How to Compete with “Free” Accenture Media & Entertainment Executive Summary
Transcription
How to Compete with “Free” Accenture Media & Entertainment Executive Summary
Accenture Media & Entertainment How to Compete with “Free” Digital Rights Management Point of View Executive Summary Many entertainment industry executives today are contemplating a complex Digital Rigths Management (DRM) conundrum: should they secure their content rigorously at the risk of affecting their user experience, and ultimately limiting reach, or should they favor reach and relax some control? Should they charge their users for the content, or experiment with free or advertising based model? What options does today's technology offer them? This study was conducted across the value chain and, in attempting to answer some of these questions, addresses strategy and technology issues that concern the creators of content, the distributors of content, and the consumers of content. This is a value chain that is in conflict with itself. Instead of being aligned with a common agenda, it is increasingly apparent that the three segments of the value chain have disparate goals and positions. “Trying to make digital files uncopyable is like trying to make water not wet…” Bruce Schnieir, Founder, Counterpane Internet Security (Wired 2006) Digital Rights Management is the cornerstone of the digital business models of the future. It is more comprehensive than traditional Conditional Access Systems, offering far finer and more sophisticated control over content usage than just allowing or denying access. It usually combines encrypted content and an entitlement process with rules governing who can access which content, when, and under what circumstances. Advanced DRM systems may go further and enforce more complex licensing, or support active revocation and content updating. DRM will get hacked – but this is not a deal-breaker As our research interviews confirmed time and again, the key to assessing DRM’s future is to accept that it always has been, is now, and always will be vulnerable to breach. This is a fact of life accepted by everyone in the digital content value chain. And the acceptance of DRM’s “crackability” will not get in the way of the development of thriving business models based on DRM. The signs of this acceptance are already clear. Microsoft’s Windows Media is cracked. Apple’s FairPlay is cracked. Yet the business models based upon these technologies are surviving – and while the studios and record labels have the right to pull their content, they are not doing so. The apparent reason is that everyone “gets” the fact that DRM is intended to be a consumer component and is always certain to be breached. Some amount of loss – euphemistically called “breakage”, “leakage” or “spoilage” – is acceptable in most businesses, so long as the overall revenue trends positive and the market trends towards growth. Like other thieves, online hackers and digital counterfeiters will always be with us. The fight against them will go on. But focusing on the fight itself – something many have chosen to do – is perhaps to miss the point entirely. While legal action might appear to be a powerful weapon against people stealing content, it can in practice be counter-productive, turning consumers against the company behind the action. In contrast, the companies that succeed in the digital future will be those that accept DRM’s limitations and focus remorselessly on winning, engaging and retaining customers with an easy and wonderfully fulfilling media consumption experience, a vast and usefully accessible array of content, and an unequivocally fair price. How to Compete with “Free” 1 Accenture’s six recommendations for DRM: Accenture’s six recommendations for DRM: 1. Focus on usability, a fair price, and cultivating a cool memespace rather than enforcement – win your customers, don’t bully or coerce them. 2. Market your product or service through continuous, pervasive marketing campaigns. Apple has set the bar for this approach having invested half a billion dollars in marketing iPod and iTunes while competitors, with better value products and services, have failed to be as widely adopted. 3. Content creators and other IP holders such as DRM companies – consider lowering your unit prices to allow certain DRM models to thrive early in the game. There may be too many people trying to take too much profit out of this value chain in its infancy and it may slow or damage the market irrevocably. 2 Accenture Media & Entertainment 4. Embrace DRM and drive it – consciously and with an analytic methodology: understand and model your technical requirements and your business requirements – do not base your decisions on perceptions; do not assume that all “Open Standards” solutions are less expensive – they may not be. 5. Select a portfolio of options no matter where you sit in the value chain, as all possible outcomes will be determined by value chain dynamics that co-vary. Gaining market share incrementally with deeper security methods and rigorous enforcement practices, and gaining orders of magnitude of greater market share with a compelling consumer proposition, service and great marketing are not mutually exclusive. Most companies tend to focus on one or the other, high performers adopt a portfolio of strategies. 