At our Enterprise Information and Master Data Management Summit this year (back in the Spring) we mentioned, as part of the keynote, the phrase, “from information asset to information access”. See Information is the new source of economic value, May 2015. This perhaps innocuous phrase captures a significant part of the message from the keynote: the digital, now algorithm economy, will herald significant economic shifts. I was reading my newspaper this morning, December 24th, and an article hit me right between the eyes and made me sit, bolt upright: From the US print edition of the Financial Times: Let it be Fans of the Beatles gifted all 13 studio albums on streaming sites and from the US print edition of the Wall Street Journal: Getting Better for Beatles Fans.
I read first that reported how the Beatles estate (Apple Corps) has finally succumbed to the idea of streaming all 13 studio albums through several services. The article was front page news, but I didn’t think too much of it. I already own many of the 13 albums, a couple on vinyl and a few more on CD converted to MP3. But after browsing my FT I moved over to the Wall Street Journal. That paper ran the same story but included a chart showing the share of the industry’s revenue from streaming compared to physical (DVD) and digital download (MP3). In 2004 streaming and digital downloading was virtually zero and physical was almost 100% for a total U.S. market size in excess of US $12bn. By 2014 streaming had achieved US $1.9bn of a reduced total of US $6.8bn.
The fact that the total has collapsed is one thing. The other fact that streaming has, in a matter of 10 years, gone from zero to over 26% of the total spend, is just amazing. And this very small but impactful analytic signals that the economy is changing – in ways that many previous technologies have not really enabled. Short-term the digital economy is causing mostly economic woe; long-term the benefits will be more widely felt in a more positive way. First, let’s be clear of the innovation and its immediate impacts.
Streaming is just one example of how the Internet is able to facilitate an entirely new business model to challenge a previously well-established model. In fact, the Internet has provided a platform for several waves of innovation that have eaten up every innovation before it. Do you remember Napster? Peer-to-Peer computing (still an under exploited, ‘sleeping’ innovation) provided a means for those with digital copies of music and data to share then easily and quickly with others. There are numerous case studies (even Harvard Business Review did one) cataloging the disruptive nature of file sharing and how it disinter-mediated the record labels, distributors and retailers. Referring back to the chart on the front page of the WSJ, we see that digital downloads were also near zero in 2004, and they achieved their largest nominal value around 2012, and have been declining ever since. But in terms of high growth and total share of the market spend, digital downloads peaked in 2010.
From around 2010 to date, streaming growth took off and shows no sign of slowing down. Streaming is thus the second blow to physical distribution, and at the same time, it is acting is a killer blow to digital downloads. The Internet spawned its own secondary innovation that in a matter of 4 years has signed the death warrant of a previous Internet-bound innovation that was in the throes of disrupting the previous non-digital innovation (physical CDs).
So what does streaming do that digital downloads and CD’s don’t? This is the crux of the economic impact. With CD’s we used to own a copy of the licensed file. With digital download we still owned a copy of the licensed file, but without all the overhead of the physical CD and supporting materials. With streaming there is no physical ownership; there is no file that persists on my machine at home, or my device in my pocket or hand. With streaming I am simply accessing the file, on-demand. As such I am paying for the right to access the music file, not to keep a copy.
Digital downloading disrupted the physical supply chain – or at least much of the middle of the supply chain between consumer and artist. With streaming, the economics of the file itself, the music, is turned upside down. The supply chain is disrupted again but more substantially the economics of the nature of the value chain is being re-written.
No longer is there a payment for a copy of the asset itself; the payment permits access to the asset for a period of time it takes to play it, over and over if you want. So the profit accrues to the license holder of the asset, not the owner of the asset. In the physical and digital download scenario payment was tied to the movement of the asset, a copy of the file. With streaming, payment is tied to access of the asset.
We might apply the same idea to what 3D printing promises. 3D printing suggests that as consumers I no longer pay to acquire the physical asset in mind; I might instead pay to access the 3D design that I can download and use for a time. I can then create the object locally. So the value, the payment, will likely accrue to those that create the 3D design license, not the object itself.
In some cases I might purchase the 3D design, but as a consumer I don’t want that. They will go out of date quite quickly; I’d much prefer to pay a license in order to get the most up to date design each time I wish to use the ‘product’. We may see streaming of 3D designs, as opposed to shorter term 3D design file sharing. And is such revenue “product” revenue, in terms of a design file? Or is this more like a service?
With the supply chain and ownership conversation out the way, how is this impacting firms and profits? It turns out that short term there are a few things we can observe:
- Disinter-mediation results in established firms losing out and failing
- Costs go down to consumers, overall
- Profits to asset owners increase while profits for asset distributors shifts from physical supply chain to digital supply chains
With streaming this model is upended further:
- Profits for digital supply chains fall, and those fledgling innovators are themselves disinter-mediated
- Profits for asset license holders increase
- Costs go down to consumers again (as there should be even less delay between artist and consumer
So there you have it. The Beatles made it to streaming and streaming is the big economic game changer (today). Funnily enough I have yet to sell my CD’s and MP3 files and covert to streaming. Yet my sons think I am weird. They own virtually no CD’s – those they received as presents sit collecting dust unplayed. They don’t even own many MP3 files. They stream and don’t know anything else. They don’t even know or care about who is being disinter-mediated – they have never heard of such companies. How is it that two generations can experience three innovations at once?