Movin' on Up (the Value Chain)

Belle said Kirshbaum’s “experience, creativity and strong leadership will be critical to our mission--continually innovating on behalf of authors and readers.” 


Amazon recently hired Larry Kirschbaum, the former head of Time Warner's Book Group, to be its Vice President and Publisher for Amazon's budding publishing business. Mr. Kirschbaum brings with him years of experience and accolades, such as being named Publisher Weekly's 2005 Person of the Year, to a position and to a fledgling business in need of credibility and expert direction.


The move by Amazon is particularly significant on two particular fronts. First, the hiring will shift Amazon away from just a traditional role as a content distributor into one providing post content-production services as well. Authors will now be able to self-publish their works by way of Amazon's publishing business and to see their work make it to Amazon's offering list. This development is significant as it increases the company's clout in the overall book publishing industry. It is moving up the value chain and become a more holistic provider of services to content providers (the authors) in a way that could be less burdensome for the writer and could garner more profits for the content provider himself. Additionally, the business model for this self-publishing arm provides plenty of incentive to the content producer as well: instead of receiving 15% from titles sold, authors will now receive up to 70% of the revenues under this new self-publishing business model. In the meantime, Amazon extends its revenue streams to capture the value created by post-production service companies, like, ironically, Time Warner's Book Group. 

With hardware already dominated, Amazon looks to stretch its influence across
the entire value chain.

The publishers, meanwhile, along with anyone else down the value chain, will be hurting badly by this Amazon move. From the $68 billion worldwide book market, retailers take a 50% share, agents take 15%, and traditional publishers take 20%. If budding writers, or even established writers (much like Madonna moving to LiveNation), opt to self-publish their material, this existing business model, rife with intermediaries, will experience a rude awakening as the content creator justifiably gets the lion's share of the revenues while Amazon nets the rest.

The proof: self-publishing being more common than traditional publishing

Additionally, the move could have profound effects on the stewardship of the Kindle in the budding e-book market. As one writer puts it, the rise of Barnes and Noble's Nook e-reader has made the market a two player game for now. As Mr. Kirschbaum comes into the Amazon family, it will be interesting to see how effectively he can jump-start the publishing business and begin churning out e-books in Kindle format. This progress could add to Amazon's already growing Long Tail of available titles, bolster its proprietary recommendation system for readers, and lock the Kindle and its format up as the bona fide standard of e-readers.


It should be interesting to see how Amazon will fare in the publishing domain, especially with online self-publishers like Lulu.com already having made a name for itself. Even more interesting, however, is how traditional publishing bodies will work to compete against Amazon and this new business model without the benefit of a Kindle to rely on.


Nevertheless, if Amazon's publishing branch proves to be a success, this addition of Mr. Kirschbaum would be a monumental hire in prolonging the meteoric growth of Amazon and its increasingly vertical services for the book publishing industry.


Article:
http://www.publishersweekly.com/pw/by-topic/industry-news/publisher-news/article/47393-kirshbaum-named-publisher-of-amazon-publishing-group.html

What We've All Been Waiting For...

Mothers, lock up your gamers. The PlayStation phone has arrived.


This review conducted by Wired magazine of the new Xperia Play, a Sony Ericsson-produced smartphone to use Verizon Wireless's network, illustrates a key point: the first (legitimate) move into true mobile gaming has been launched. Sure, the now seventh-generation PSP is an impressive device and certainly a long evolution from the Game Gears of years past, but the Xperia Play offers a device that could viably change the dynamics of players all along the value chain.


First and foremost, the Play, unlike the PSP, has the look and feel of a touch-screen smartphone, only that there is a disguised standard Playstation controller that slides out whenever it is time to game. Next, the components of the Play are way superior to the PSP. The smartphone's CPU, a 1 GHz Snapdragon chip, makes it possible to have a seamless gameplay while also having other standard smartphone apps open (the article names data-heavy Google apps like GMail to really emphasize this immense processing power). The PSP, on the other hand, has a CPU clocking in at 333 MHz in peak performance. Thereafter, the Play matches the PSP's WiFi access capabilities as well as connects the users to Verizon's 3G network, making the device more portable and connectable. Finally, though the review does mention that these components are (by modern standards) clunky at best, the Play houses standard smartphone features, such as two high megapixel cameras, that the PSP totally lacks.


If the release of a device like the Play were to be a success, the entire idea of mobile gaming could be radically altered. As it stands now, PSP users insert cartridges into their system to play games, remotely or otherwise. With a WiFi access, they are able to play other users in an online PSP forum and to download basic versions of games. What the Play brings to the value chain are added network effects and greater mobility and connectivity in the distribution of games. The device can now hold and play full versions of games that users can download while on the move. What could happen is that, much like what has happened to Amazon's e-book business with the arrival of the Kindle, the sale of high-quality digital gaming could soon replace the need for separate cartridges. Content providers and post-production services can make a game for solely digital distribution, which will reach a smartphone audience far greater than the current PSP user base is. As a result, the Xperia Play will bring added network effects to the market of true (smartphone-based) gaming and bring about a greater adoption of the mobile gaming concept.