6. Accept that right now Microsoft DRM fits most studio requirements, and Microsoft may be the only company in the DRM space that is immune from having to pay further fees to DRM IP owners because it has already paid a US$440 million lawsuit award. A world without DRM? To put this vision in context, let’s imagine a situation in which there is no DRM at all. The music industry, which has inhabited such a world for some years, is of course much further along the road than movies or television in terms of having been exploited by online downloaders; the relatively small size of music files made it an easy target in the 1990s, and its content has been virtually unprotected and easy to copy throughout the past decade. This has created cultural norms and habits that encourage free sharing of music. Despite the success of the iPod, experts across the music industry believe only a small fraction of the songs on all the iPods ever purchased are in fact legitimate. In the battle against illegal downloading, many file sharing services have been shut down; but new services have taken their place, and paid-for services have sprung up that are hosted in countries that do not support our legal concepts, giving consumers music for pennies a song, and not compensating the record labels or artists at all. Based on this reality, music executives are facing some difficult challenges. One former C-level executive from a major label told us that he had suggested giving content away on peer-to-peer networks. He commented: “You can’t compete with Free and Easy-To-Get”. His suggestion was to flood the P2P networks with the label’s content, with advertising embedded in the content, and fund the label with ad revenue instead of content sales revenue. If the resources of a record label were focused on P2P it could easily saturate the world’s P2P networks with its content, and disrupt the P2P consumption experience in favor of legitimate content. We believe that even in such “free” distribution models there is a place for ultra-lightweight DRM – in order that the record labels can track the playback of music so they know which songs are popular. Otherwise they will only know which songs are downloaded, and we believe that many more songs are downloaded than are repeatedly consumed. We are in a decade where people take such advertising-fueled business models seriously. The film and television industries have not yet experienced losses on the scale of those suffered by the music industry, so they are not yet of a mind to strip off their DRM protection and give their content away. While we find the above advertising driven model interesting for music, we do not think the music industry has to resort to that disruptive a model just yet. Even in models with advertising revenues as components, it may make sense for video content to have DRM protection – if for no other reason than to prevent the advertising from being removed from the content. But, as the comment from our record executive shows, content can still find ways to make money even in a world where it can be copied for free. How to Compete with “Free” 3 How we got here… To start building a vision of the future of DRM, let’s take a look at how we got where we are today. The timeline opposite and over the page, illustrates that the concept of copyright has its roots as far back as the 15th Century. Progressive advances in media technology since then can be traced from the invention of the Gutenberg press in 1454 to today’s digital storage and distribution. What this timeline shows most clearly is that this progression is now accelerating more rapidly than ever before – putting established legal, technology and content management/protection processes under intense pressure. As the evolving legal frameworks in the timeline show, content creators have long held the view that their content should not be copied. Their worst fear was that identical copies of their high-value content could be propagated virtually anywhere at 4 Accenture Media & Entertainment virtually no cost to those distributing them. In today’s world, that fear has become reality. The combination of digitized content, ever more powerful computers, pervasive use of the internet and global broadband networks, together with the web’s community and search aspects, has truly let the genie out of the bottle – putting unprecedented power in the hands of every consumer. Eclectic history of technology and copyright landmarks in the Entertainment industry 1474 “Recuyell of the Historyes of Troy” printed in Bruges by William Caxton. First book printed in the English Language. 1454 Gutenberg Bible printed in Mainz, Germany by Johann Gutenberg, inventor of printing. Earliest full scale work printed in Europe using moveable type. Written in Latin. 1662 Licensing Act The ability to print books easily and cheaply raised the issue of piracy. The Licensing Act established a register of licensed books, along with the requirement to deposit a copy of the book to be licensed. 1681 Licensing Act repealed and the Stationers' Company had passed a by-law that established rights of ownership for books registered to a number of its members so as to continue regulating the printing trade themselves. 1710 Modern concept of limited duration copyright originated with the British Statute of Anne. 1400 1500 1600 1700 1800 1810 1820 1830 1840 1927 The Jazz Singer is released by Warner Brothers. The first feature length motion picture with talking sequences. 1895 The Lumière Brothers held their first private screening of projected motion pictures. 1926 Scotsman John Logie Baird gives the world's first demonstration of a true television system, one that could broadcast moving images with tone graduation. 1888 Lateral-cut disc records were invented by Emile Berliner. 1877 Thomas Alva Edison announced his invention of the first phonograph, a device for recording and replaying sound. 1908 Columbia Records introduced mass production of disc records with recordings pressed on both sides, which soon became the industry standard. 1861 The first permanent color photo was taken in 1861 by the Scottish physicist James Clerk Maxwell. 1842 British Government amended its own copyright statutes, explicitly forbidding import of any foreign reprint of British copyrighted work into the UK or its colonies. 