Last Updated Jan 24, 2011 9:12 AM EST
Such is the new world of content production. The recording industry isn't the only one that is concerned, and rightly. Books, magazines, newspapers, television -- all worry about the potential of tumbling revenues and new distribution mechanisms that will make it impossible to maintain their empires. They keep looking for the magic solution, but it doesn't exist. What we're seeing is the beginning of a total realignment in which the business term "economies of scale" takes on new meaning. Once, managers thought it meant too big to fail. Soon it will mean too big to succeed.
According to Eric Pfanner's story in the New York Times, the London-based trade group International Federation of the Phonographic Industry said that digital music sales in 2010 were up only 6 percent over 2009 while the entire music market was down between 8 and 9 percent:
In each of the past two years, the rate of increase in digital revenue has approximately halved. If that trend continues, digital sales could top out at less than $5 billion this year, about a third of the overall music market but many billions of dollars short of the amount needed to replace long-gone sales of compact discs.Recording executives blame online piracy. If only they could get people to pay for the music that they get for free, the execs think, the industry could pull back from the brink.
This notion explains a lot. The recording industry, in this case, isn't primarily motivated by greed, to wring out every last penny available. Rather, fear drives the executives. They see a changing landscape that will mean far smaller revenues because consumers no longer have to buy a block of music, in the form of a CD, to get a song or two.
The revenue was always artificially supported by a scarcity of consumption methods. If you wanted one piece of music, you had to buy the other pieces on the CD. When it's possible to get one alone, the effective revenue goes from buying the album at $12 to $15 or more down to $1 or $2. As more music consumption becomes electronic, the industry will eventually have to settle for 5 percent to 15 percent of what it once made.
The same is true in every other form of media. Publications used to force people to buy an entire issue of a magazine or newspaper to get a few articles. Now either those articles are available separately online or the equivalent information can be had elsewhere for the cost of exposure to some online ads. Ebooks? Prices are far lower than paper (even though the cost of producing them is actually only a couple of dollars less, at most) and more people are shifting to e-readers. Television studios are trying to understand how they can keep people watching on broadcast or cable, where the advertising rates are much higher, rather than going to the Web.
Each of these industries has approached the changes in technology and consumer preferences by trying to find ways to keep their businesses as they had always been. That is impossible. The world has changed and revenue increasingly will be unable to support the former size of the corporations.
Unfortunately, the companies squandered the time they had and didn't consider how to completely restructure themselves so a much smaller organization could provide what people wanted. The reason is simple. Corporate downsizings often target the worker bees, insisting that those left expand what they do to take up the slack. That isn't possible this time. If the content creators leave, there is nothing left to sell. And as corporations, to save money, have often pushed sales and marketing onto content producers and significantly dropped up-front payments, the latter increasingly less has a reason to deal with a company. Those who spend their time taking meetings and discussing abstruse strategic concepts won't have jobs.
We're on the cusp of an historic industry downsizing. Content producing and brokering companies will either radically reform themselves or they will go out of business, to be replaced by small firms and individuals who can work more cost-effectively and who now have direct access to their audiences.
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