It happened with e-books.. are e-games next?

All the while, a change like this could not come any sooner for the gaming industry. While facing a 8% drop in sales from last year, game makers now face an added pressure of selling a $60 physical product against mobile phone applications that cost, at most, a couple dollars. A shift to an "e-game market" coupled with a phone that can competently play long-style "rich" video games would provide a new distribution avenue for games, possibly without the $10 million in video game production costs per platform.

New hardware and new game distribution could be on the horizon for existing game makers

Of course, the effects of this device on the value chain and on the industry are speculation, but who knows what a successful smartphone gaming console could do...


Article:
http://www.wired.com/reviews/2011/05/sony-xperia-play/

And In the Other Corner... Youtube?

YouTube began adding some 3,000 films from major studios for rental in the U.S. on Monday, doubling its catalog in a bid to keep up in the rapidly escalating arms race among online video providers.


In a somewhat surprising move, YouTube has begun a series of moves and deals with movie studios in order to add movie-style content to its website. The underlying rationale here is first that the video-sharing website is hoping to increase its average time-per-visit figure (currently at 15 minutes per visit), which in turn increases its existing advertising revenues. After that, however, YouTube is looking to leverage its massive existing user base, which was 120 million in 2009 and most definitely far more than that nowadays, into a formidable entry into the attractive online movie streaming market. Though still a nascent market, the overall growth of online movie streams was measured at 37% between 2009 and 2010 alone. For YouTube, this seemed like a logical next step, as rental fees would also give rise to a new revenue stream for the company.


And yet, don't consider YouTube as having sold out to enter the Netflix business quite yet. In fact, YouTube is moving one step further down the value chain into the realm of content production. Compared to Netflix, it seems as if the overarching goal for YouTube is not to stop at mere content management but rather to eventually develop its own content production and distribution services. If anything else, its $100 million investment in their own original content channels seems to be proof enough. 

Pretty soon YouTube could be everywhere, except hardware of course

Given current trends in the movie industry, YouTube's foray into full-length features makes sense. While online video viewership increases, the consumer willingness to spend for movies has dropped. At 71% YoY growth in video viewing, the average amount of time spent per user watching videos has now reached almost 15 hours in one month alone. Additionally, as Internet piracy has driven down the perceived value of the movie theaters experiences (which has simultaneously raised in price tremendously in this time), many consumers see less value in going to the movie theaters nowadays. Many would prefer to pay a fee of up to $3 to download a movie and to view it from the comfort of their living rooms rather than pay extra for what was once the allure of the "movie-going experience." Though the box office and DVD sales markets still amass $10 billion and $17 billion in revenue, respectively, YouTube hopes that these latest moves will position itself favorably as the economics of the industry (and the corresponding revenues) shift with a more digital, sedentary consumer lifestyle.


What's interesting, however, is the necessary "ideological break" that has made YouTube what it is today. The site offers the average citizen a chance to have his voice heard; it has been a true haven for "open source video productions." But now, it is as though the licensing of professionally produced content brings Youtube away from the source of its success. Granted, most users probably won't know the difference and won't view YouTube in a different light, but the risk is still there. An overproduction and over-distribution of professionalized content on YouTube could doom an otherwise logical and attractive business move for the firm. Nevertheless, it remains to be seen how successful they are in their goals of increasing time on the YouTube site. 


Article:
http://www.variety.com/article/VR1118036622

Expanding Netflix's Long Tail of Movies

Netflix announced Monday that it has entered into a multi-year agreement with Miramax, bringing hundreds of films, including Pulp Fiction and Good Will Hunting, to subscribers of the streaming service.


This deal with Miramax, a major motion picture studio, is the latest in a string of validating deals for the digital movie streaming service. Following deals with CBS, Disney, and Lionsgate, this latest deal adds a valuable (and sizeable) amount of content to Netflix's library and, perhaps more importantly, incredibly boosts legitimacy to the company's infamously pioneering "Freemium" web-based movie rental business model. With already over 100,000 titles for a user base of 14 million subscribers (at a monthly rate of $7.99), the deal gives Netflix, for the time being, a catalog of proven popular older movie titles to increase its stewardship over other movie streaming services like Redbox, Blockbuster, and Hulu.


On the Miramax end of the deal, they benefit just as handsomely. The deal is the first of an anticipated many to make the catalog available digitally to users, exhibiting Miramax's recognition that digitizing its library is too good an opportunity to pass up. In fact, the overall movie industry received approximately $66 million from Netflix in the second quarter of FY2010 alone to acquire the licenses necessary to stream the content. Though a large proportion of this figure came from acquiring licenses to new content, older content, like what Miramax had just licensed to Netflix, was also acquired by Netflix, whose Recommendation functionality in its services assure that it is licensing money well spent (for both Netflix and, of course, the movie studios).