1886 Berne Convention First established recognition of copyrights among sovereign nations, rather than merely bilaterally. Influenced by French “droit d’auteur” (rights of the author). 1846 First reciprocal copyright agreement between Britain and Prussia. The British continued this process for reciprocal agreements until the Berne Convention. 1850 1860 1870 1880 1890 1900 1911 British Copyright Act Brought provisions on copyright into one Act for the first time by revising and repealing most earlier Acts. Amendments included the introduction of a further extension of the term of protection, together with a new arrangement for calculating the term of copyright. Records, perforated rolls, sound recordings and works of architecture also gained protection. 1910 1920 1930 194 40 1999 Napster enables MP3 (compressed music) file sharing over the net. First peer-to-peer application. 1999 The DVD security method, CSS, cracked. This is the basis for all of today’s DVD ripping packages which make the DVD format virtually unprotected. 1973 Dr. Marty Cooper makes the first call on a cell phone. 1972 First video game is released, the Magnavox Odyssey. 1972 David Bowie’s music video for “Jean Genie” is released. Considered to be the first music star to combine all the elements of the standard music video. 1970s Development of the personal computer. 1996 The first DVD players and discs were available in Japan. 1991 The first commercially available digital camera was the Kodak DCS-100. It used a 1.3 megapixel sensor and cost US$13,000. 1991 Tim Berners-Lee posted a short summary of the aims of "The WorldWideWeb”. 1988 The first true digital camera that recorded images as a computerized file was likely the Fuji DS-1P. 1965 Email started as a way 1982 for multiple users of a CD introduced, remains the time-sharing mainframe standard physical medium for computer to communicate. commercial audio recordings Professional and private as of 2006. use of email didn’t really take off until the 1980s early 1980s. Development of the internet. 1952 Universal Copyright Convention (UCC) Signed in Geneva. Sought to ensure copyright protection of literary, scientific and artistic works in 62 contracting States (developed by the United Nations Educational, Scientific and Cultural Organization – UNESCO). 2007 HD-DVD and Blu-ray security cracked. 2003 Napster acquired by Rexio Inc. and introduces “Napster To Go”. 2001 Apple launches iPod and iTunes. 2001 Napster “shut down” by legal action. 1994 Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) Treaty, administered by the World Trade Organization (WTO). 1998 US Digital Millennium Copyright Act. 1971 UCC revised in Paris. Developing countries, Soviet Union, US and most of Latin America joined. 2001 Doha Declaration Clarifying scope of TRIPS. 1981 US became party to the Berne Convention. 2004 Microsoft pays US$440 million to settle DRM dispute with Intertrust allowing Microsoft customers to use their software without requiring a license from Intertrust. 2006 162 countries now party to the Berne Convention. 2006 French Senate approves amended DRM legislation. Original draft might have compelled Apple and other online music retailers to share their DRM technology. 1950 1960 1970 1980 1990 2000 2010 …and where we are heading "DRM is not where it should be." Bill Gates, Chairman, Microsoft As content propagation methods have advanced from wax to digital, and from linear to on-demand – driving new methods of copying with them – the fundamental concept of the “maturity curve” comes to the fore. The maturity curve – sometimes called an “S” curve – is a proven model that describes how new markets and market leading companies are born, mature, and thrive. An immature market is characterized by slow and uncertain adoption, proprietary technologies that do not talk to each other, and high prices. As the market matures, components start to work together, new features are added, and rising competition drives prices down. Over time, the consumer gets more and more functionality for lower and lower prices. At some point, a groundbreaking innovation emerges that triggers a whole new and different maturity curve. 8 Accenture Media & Entertainment Maturity Next generation maturity New proprietary value add Standards become effective Some companies will choose to avoid standards beyond the maturity point and will have to innovate and create new added value and define new market expectations; this isn’t easy but if they succeed they can continue to charge premium prices and sacrifice interoperability High maturity – open and modular Commoditization At this point it may be possible for companies to earn more revenue by supporting standards and fostering interoperability than by ignoring them X You are here Low maturity proprietary and integrated The remaining “immature” time when companies can harvest maximum revenue from proprietary DRM methods is believed to be at least five more years – until 2011, and is likely to be ten or more years, until 2016 DRM maturity is believed to be approximately here; this includes the iPod & iTunes, and Zune as well as other proprietary DRM methods and even the current standards supported by major corporations and patent pool companies Time Most industry experts believe we are not yet even halfway up the maturity curve for DRM-based content delivery models. Therefore it is not surprising that we have virtually no cross-device interoperability, no broadly adopted standards, a single dominant market leader (Apple’s iPod/iTunes bundle) in the content portable player space, and little certainty about the final destination. These same experts believe the first stages of true maturity may be five to ten years in the future. They also believe that Apple and perhaps Microsoft will have some success in slowing the maturity curve to extend their ability to harvest revenue from the pioneering