Saturday, July 14, 2012

BPN 1606: Thresholds on supply and demand of digital content

This is a summary of a Dutch study, published in June 2012 by SEO, a consultancy for economic research in Amsterdam, which analyses which factors may hinder the supply of and demand for digitally distributed music, audio-visual content, games and books in the Netherlands. The analysis includes economic, legal and technical factors. It takes two to tango: problems may arise on the supply side and on the demand side of the market. Additionally, the transaction itself may be problematic, due to the costs and safety risks associated with e-commerce.

This research was commissioned by the Dutch Ministry of Economic Affairs, Agriculture and Innovation. A mix of research methods was used: literature review, in-depth interviews and an online survey of consumers.

The four sectors differ substantially in terms of digital distribution. The music industry has managed to offer a comprehensive supply of digital music, consisting of download and streaming services. The business case for streaming still has to prove successful in the long run. Apart from the major brands that offer a vast collection of music to mainstream consumers, there are also niche players that cater to specific genres. Suppliers of music have to negotiate with numerous parties to clear copyrights. This is a serious obstacle, but some (large) firms have succeeded. In the Netherlands 40% of music transactions is digital, but the digital share in revenues lags behind with 15%. The explanation might be that legal digital music stands out insufficiently compared to illegal sources and the physical product on those factors that matter most for consumers when they choose where to consume music: the convenience of the transaction, the price and the scope of the library of songs. Put differently, consumption of illegal offerings or physically distributed music may be preferred.

The supply of audio-visual content lags behind the music industry and is fragmented and incomplete. This report concludes that the industry’s strategy of windowing and the trouble of clearing rights are important determinants of that result. The market for digital AV is in its infancy, although Video on Demand shows strong growth. As long as the available libraries are relatively incomplete and slow in including new releases, this report expects the market for digital AV to lag behind.

Digital distribution of games does not meet serious obstacles. De digital market is almost as large as the offline market, and some games or add-ons are exclusively sold digitally. Consumers sometimes prefer the bricks-and-mortar store for the base level of a game, due to the large amount of data involved and the low price advantage of online offerings.

The market for e-books is almost a mirror image of the market for digital music: the supply of e-books in the Netherlands is low, while consumers seem to be willing to read electronically and experience a lack of titles. New releases are increasingly also published as e-book, albeit with some delay. The backlist – older titles that are not being marketed anymore – faces serious obstacles in digitization. The availability of titles from the backlist is poor. An important reason is the difficulty to find the relevant party to clear copyrights for older titles. The limited size of the Dutch speaking population is also a relevant obstacle. The digitization of a Dutch novel from the backlist will be less profitable than the digitization of a French or English novel.

Digital markets are dynamic and some of the issues raised in this report may become less important in the future. The music industry has succeeded in tackling issues that some years ago were considered as obstacles. Other industries have also managed to overcome potential problems associated to digital distribution and retailing. This suggests that the industry will also resolve the issues identified in this study.

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