The deal, however, does come at an interesting time both for the overall industry and for Netflix. Netflix is in the process of fully abandoning its service of physical DVD rentals, opting instead for the abovementioned "Freemium" business model. Streaming video increases its profitability, as it can save on 30% COGS for "Fulfillment Services" as well as $700 million per annum in packaging and handling costs. It marks a strategic shift for the company away from being merely a movie rental company to "one of the largest licensors of TV shows and movies" on the market. Netflix is, for all intents and purposes, asserting itself more strongly along the industry value chain in two ways: first by becoming a hybrid, comprehensive industry content manager/distributor and next by removing the hardware requirements necessary to watch movies. 

Casting its Shadow: NetFlix Changing Industrial Dynamics... One Movie at a Time

Meanwhile, though some players like Miramax have jumped the "Netflix bandwagon," other larger studios have sought to hold out and to control distribution themselves. Players like Warner Bros and Sony, who have traditionally held lions shares of the film distribution market, are reluctant to give up their positions and to cede both content management and distribution control to Netflix, to which we can extend some empathy. Perplexingly, however, is the way in which they are doing so: entering in delayed release agreements with Netflix so as to stimulate first-month DVD sales of new content. What makes these decisions so odd, however, is the fact that DVD sales are now on the decline and that these agreements hurt the distributive capabilities for the older content in these players' catalogs. And, unfortunately, the rise of Blu-Ray has and is not expected to provide enough support to stop the bleeding from the loss of the DVD.

My recommendation for these studio holdouts? This deal between Netflix and Miramax shows that the "Freemium" and streaming-based business model by Netflix works for itself and for the overall industry, so why be so contentious? In the absence of any productive and logical alternative, these studios should be more openly licensing their content to Netflix. 


Article:
http://mashable.com/2011/05/16/miramax-netflix-deal/

Pandora's Meteoric Rise.. Coming Back to Earth?

Personalized radio service Pandora has reached a major milestone: last week it recorded its 10 billionth thumb (and it was a thumbs up).


After the well documented decline of profitability in the music industry, it seems as though, with the help of streaming radio services like Pandora, the industry can again begin to garner profits from music sales. Between 1998 and 2006, record sales dropped more than 25%, from $38.6 billion to $27.5 billion, respectively. This led to an industry-wide paradigm shift in the importance of live performances and concerts. New music was released to promote new tours, whereas the "old way" would be for artists to go on tour to promote new music. 


Now, Pandora's emergence as a legitimate streaming radio provider has brought more "balance" back to the revenue streams for the industry. Early in 2003, as the figure from an IFPI Report shows below, the presence of digital music services had a negligible impact on industry revenues and profitability as a whole.

Fast forward to 2009, however, and the digital distribution channel now generates $4.2 billion, or 27%, of total industry revenues, and it's about to get a whole lot sweeter. A legislative agreement reached in 2009 between streaming radio providers and royalty company SoundExchange stipulates that the music industry will, by 2015, receive royalties at a rate of $0.015 per stream, up from a clip of $0.008 per stream.

It's Getting Harder to Ignore the Importance of Digital for Musical Content Distribution

Nevertheless, a word of caution should be levied to the music industry. What we are seeing for the music industry is an incredible rise of a new digital distribution channel for its content. The simultaneous rise of a la carte music stores, like iTunes, and subscription-based radio services like Pandora demonstrate that music can be monetized on the internet. 


Interest in new artists and in new music has been higher than ever, but the industry has still to figure out a way how to translate this interest into its own profitability. Though the realm of digital music has exploded into a legitimate channel, the total music market has shrunk by 30% between 2004-2009. Clearly, there is still work to be done. One way NOT to do it, however, is to squeeze one avenue of its new distribution channel. Despite its success, Pandora failed to turn a profit in 2010 and is filing for an IPO on the basis of future profitability. As negotiated royalty rates per stream increases in the years to come, the music industry is effectively extinguishing a proven successful distribution channel for new content in exchange for short-term gains on existing content.


Upon receiving its 10 billionth thumb-up, it is nevertheless time to celebrate the success of Pandora. In the eleven years since its founding, the company has developed a user base of 48 million that listens to a library of 800,000 tracks, which now accumulates $91 million in revenues for the firm. Its success has also brought rise to other entrants into the streaming radio market, such as Last.fm and Spotify, which themselves have developed into formidable subscription-based players in the market. And for that, the music industry should now also have reason to celebrate.. though it seems like they don't know it quite yet.


Article
http://techcrunch.com/2011/05/02/pandora-is-now-10-billion-thumbs-strong/