Digital Distribution and Different Business Models

An interesting seminar at City Uni back in April (here) which threw up a lot of questions and thoughts around new digital methods of distribution and the different business models that are being tried out. 

Sometimes it feels like we really are living through a major shift of traditional business models that are leaving behind the traditional buy low, sell high businesses where the value is in the core product to models where the value or profit is ancilliary to the product or service.  I wonder whether we’ll look back in twenty years time and think it was a major turning point.

Anyway, focussing on digital distribution and online distribution specifically, is this becoming a viable financial model for filmmakers and creatives to get their work out and earn a living?  Like many of these kinds of areas, there are a few that have done it and made it big, (see Power to the Pixel for many examples) but it’s yet to really to reach any kind of tipping point.  Or at least, currently it seems that for particularly niche areas it’s a lot more viable than for the mainstream, in being able to reach niche audiences who are prepared to pay or respond to products passionately.

For the mainstream, online distribution still seems to be more of a promotional tool, a way of reaching more people and raising the profile of the film / music etc. and maybe making some money, but a fraction compared to their tradtional revenue streams.  That’s not to say they’re not taking it seriously, not wanting to miss out on the next big thing, with many of the major studios committed to and backing the Hulu website.  But whether digital i.e. online distribution will ever become more important or valuable than traditional distribution remains to be seen.  And would depend on a number of shifts in order to really advance:

Firstly, the distance between computers and televisions needs to close.  Currently, online distribution is pretty much limited and very much associated with computers, whether that be a desktop PC or some kind of fancy mobile phone.  And because of this, content is being tailoured to these enviornments more and more, so that the differences between content produced for tv and content produced for online is widening rather than closing.  For online distribution to really work and challenge traditinal distribution forms, it really does need to be available on your tv.  It kind of is already with 4OD and bbc iPlayer available on Virgin’s cable service allowing viewers to watch a massive amount of content already transmitted.  But at the moment this isn’t much more than a very large and extensive Sky+ box.  TV on-demand rather than online distribution.

The revenue models for this are also pretty important in terms of what would you pay for?  Or to put it another way, what can you get for free?  There are basically 3 models for revenue (or 4, if you include models that don’t make revenue directly). 

1) Traditional sales model.  You want this, you pay for it, whether buying a DVD (either in person at HMV, or online at Amazon), paying for a Video On Demand movie, or going to the cinema.  (I’m using film as my example here, but it applies to most creative sectors).  

 2)  Ad-based model.  You can watch this for free, but we’ll make you watch some adverts before / during / after it.  Examples including commercial TV, video sites like YouTube and to a certain extent cinemas, where without the advertisements, the admission ticket price would be higher. 

3) Subscription based model.  Pay us a monthly / annual etc. fee and you can watch a certain / unlimited of content.  Lovefilm’s DVD rental service, SKY and funnily enough one of the oldest ‘new’ models – the Beeb.

4) Loss-leader model.  iTunes is a good example here.  It’s currently the market leader and probably does make money, but it’s a secondary market for Apple in terms of a promotion for it’s primary business, that of selling hardware – iPods, Macs, and iPhones.  In terms of video content, mobile phone companies seem to be leading this, with investments in content being repaid in handset and call revenue models. 

Not unsuprisingly, music is leading the way in a lot of these models, with the smaller file sizes enabling easier distribution (and copying / sharing).  (See my other Future of Film post for a more detailed account).  Recent entrant to the ad and subscription based models is Spotify, but rumours of not enough people signing up fo the subscription model may threaten it’s continued existence.  Do we have a different attitude to consumption and availability of music than to films?  Currently it does seem that more people take free music more for granted than film certainly.

Generally, it does seem that the strength and resources of the business are key to success in any of the revenue models.  Apple is dominating the online music category with their weight and primary revenue model in hardware, making it very difficult for a mainstream online music company to compete (although niche market models are sustainable).  The likes of Sky and BBC are so well-established and have such penetration that any similar competition is very difficult, the recent collapse of Setanta being a good example of this.

So it remains to be seen whether one model will come to dominate.  The Hollywood majors seem to be backing the traditional model through the Hulu pay as you go model, but could this be overtaken by a subscription model in the future?  Certainly Lovefilm is well positioned to develop it’s online downloads sector, but with a current sell-off in progress, it points to a business where the future is uncertain.

In the physical world of cinemas, a combination of all four models seems to be best way forward, with direct tickets sales, subscriptions either in the form of a monthly payment for unlimited movies or a membership card giving discounted tickets, pre-feature adverts, and ancilliary sales of food and drink all contributing revnues.

Similarly for rights holders, it’s also a combination approach, with music and film sold in traditional and modern distribution routes all counting.  Ultimately though, it will depend on inherent values of the product and social acceptance as to which models dominate in the future.  The subscription model has become the leading one for mobile phones over pay as you go, because we make phonecalls on a daily basis, whereas if we only watch films once a week or more more traditional sales models work best.  And unless the gap between computers and televisions is bridged, then it will be hard to fully exploit online distribution.