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The music industrys digital revenue grew by 4.3% in 2013 to US$5.9 billion.
Globally, digital now accounts for 39 percent of total industry global revenues and in
three of the worlds top 10 markets.
Online audio distribution has further evolved, enabling its users not just to listen
shared songs but also upload, record, promote and share originally-created sounds.
Sound cloud which has over 40 million registered users and 200 million listeners is
one its kind. These applications also work on a freemium basis, providing a limited
sharing space for free and charging premium if the sharing space has to be
increased. In this way it provides opportunity to aspirating artists and musicians to
bring their sound to the world.
Current Licensing Environment
The Digital services discussed above are required to license two separate
copyrights: the sound recording copyright and the underlying musical composition
copyright. The sound recording copyright is controlled by record labels, while
publishers and songwriters own the latter. The picture becomes even more
complicated considering the numerous independent labels, publishing companies,
individual performing artists and songwriters whose licenses add tremendous
perceived and actual value to a digital music service. Multiple owners further
complicate the process of obtaining a license due to disagreements among the
owners of a copyright.
This means that services such as iTunes or eMusic must secure individual licenses
from every sound recording they offer. Apart from the download stores, broadcast
streams must also obtain public performances from both sound recording copyright
owner and music composition copyright owner. Each of the services discussed have
to negotiate licenses with labels and publishers in order to build a catalog vast
enough to attract listeners.
Piracy Control
Tackling piracy and maintaining the shift to licensed consumption remains very
challenging in markets which have the highest potential. According to the Recording
Industry Association of America (RIAA), global piracy of music causes $12.5 billion in
economic losses every year and has contributed to a 50% decline in CD sales over
the last decade [8]. This has brought the concept of digital rights management
(DRM) technologies that make copying difficult. DRM controls how end users can
access, copy, or convert information goods, such as software, music, movies, or
books. For example, the original iTunes Fairplay DRM system restricted users from
installing music on more than five authorized computers or burning a song more
than seven times, and songs downloaded from Walmart Music can be played only on
Windows PlaysForSure licensed products [9]. Other digital goods also have some
form of DRMa movie purchased and downloaded from the iTunes store can only be
played on an authorized computer, and books purchased for the Kindle cannot be
read on any other device. All these constraints are designed to protect digital
products from unauthorized copying and distribution and thus reduce the level of
piracy.
Recent Developments
from one product to another. For a company that has not matured enough when it
comes to pricing, it might be a good approach to let the market decide, and to
separate the price and product development on existing product lines. Give both
digital and non-digital products their best shot. This approach actually requires less
effort than reorganizing all the resources to emphasize the new digital product.
The Digital Entertainment Revolution
This study conducted by CapGemini [15] discusses the revolutionary changes to the
entertainment industry that will be brought upon by the digital age in the coming
years. This is not limited to the music and gaming industry but even TV and movie
industry are forecasting massive changes. These industries are analyzed for their
compatibility with the new shifts and how the present business models would have
to be modified to still have a future. Shifts in Business Models are Inevitable to gain
advantage in this highly competitive market. There will be large scale disruption
caused by the impact of digital and the rapidly changing demands of consumers
with more control than ever before. Changes will have to be made to physical and
digital operations in order and a cost structure balancing the size and margins
associated with shift in physical and digital content sales will have to be invented.
But its not only challenges. Unprecedented opportunities to engage customers 24/7
will present themselves through this connectivity. With changes to the IT systems,
interconnecting with content delivery networks, advancements in advertising
capabilities and creation of entirely new interfaces with distribution partners,
companies stand a chance to tap into $10 billion in revenue opportunities made
possible by the advent of digital electronic entertainment.
Video games are well positioned to benefit from the digital transition. Unlike the
movie and music industry, video games are inherently interactive, have multiple
pause points that permit the gameplay to be interrupted and return to it
whenever convenient. Features that improve the users experience, connect with
online communities, and provide downloadable extensions that extend gameplay
time or add features to the original version of the game can be very easily provided
and are an integral part of the gaming industry strategy.
Future trends of the industry are discussed with reference to the increasing
penetration of digital technology and internet in the industry, improvements in
technology, the invasion of PC in the living room and changing buying and
consumer behavior.
The Obstacles and Opportunities for Digital Distribution
Grutzky [16] focuses on the opportunities and obstacles for digital distribution in the
video game industries and its implications for the industry actors such as the
retailers, the developers, the payment solution providers and the publishers. The
video game industry today has a significantly higher turnover than even the film
industry and the consequences of changing the distribution forms can be enormous.
The video game industry is going through a significant change in how the
consumers are and will eventually obtain the content. Digital distribution, increasing
internet bandwidth, curtailing of the used game market, increased prevalence of e-
commerce are some of the factors that will eventually lead to the disappearing of
specialized retail stores for video games.
The paper tries to answer the questions of the future of video game retail, whether
it will develop or decline, the obstacles in digital distribution and the movement
towards smaller digital packages. Two methods of information collection have been
used, a literature study and semi-structured interviews. The traditional video game
distribution industry is discussed followed by an analysis of the existing video game
value chain. Different revenue models that have been discussed are free to play /
micro transactions, subscription model, episodic entertainment and advertisement
driven. The digital distribution is discussed and then compared against the existing
digital music industry.
The paper declares that hardware compatibility, piracy, DRM, the lack of computing
power in most laptops and the rise of console gaming have led to the decline of
video game retailing. They see bandwidth, hard drive space on consoles and decent
technical support as being the main obstacle for digital distribution. The current
trend of breaking up albums into songs and then selling them for cheap is not a
direction that can be taken up by the games industry as the initial investment will
be much larger for the video game. A SWOT analysis is done for the digital
distribution framework. The strengths are unlimited supply, rapidly growing
business and increased customer value with 24-hour access without travel. The
weaknesses are strong dependency on the development of bandwidth
infrastructure, limited hard drive storage space on consoles, lack of drive storage
space on consoles, lack of personal service and lack of options for youth. The
opportunities are ability to use different price points and micro-transactions, new
revenue streams from digital content, diminishment of used game sales and
increased piracy control. The threats are new players taking over the market,
resistance from retailers and diminishment of the retail channel and fear of low
payment security.
