Digital Economics: Content wants to subscription stream

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This is a multipart series on digital economics. More here.

Maybe ten years ago I read a provocative article arguing that music, TV, movies, newspapers, and other types of media were all evolving towards subscription streaming as their end point. Unfortunately I couldn’t find a link. But by now we’re familiar enough with paying a monthly fee for unlimited content to believe this is the future. Think Netflix for movies. Or subscription music services like Spotify, Pandora and Rhapsody for music. But we’re not completely there yet, so it’s worth seeing how far we’ve come.

Music

First let’s do music since it’s farthest down this path. Music delivery format transitioned from vinyl to cassette tapes to CDs to end up as downloadable digital files. Note that the last step moving from digital music on a CD to digital music on an mp3 player is small at a technology level, but huge from an economics point of view. Once the product became entirely digital with no physical media, the marginal cost of each extra copy went to essentially zero. Suddenly we’re in a different world. Great for consumers. Poverty for producers.

In fact the real puzzle for music is why big players such as Amazon and Apple have not offered unlimited music for a flat monthly subscription fee. For example Apple acquired music streaming service Lala way back in 2009. This is speculation, but perhaps two reasons: 1) the older iTunes model of paying a la cart for mp3 files makes more money than streaming ever will, 2) channel conflict, where  music companies don’t want to give more power to Apple and Amazon. For point #1, all you have to know is artists get less than half a penny per play on Spotify, but get about 10 cents per mp3 file sold. So roughly 20x more money for selling an mp3. A million plays of an artist’s song on Pandora pays them about $1000, and even so Pandora is barely breaking even.

Regardless, while buying mp3 files a la carte won’t go away, it’s likely in long term decline relative to subscriptions. The subscription model is so much cheaper. Either free with ads, or pay a monthly fee if you want premium capabilities. As a heavy music listener, I’m paying Rhapsody $10 a month for example.

Movies and TV

Here Netflix is leading the charge, though Amazon and others are in the game. Again, the economics are rather stark if you create TV shows. For example, Matthew Yglesias is writing a Star Trek feature on Slate, and watching all the Star Trek TV episodes ever produced, including the many TV spin-offs series. While I’m a still somewhat of a Star Trek fan, that sounds like torture. Anyway, what he pointed out was this costs him nothing. The complete Star Trek catalog is on Netflix, which he already gets for other reasons for $8 a month. In contrast if he bought all the Star Trek TV spin-offs on DVD it would cost $775. That amount would pay for 8 years worth of Netflix. Obviously a dedicated Star Trek company along Netflix lines, let’s call them “TrekFlix”, would not be able to charge anything close to $8 a month.

Now the open question here is how Cable TV will play out, since Cable TV costs far more than Netlix. But I posted on that already. For this discussion, we can simply say subscription streaming is already far along for Movies and TV.

Newspapers and Magazines

The Wall Street Journal and the New York Times have already moved to a “freemium” model, where you can read a certain number of articles for free, but then have to pay a monthly subscription cost if you want to read more often. As the Economist points out, even though revenues are still declining, it’s already clear this is going to stabilize and work long term.

But as a writer of course life continues to suck. Nate Thayer recently published a piece making the rounds with the numbers. The Atlantic asked him to rewrite one of his blog posts as a magazine article without offering to pay him anything. He refused. But note that even if he had gotten paid, it would have only been about $100 at most. Even if you can crank out a few articles a week, hard to live on that.

Books

I think books are the most interesting of the bunch. Music, movies, and newspapers are already fairly far along the subscription streaming path at this point. But books are still in the equivalent era of selling music tracks one by one. You buy the digital books one at a time. That seems unlikely to last long term given the examples above.

Long term we’d expect a monthly subscription fee model for books as well. Say for $25 a month you get unlimited books and can read anything you want. Then about half that if you are willing to have ads in your books. Probably even a free version if you limit how many books you read on top of accepting ads. Amazon of course would love this, as would heavy readers. And the technology to do this is already there of course. It’s really the legal rights and business models which have to change. Naturally authors will hate it, and their overall income will undoubtedly continue to plummet, similar to what we saw in music and newspapers.

What would this world look like? Well, libraries as we know them would become obsolete. If you want to make books available to people who can’t afford them, you wouldn’t create a public library. Instead you’d just subsidize their book subscription. With that said, just as CDs and mp3s are still around, selling individual books and ebooks won’t go away. It’s just that mainstream book reading will move to subscription services. If Amazon has their way, undoubtedly they’d bundle it into Amazon Prime, so for a single monthly fee you’d get free shipping, unlimited music, unlimited movies, plus of course unlimited books. While I’m not sure I’d like Amazon to rule all media, personally I can’t wait for the ability to pay a flat fee for unlimited books. But given the rights changes needed and how negatively it will impact authors I’m not holding my breath. At least a decade away.

This is a multipart series on digital economics. More here.

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