phase, but that they cannot stop it entirely. And if these companies are not wise and swift they may fall behind an as-yet unforeseen market leader in the mature phase. This has happened in many industries before – and it can happen here. The emergence of standards is part of this world view, since they pave the way for interoperability and eventual commoditization. The organizations leading the standards drive in DRM include Sun, IBM, Hitachi, and Intertrust. They are not at the forefront at this point in the maturity curve, but hope to be in that position in the mature phase. However, the technical and commercial interrelationships and competitive dynamics between the proposed standards are complex to say the least, creating a lack of clarity over future trends. Largely as a result, the market is not mature enough for any of the attempts at interoperable standards to take much share as yet. Proprietary technologies – especially well-integrated vertical offerings such as iPod/iTunes and the coming Microsoft Zune – may provide a better user experience for some time to come. How to Compete with “Free” 9 The DRM-enabled entertainment content value chain Content Creators DRM Technology Content Distribution Content Consumption Profitability challenges Overall – one way to express the endto-end DRM-enabled value chain is as above. 1 Content Creators include Record Labels and Movie Studios. DRM Technology companies include for-profit consortia, standards bodies, and other DRM IP rights holders who monetize their IP with DRM royalties. 10 Accenture Media & Entertainment One significant conclusion from our research is that both the content creators1 segment and the DRM Technology segment may be seeking to extract a larger amount of revenue and profit from the value chain than it appears to be capable of viably paying them. This appears to have had a detrimental effect on the acceleration of market penetration and consumer adoption, and is making the market less fertile for new entrants. The primary implication here is that if businesses based upon DRM-enabled content distribution cannot profit, then the only truly viable entrants are going to be those who make profits in other ways. Apple, for instance, with the iPod, and perhaps Microsoft’s Zune, driving the content business with profits from their playback devices and complementary technologies. An interesting secondary implication of this ecosystem balance is that it seems businesses such as Apple and Microsoft are best suited for the lowor-no profit economics of today’s DRM-enabled content market. They subsequently drive their content businesses into a sufficient market penetration and consumer brand loyalty “tipping point” – they may well have the power to dictate better terms upstream – lowering content costs and decreasing license usage strictures. This will lead to a better consumer experience, sooner, and will create a market that then is ripe for other, direct-profit-oriented content businesses. We believe this is one possible expedited path to market maturity. It isn’t just cost per unit of content that makes the DRM-enabled content business a low profit endeavor. For many entrants, the cost of DRM also further reduces profit. Not for Apple – because their DRM has no outbound royalties. For entrants who are not A meme is "a unit of cultural transmission, or a unit of imitation”. Examples of memes are popular tunes, ideas, catch-phrases, and fashions – for example, the way people around the world took to wearing baseball caps backwards is a meme. And overtly using an iPod – and displaying the trademark white headphones – has become a powerful meme as well. Apple… Sun’s DReaM may be a good choice, as it is royalty free, but it has yet to be in significant use, and supports ultra-simple use cases that may fall outside the upstream content owner’s contract terms around DRMprotected use cases. Microsoft’s DRM is free of fees, but requires licensing of other Microsoft components. Most other DRM is subject to fees that can be significant. For example, any DRM licensed from Intertrust, or any DRM that adheres to the Coral, Marlin, or OMA standards has a cost. Sometimes fees are based on sales volumes, sometimes on number of subscribers… and sometimes – as in the Intertrust suit of Microsoft – DRM IP holders pursue hundreds of millions of dollars in IP damages. (Microsoft paid US$440 million to Intertrust but has not passed these costs on to their DRM customers as DRM fees.) We believe the fear of being sued for infringement may further slow entry into this market… and may make it less attractive to enter in general. Win or lose, the added legal and time costs related to appropriate, cautious IP legal diligence to avoid being sued can exacerbate the profitability challenges we’ve discussed. Usability and accessibility: the keys for consumers Let’s consider the question of what experience consumers are actually seeking. The answer is that they want two things. One is simplicity; people can be overwhelmed by too much choice. The other is that they like things that just work without having to know what’s happening under the hood: they don’t like to be frustrated or confused by technology. A product or service that delivers simplicity and usability – and whose marketing and design cause it to be adopted as a meme (see definition above) – can get away with charging a remarkably big price premium. That “cultural high value” patina can cause it to compete on terms other than price. If you fill an 80 gigabyte player with content from Napster To Go, you get 12,000 songs for US$14.99, and two million to choose from. Per month, that is 1/10th of a penny per song for the 12,000 songs in your pocket. To fill that same player in iTunes would cost close to US$12,000.00. Napster To Go clearly offers much lower cost per song and better value… but