Value Modelling in Online Digital Distribution
Online markets are very dynamic and have grown continuously in a very short span
of time and have emerged as the main marketplace for many products and
services. Within this marketplace, there is a section which caters to selling products
which are software themselves, not just the transaction. The video game industry
constitutes a huge chunk of this market. It is characterized by big volumes of sales
and a very complex market. The variety of business models used by the companies
in the sector has led to a variety of innovative solutions which are of great interest
to areas outside the digital domain. This paper aims to enhance the value chain
with a set of logic rules to manage price policy and choose the most effective value
model for given market characteristics with the ultimate goal of building a tool
which, once provided with information on the market (number of clients, average
payment per user), can compute the expected volumes of value exchange and
recommend a business model that best fits market demands.
Ceci [17] discusses the current video game market on the bases of price elasticity,
price levels, menu costs and price dispersion. It also analyses the various pricing
models currently prevalent in the market such as micro transactions involving both
virtual goods and dual currency, subscription, free to play, crowdfunding, early
access and DRM.
A similar pricing model may be in employment by Steam which is one of the biggest
online distributor of video games. Its pricing is very arbitrary and communities are
built around specific products by means of special sales. Prices are not bound to
fixed costs and can be managed with flexibility. This semi-automatic management
of prices fulfils three goals, maximizes the revenue from the business process,
optimizing the number of paying users while avoiding measures such as DRMs and
grants access to digital entertainment to all types of consumers by simply
rearranging (virtual currency, free-to-play, special sales) the method how different
customers are likely to purchase the product.
Prohibition of Resale Markets for Information Goods
According to existing research frictionless resale markets are unable to decrease the
profits of monopolist producers of perfectly durable goods. Therefore producers
should welcome a well-functioning resale market activities. However this paper
suggests that these findings do not hold true for goods such as video games where
users tire of the product after repeated use by presenting logical arguments. These
resale goods end up fulfilling a residual demand and fetch a low price discouraging
forward looking customers who would have otherwise factored a high resale price in
their buying decision. This assumption also implies that the impact of resale is an
empirical question. In the video game market producers can and most likely would
legally prevent resale by distributing their products digitally as downloads or
streamed rentals. The above empirical assumption is thereby applied to this market.
Estimation is then done in two steps. First, demand parameters are estimated using
a dynamic discrete choice model in a market where resale is allowed, using data on
new sales and used trade-ins. Secondly, with these parameter estimates, prices,
profits, and consumer welfare are simulated under counterfactual environments.
The data was constructed from two datasets, the NPD group, provides information
on monthly sales and average prices of new copies of video games by game in the
U.S. and the second dataset contains used game auctions from an online
marketplace over November 2005 to December 2008. These latter data serve as a
proxy for the monthly quantity of used games traded-in by consumers which then
needs to be scaled up to be at the same level of entire US region. Time-invariant
variables include game characteristics like critic review scores from the NPD group
and replay value scores from reviews.
The results show that profits from selling video games would be higher by 100% for
non-resellable goods. The increase in amount was sensitive to the assumed market
size. Non-resellable good profits were also much higher than rental profits, almost
100%. These findings stand in contrast to most previous empirical and theoretical
papers focusing on products for which consumers do not lose interest which found
that monopolists profits do not decrease with frictionless resale. The difference in
findings suggests that the rate at which consumers lose interest has high impact on
resale on producer profits. This can help policy makers in deciding the mode of sale
subscription services, reiterating the value of being able to choose and pay for
what you watch[1].
Purchase Preferences
According to 2013 report on Accenture video over internet consumer survey [2], the
following were the major findings:
The majority of consumers (62%) are willing to pay for a monthly subscription to
access on-demand content on a PC, TV or tablet. Despite the difficult economic
climate where ancillary or secondary expenses are drastically reduced there is an
element of resilience in paying for online video services. However, most consumers
report they will pay the equivalent of less than $10 on a monthly basis. The
propensity to pay remains particularly strong in regular subscription and TV license
fee models more than in pay per view. While 37 percent of consumers pay for
access to video content through a regular subscription or TV license fee, just 10
percent of respondents reported paying per view for video on-demand, down from
12 percent in 2012. These results show an important media consumption trend,
where the transactional model is no longer the preferred way to pay for
entertainment.
Consumers increasingly scrutinize the content for which they will pay a premium. As
online consumption is maturing, and consumers are getting more sophisticated,
they want to pay less for content overall, but they will pay more for getting
specifically what they want. In other words, if providers demonstrate value in
premium content, consumers are willing to pay. Otherwise they will opt for
consuming content for free: two-thirds of consumers said they mainly watch free
video content.
Similarly, 45 percent of consumers would be interested in an la carte menu for
their video/TV access to show only their top 10 most watched channels. Among
those interested in an la carte menu, 70 percent said they would expect at least a
25 percent reduction in their monthly TV bill for this approach. 41 percent said they
would expect a reduction of 50 percent or more.
In short, consumers confirm that they have an appetite for online video and are
willing to pay for good content, making watching online a viable source of revenue.
Business Models
A study commissioned by European Commission [21] on the business models for the
sale of online videos lists the following models:
1. Platforms for digital content rentals, on which the film is downloaded / streamed
for a specific period of time (up to 30 days or 24 or 48 hours) and DRM
technologies prevent playback after agreed rental period
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