How the music industry got it wrong: Pt 2

LESSON FOUR: Profits come from secondary sources

One part of the music industry remains highly profitable – music publishing. That is the business that owns the underlying copyrights and licences it out to films, commercials, video games and other media channels.

They generate revenues from ringtones, radio play, in fact on any occasion when a business wants to be associated with the brand, band, sound or emotion that a particular track can offer. So it is not the case that music cannot generate money anymore. Simply, as per Lesson one, that with the consumer setting the price, music companies must seek to exploit alternative sources of revenue wherever possible.

None of this is new to the games industry. In-game advertising has been exhaustively discussed in these pages. Micro-transactions are a rapidly growing source of revenue, particularly in the Far East.

Massively multiplayer games, like Runescape or indie game Dark Wind, offer a reasonable level of gameplay for free, but some of the cooler features, like owning property or advanced missions, are reserved for paying subscribers. The lesson from the music industry is that in some cases, giving the game away may be the best strategy, provided that the alternative sources of revenue are clear.

LESSON FIVE: The nature of distribution is changing

Entertainment media developed in an era where distribution was scarce, whether that be due to limited airwaves for television channels, or the need to get physical products into stores. It is now competing in a world where distribution costs are rapidly heading to zero.

The Canadian Broadcasting Corporation recently broadcast a first-run television show, Canada’s Next Great Prime Minister, simultaneously on a terrestrial channel and via BitTorrent technology, giving a glimpse of a world where peer-to-peer networks will be a legitimate distribution channel for mainstream media, not a byword for illegal downloading.

Physical products are becoming less key. It is already difficult to go into a store and find a full range of PC games – these are more easily found on the Internet, whether in boxes or for direct downloads. Consoles will surely follow. There will remain a place for physical goods, whether that be impulse purchases at supermarket checkouts, for gifts and for premium products for early adopters who want to be amongst the first to own Grand Theft Auto IV or Halo 3.

But with Sony and Microsoft rapidly embracing the digitally-distributed world, any publisher making the assumption that the existing business model for physical product will be the predominant model in ten years’ time is taking a very significant gamble.

CONCLUSION: What lessons can we draw?

The games industry has many similarities with the music industry, but also many differences.

The biggest challenge facing the industry is how to adapt to a new generation of media consumers. It is not that these consumers aren’t prepared to pay for their entertainment, far from it. Expenditure on entertainment is on the rise, but the old model, of monolithic publishers and powerful retailers controlling channel distribution is dying.

Retailers have responded, embracing the trade-in model despite the bleatings from publishers and developers about revenue loss.

Massively-multiplayer companies like NCSoft have experimented with a variety of different pricing models for their titles, ranging from boxed product sales to subscriptions to in-game transactions and more. And the revitalised Infogrames, under David Gardner and Phil Harrison, has made very interesting noises about the future of games in a broadband world.

But the one thing that stands out is that the games industry had better watch the music, and the film, industry carefully. Or else the cries of how badly those industries dropped the ball and lost their audience to file-sharing and piracy will be directed at us.

– Read more industry analysis at nicholaslovell.com