iTunes has sold 2,000,000,000 songs to date, orders of magnitude larger volumes than all of the other competing music services including Napster To Go. The problem faced by companies like Napster in this market is that somehow, perhaps through less persuasive marketing or perhaps through usability issues, their product has not become associated with a popular meme. People understand iTunes – 99 cent per song pricing – but they don’t intuitively understand DRM subscription models, and people just can’t visualize two million of anything. So far, the iPod/iTunes meme seems to be winning. How to Compete with “Free” 11 “Our core initial strategy on the store was that if you want to stop piracy, the way to stop it is by competing with it, by offering a better product at a fair price. In essence, we would make a deal with people. If they would pay a fair price, we would give them a better product and they would stop being pirates. And it worked.” Steve Jobs, Chief Executive Officer, Apple (Newsweek interview with Steven Levy, October 2006) Given the type of simple, seamless user experience provided by the iPod, combined with a quarter of a billion dollars spent on marketing, it has become a pervasive meme. iTunes customers are almost universally satisfied, tell their friends, and remain loyal. This memetic consumer buzz has worked well for Apple, in addition to almost half a billion they have spent on marketing these products. But firstly, we are at an early stage in the maturity curve – so proprietary is “in”. And secondly, the pervasive success of iTunes has limited relevance as a business model to anyone who isn’t Apple – because there’s no profit in songs at 99 cents. Apple’s primary revenue driver has been the sale of iPod hardware, and the content revenue seems to be incidental by comparison. Also, as we have already noted, the vast majority of content on iPod devices today is illicit. Still, we believe this serves as a very powerful proof point that the right product, with the right marketing, 12 Accenture Media & Entertainment and the right user experience, can achieve dominance and trigger pervasive, memetic cultural change. And we believe that is a necessity in this competitive, profit-sparse marketplace. However, there is a lesson here for DRM-fueled models. The primary challenge most of these models face is that they offer a cumbersome, intrusive user experience. iTunes less so than all of the others. To win in the marketplace, a product must meet or exceed the user’s expectation. Everyone we have spoken to has confirmed our belief that consumers are at least as attracted to stealing content due to the ease of P2P access rather than simply because it is free. Most consumers don’t care about the ethical issues, but steal content firstly because it is easy to do so, and secondly because it is free – in that order. So in a sense, an appropriately transparent DRM business model may help to keep the “don’t-care consumer” honest – and the belief “Most consumers… steal content firstly because it’s easy to do so, and secondly because it’s free – in that order.” C-Level music executive is that this is the majority of consumers. The challenge, as we see it, is that the transparency and ease of the user experience is directly related to the contract terms the distribution company has agreed to with the upstream content owners. Those contracts define the required level of DRM intrusiveness. If Yahoo Music’s DRM forces expiration on 20 GB of content in the pocket of a traveling user on a specific date with no grace period – inconveniencing that user and making them angry – it likely did so because the record labels required it. People tend to blame DRM immaturity, or lack of interoperability for lower levels of customer traction and satisfaction… but we believe the single greatest challenge is that the upstream usage terms in content contracts require that DRM behave in an overt manner. Why isn’t Apple’s DRM this intrusive? Because Apple, driven by Steve Jobs, limited their DRM to a minimum set of simple functions, and then negotiated less restrictive usage terms for those simple functions. The profile of most piracy presents us with an opportunity; the fact that the majority of consumers don’t care means they can be converted into paying customers – if they can be provided with a user experience that is easier, cooler and memetic. However, it is important not to anger this “don’t-care” class along the way, because they can be strongly converted to the dark side too – the memetic behavior of using and distributing illicit content – which would add to the industry’s biggest adversarial force. The risk is that heavy-handed enforcement (restrictive DRM, threats, lawsuits) could create the kind of situation seen on highways in the US, where drivers will flash their lights at complete strangers (also a meme) because the police are seen as the common enemy. There is a metaphor here for allowing certain usage, copy and sharing flexibility even if the industry doesn’t want to. Because the backlash may be more expensive than today’s piracy rates are. Avoiding the protection backlash This risk casts an interesting light on the traditional idea that the way to keep people honest is by putting up barriers and instilling fear of consequences – whether through technology or legal action. Both of these may equally bring major drawbacks over time. Outright copy protection technology has a checkered history – seen not least with the cracking of the CSS technique, which has left the DVD format open to arbitrary copying for years. The new managed copy and device integrity security technologies that are key components of standards like HD-DVD and Blu-ray are also clearly vulnerable to breach despite How to Compete with “Free” 13 “These devices are just repositories for stolen music, and they all