Paying for Downloads

MAY 4, 2010
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Consumers still adore Lovefilm, despite the squeeze on spending power, and physical media sales performed well in Q1, with Blu-ray continuing to shine. There are challenges on the horizon, however, including the expansion of kiosk rentals, ever-improving digital delivery and a plan to legalise pirated content.

On Friday, Coinstar, the parent company of Redbox, the dollar-a-night US kiosk operation, announced that profits had more than tripled in the first quarter. Nearly 40 million DVD and Blu-ray titles are taken home each week by American consumers and almost a quarter of these are dispensed from Redbox kiosks. Each unit delivers an average of 400 discs a week and takes $2.16 per rental, an increase of 7% over last year.

Having escaped from the clutches of near-bankruptcy, Blockbuster plans to expand its kiosk roster from 7,000 to 10,000 outlets this year, at the same time exploiting the four-week window advantage over competitors that it has negotiated with Universal Studios. A deal signed with CE manufacturer Samsung means that the range of Blockbuster on-demand devices will also grow over the year.

Netflix prefers what it describes as a “hybrid solution”, which combines online selection, media-by-mail and digital delivery. It’s a package that attracted nearly 14 million subscribers and generated almost $500 million in revenue from subscriptions in Q1 this year. Significantly, 55% of those subscribers streamed at least one film or television episode over the period and Netflix is aiming to have its service on more than 100 CE devices by the end of the year. This week the company advertised for a Director of Product Management with responsibility for driving international affairs; Netflix could well be coming this way.

Since the early days when VHS cassettes were unofficially rented from the corner shop, video rental has been a convenient option when “there’s nothing on TV”. Currently, rental in one form or another appears to be back in fashion but clouds remain on the horizon unless the landscape suddenly changes.

For the studios and for several retailers too, the problem with rental is that it is perceived as reducing the market for sell through packaged media. The view among content owners has always been that they want a different way to share the rental cake. They might be careful what they wish for — any equitable method of sharing reward should also share risk and distributors have long been averse to sharing the downsides of the rental business. Meanwhile, online delivery and piracy continues to threaten revenues, whatever they decide.

The news this week that News Corp. has made a significant investment in a US-based music industry start-up could be the dawn of a completely different way to price content, one that could have a profound affect on the value of digital media from whatever source. It might also provide a dramatic boost to rental of high-quality physical media and increase compensation for content owners, although it would have a negative impact on retail sales.

The newcomer is offering to pay a royalty on every audio track, based entirely on the number of plays each month and regardless of whether it was legitimately purchased, illegally downloaded or ripped from a CD. Even bootlegs are included, in what at first sounds like a remarkably philanthropic attempt by Rupert Murdoch to give away his money to the music industry.

Using its proprietary content identification technology, the company, Beyond Oblivion, creates DRM protected versions of all music files on a user’s system and logs each play from then on. No matter that there may be thousands of previously illegal tracks, the rights are cleared with the content owner and the user is licensed to play the music without infringing copyright.

“The entire history of recorded music has already been ripped, shared and downloaded,” says Beyond Oblivion’s British CEO Adam Kidron, “we are never going to get those files back. There is no illegal music in the Beyond world because we pay royalties no matter what its source.”

Just 5% of consumers pay for their music, according to figures from the International Federation of the Phonographic Industry (IFPI) and Kidron claims that these few are subsidising the many, while at the same time reducing the demand for both devices and services.

He describes existing music industry revenues as “appallingly small” and explains that it is much better for the labels to receive a small royalty each time a track is played rather than try to recoup their losses by overcharging a minority. Kidron believes that the royalties paid by his company could ultimately quadruple last year’s global digital music take of $3.7 billion.

The model is outwardly similar to Nokia’s “Comes with music”, which is an all-you-can-eat subscription service that promises unlimited free downloads for a fixed period. The difference is that device manufacturers and internet service providers pick up the tab through a licence fee payable to Beyond Oblivion, a cost that is then included in the purchase price of the hardware or the broadband subscription. In return, users get “life of the device” access to content, wherever they find it.

Involving the CE hardware manufacturers in the operation — Sony and Philips are also investors — is a shrewd move, which echoes the tactics that Apple has used to achieve its current dominance in music downloads. The revenue model, however, is based on the number of plays rather than downloading to own, “It makes paying for downloads pointless,” says Kidron.

If Beyond Oblivion achieves its objective of launching on “10-10-10” (October 10 this year), a large number of previously lawbreaking listeners could suddenly find their music collection legitimised. Since there is no obvious obstacle to applying this concept to other media, including video and print, consumers will prefer to copy the highest quality content, rather than download a camcorded rip-off, which is why rental could boom as never before.

If Beyond Oblivion has its way, the anti-piracy provisions of the Digital Economy Act 2010 could become irrelevant and, if the entertainment industry is convinced of the validity of paying for usage rather than ownership, the £0.79 that Apple charges per track could suddenly appear wildly overpriced.