to the class. For example, are there Web-accessed, Web-downloadable, dedicated e-books or books for PDAs offered, and which are in greater abundance? 3. Go to www.TBO.com (Tampa Bay Online). Surf the site and sample the offerings. Prepare a PowerPoint or other form of presentation to describe and display the efforts you see at technology, content, and industry structure convergence as well as the revenue model being used. 4. Examine and report on the progress, if any, made with respect to the delivery of movies on demand over the Internet since the end of 2001.

WEB SITE RESOURCES ■

■

■

■

■ ■

www.LearnE-commerce.net

News: Weekly updates on topics relevant to the material in this chapter Video Lecture: Professor Ken Laudon summarizes the key concepts of the chapter Research: Abstracts and links to articles referenced in the chapter, as well as other relevant research International Spotlight: More information about digital content providers outside the United States PowerPoint Slides: Illustrations from the chapter and more Additional projects and exercises

853