know it. So it’s time to get paid for it.” Doug Morris, Chairman and Chief Executive Officer, Universal Music Group their detailed security design; they were cracked in January 2007. We expect they will issue a security update but we expect the update to be cracked quite quickly – weeks or months after issue at most. Our experience is that once cracked, subsequent cracks happen faster and faster as the hackers gain more familiarity with the product’s security design thought process. This is nothing more than an arms race that nobody will win, and that will not create a consumer buzz, loyalty, or turn increased legitimate content consumption into a new behavioral meme. Also, companies face generating the type of consumer backlash mentioned above, by simultaneously withdrawing people’s long-held ability to copy content and taking transgressors to court or stripping their discs and players of their ability to play content at all. 14 Accenture Media & Entertainment History shows that when a corporation takes legal action, its own size may actually weigh against it – often resulting in its being cast as a “bully” and losing public goodwill. The RIAA case against a 16-year-old girl in the US several years ago had just such a negative effect. Beyond individual legal actions, content creators in California recently lobbied for legislative change and backed Senate Bill 2644, the Perform Act of 2006, sponsored by Senator Feinstein. This bill takes aim at the satellite radio companies XM and Sirius for having a time-shifting recording capability in their playback devices. This is an aggressive legal attempt to reduce the fair-use flexibility of certain content devices. New business models based upon DRM and ubiquitous distribution of vast amounts of content will be a better hedge against piracy and a better arbiter of continued industry growth than resorting to technology or the law. At the same time that the US legal system is being used to support content creators’ IP concerns, their colleagues in Europe are starting to give content away free on services like SpiralFrog. In France, Sweden and most recently Norway, a few years of heavy legal enforcement against downloaders resulted in increased piracy and in Sweden the rise of a pro-piracy political party, which got a measurable percentage of the vote in the last election. Our position on legislative change and civil court action is that content creators may provoke significant backlash that may have negative financial consequences in the long term. It doesn’t actually matter much that the content industry may be entirely in the right from a legal perspective. Winning hearts and minds, consumer passion, loyalty and wallet-share, is far more a marketing challenge than the domain of legal and enforcement experts. “‘You can't compete with free’ is one of Jack Valenti's favorite sound-bites, but he's just not right… Cable TV competes with free TV and CDs compete with free radio… the entertainment industry may fumble the chance to turn the tens of millions of downloaders using those networks into profitable customers...” Sam Yagan, President, MetaMachine Inc (Variety 2004) Litigation seems to be a recurring theme in this value chain; we believe the largest so far to be the US$440 million patent infringement lawsuit Intertrust filed and won against Microsoft, and most recently, there have been two different pending lawsuits against Apple and other high-profile companies. One for patent infringement (filed against Google and Napster as well), filed by a company that has so far failed to achieve financial success in the DRM enabled value chain. The other suit against Apple was for a lack of interoperability between iTunes music and non-Apple playback devices. Clearly each company is doing what it feels best for its owners and stockholders – but we also believe such suits, won, settled, or lost – cannot help the overall value chain thrive, and may actually serve to hinder its growth. Consider lowering your unit prices While the majority of executives we spoke with do not believe price is the primary motivator in most cases of content theft, our view is that lower prices for content would significantly increase adoption and thereby proportionately reduce piracy percentages. Also the increasing ubiquity of services and access methods due to increased adoption should make lawful means as easy to find and use as unlawful ones, and further drive down piracy. increased market share and revenue at lower unit prices. In a well known example from the recent past Real’s Rhapsody music service lowered prices from 99 cents per song to 49 cents per song, and saw a 600 percent increase in download volume. They were unfortunately not supported by the record labels in sustaining this price for very long – and had to raise prices back to the 99 cent per song standard. This occurred despite a 600 percent sales unit volume increase and commensurate 300 percent revenue increase during the 49 cent timeframe. This vision of ubiquity ultimately leads to broad adoption – potentially orders of magnitudes more consumption of content, at lower unit prices, because the concept of vastly increased consumption almost always carries the promise of lower per-unit cost to the consumer – a function of commoditization. Yet the content creation industry has visibly resisted steps that may lead to significant Clearly businesses are obligated to maximize returns for their owners – therefore in the Real Rhapsody case above, the record labels must have had good business reasons for not supporting the lower prices despite significant revenue and volume increases. They may have had outstanding legacy contracts themselves that disallowed lowering their prices for content – their legacy How to Compete with “Free” 15 "We're trying to compete with piracy, we're trying to pull people away from piracy and say, 'You can buy [content] legally for a fair price…’ So if they [content owners] want to raise the prices it just means they're getting a little greedy." Steve Jobs, Chief Executive Officer, Apple (MacObserver 2005) artist payment obligations may be too high per unit sold. Or they may believe there is a brighter economic future for them in emphasizing a higher unit price, potentially augmented by other present and future content delivery means. If the content owners can restore the security of HD-DVD and Blu-ray cracked in January 2007, these next generation physical media options, despite hypothetically threatening DRM-enabled models that depend on lower prices and higher volumes over time, may be a sensible strategy for content creators. Are they then effectively playing both sides of the evolving competitive landscape at once? Perhaps, as the concept of hedging strategic bets by adopting a portfolio of parallel and serial options is a valid one. 16 Accenture Media & Entertainment The shape of the market: current value chain dynamics Not surprisingly, we found that the content creation companies, especially the movie studios, have a great deal of power in the current supply chain. They would have even more power today if the DVD format’s CSS (Content Scrambling System) had not been cracked by “De-CSS” – and they wish to undo that breach. Despite De-CSS, movie studio revenues have not spiraled downward; on the contrary, they have been trending steadily upwards globally. Video content businesses were hoping that the new disc formats such as HD-DVD and Blu-ray would offer much stronger, renewable security than the DVD’s CSS system did. Their high hopes were dealt a severe blow when it was reported cracked in early 2007. Presciently, the record labels have been more cautious about these formats and many of them have adopted a “wait and see” strategy to see how secure and popular they are. Meantime, today’s reality is that De-CSS has breached the security of the DVD format. This has driven a more flexible attitude towards DRMbased business models. This is partly because nearly all of these business models are more secure than a CSS protected DVD disc. Our research suggests there may be a possibility that movie studios and other video content creation companies may wish to reduce this flexibility when the HD-DVD and/or Blu-ray formats start to ship in volume, for example – in order to pursue strategic managed copy business models. These models may compete with, or render redundant, the DRM-enabled business models of today, from iTunes to Vongo, and may also be used to threaten disc-based media rental models such as BlockBuster and NetFlix. The content creators will soon create managed copy services – either their "DRM is actually working [for the internet DRM-enabled supply chain], but the protection used on DVDs clearly is not." Curt Marvis, Chief Executive Officer, CinemaNow own infrastructure, someone else’s “White Label” infrastructure, or perhaps today’s DRM-enabled services such as iTunes and Vongo will assume some or all of the functions of managed copy. The release timeline for content progressing from theatrical release, DVD release, DRM-enabled On-Demand and web release (iTunes, Vongo, etc), Linear-Paid-Services release (HBO, Starz, etc), and Free-To-Air release (NBC, ABC, CBS, BBC, etc) will change over time – modified as contracts come up for renewal – and value may be retained in the higher-margin release phases for longer periods of time, and On-Demand and Paid-Linear companies will likely have to wait longer for popular titles as the content creators maximize their revenues and profits via managed copy. We believe the process of renewing the security of Blu-ray and HD-DVD via AACS will continue and there will be releases that patch these security holes. While we cannot say for how long, there is a chance they will regain security and maintain it. If they continue to sustain 18 months of security per release they will have accomplished their goal of locking down the system. They can also shorten the cycle to 12 months or less (at greater cost of course) if they wish. There is probably a development cycle time they cannot fall below – perhaps four months. In the end if the amount of time it takes to crack the security is longer than their shortest development cycle, they win the arms race. Their opponents, the hackers, have time and very low development costs. We cannot predict who will win. Therefore for now, our findings indicate that a safe strategic approach is to strive for a balance between all of these strategies – HD-DVD and Blu-ray business strategies, disc rental strategies, and strategies that do not hinge on hard media at all. At the time of this writing, major studios were defining technical standards for DRM that call for Windows Media, and their customers were implementing it, even though it is made vulnerable by tools like FairUse4WM. Meantime, organizations intent on becoming high performers in this space have to make DRM choices, and have to consider the challenges of what we’re calling “multiplicity” in the DRM space. We recommend diversifying and supporting a portfolio of DRM methods to match the right mix of target platforms, when and where it makes economic sense. How to Compete with “Free” 17 Our ten-year projection for the industry Based on our findings and insights from this study, we have achieved a consensus of opinion on the future of DRM over a ten-year horizon. Within that timeframe, our findings indicate that interoperability can become a reality and consumers can experience the benefits of true DRM commoditization, with most content working on most devices. Within far less time – maybe five years – some degree of interoperability may allow selected devices to interchange content. This will be good for everyone; most of the leading players we have spoken with believe that DRM-enabled business models can and will boost content revenues, and will also increase the ratio of legitimate content in play to illegitimate content in play globally. The DRM-driven business models that ultimately prevail will need to have some or all of the following attributes. They will have to: • Mask the current lack of interoperability as much as possible 18 Accenture Media & Entertainment Be simple and flawless to use – easier, more fun, more reliable, more flexible, and more value added than using P2P networks to get stolen content • Be ubiquitously available and very fairly priced • Have vast amounts of great content • Have superior search and discovery capabilities • Be very high performance so content flows quickly to the end-point • Be perceived as cool, even if it costs hundreds of millions of marketing dollars – or more – to create the right perception, since the perception drives results • In time, in order to truly compete with “free”, they may need to feel more like they are free, or so close to free that nobody will care – this may require that the content creators and/or the organizations who hold DRM IP alter their expectations of revenue and profit per unit of content, in favor of the possibility of winning orders of magnitude larger collections of customers globally • “Most of the leading players we have spoken with believe that DRM-enabled business models can and will boost content revenues…” Enable peer-to-peer distribution of “free” content with “lightweight 2” DRM. DRM is used to track usage, measure popularity of content and provide other CRM data • Ensure peer-to-peer distribution of “free” content with embedded advertising locked into the content with “lightweight” DRM where DRM is used as above with advertising locked in • Allow for preview or limited use with “lightweight” DRM and full access for a fee. • Ultimately, our research and insights show that DRM provides the potential to instrument the far end of the value chain in ways that were impossible in the past, and will evolve to provide consumption data at finer granularity and faster than any historic sales process ever could. Even in models that don’t contractually require DRM protection, we think the value add of lightweight DRM to track actual consumption is a powerful economic lever. Imagine a world in which you could download music for free with no DRM. How would anyone ever know who was “number one” that week? The record label may know what you downloaded – thousands of free songs through your super-fast broadband link – but without DRM they might never know which ones you listened to. We also believe DRM has high-value potential to be connected to state-ofthe-art Customer Relationship Management (CRM) systems and drive more responsive, customer-oriented businesses that can adapt and serve their customers in exciting and innovative ways. This in turn can drive a revolutionary change that dramatically increases adoption and value. It is a revolution we expect to see within the next decade. 2 Definition of “lightweight DRM”. Standard commercial DRM such as Mircosoft’s applied in lightweight business rules allowing maximum usage with limited restrictions (e.g. geographic) as needed. How to Compete with “Free” 19 Postscript The DRM-enabled value chain has the potential to ubiquitously deliver huge amounts of content at fair prices to every internet-connected person on earth. The visionary companies that created this value chain intended it to some day be the primary distribution method for content. The creators of content may not necessarily share that vision in full – they seem to be leaning towards the current price point for content even if that limits the success of DRM-enabled methods. But we know that economic incentives drive the decisions of public companies, and so we know that if the DRMenabled value chain captures market dominance by means of great products and pervasive, memetic adoption, it can become the primary delivery means. What will the future bring for the DRM-enabled value chain? The road is uphill from here, and the creators and owners of content may have other preferred outcomes in mind. That decision ultimately depends on the economics. 20 Accenture Media & Entertainment We now know some of the ingredients required for market dominance, and we know that such dominance is the key to attaining that DRM-enabled future vision. A quote from the TriStar Pictures movie Terminator 2: Judgement Day may say it best – “The future is not set. There is no fate but what we make.” This paper is synthesized from a more detailed report, “How to Compete with ‘Free’: Digital Rights Management Point of View”. The full report can be downloaded from www.accenture.com/drm. The study on which this report is based was conducted by specialists within Accenture’s Media & Entertainment, Security and IPTV practices. Our senior industry and subject matter experts have undertaken Digital Content-related design, build, and run work for fifteen years. For more information about this report send an email to [email protected] or contact the author: Rick LeVine, Rights Management Global Lead, Accenture [email protected] Copyright © 2007 Accenture All rights reserved. Accenture, its logo and High Performance Delivered are trademarks of Accenture. About Accenture Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With approximately 146,000 people in 49 countries, the company generated net revenues of US$16.65 billion for the fiscal year ended Aug. 31, 2006. Its home page is www.accenture.com. Media & Entertainment Accenture helps entertainment, broadcast, publishing, printing and portal companies adapt to the realities of the digital evolution and capitalize on new opportunities. 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