Elephants mate with elephants: The perils of Telecoms/mobile playing second fiddle to the entertainment industry

Elephants mate with elephants ..

I have a friend who often uses the phrase ‘Elephants mate with Elephants’. By that, he means – there is a nexus between the Entertainment industry and the Telecoms Operators (both being ‘big’ i.e. ‘elephants’). The entertainment industry needs channels (aka passive consumers) to sell their content. The Telecoms industry thinks it has these consumers through its portals.

Thus, presumably this was to be a marriage made in heaven ..

However, reality does not reflect this thinking. Today, both the entertainment industry and the Operator portals are both being affected by forces beyond their control.

Ironically, the Telecoms industry is stronger and does not need to play second fiddle to the Entertainment industry. Telecoms and mobility have always been about ‘connecting people’ and there is far greater revenue in connecting people/communications for the telecoms industry – than in becoming conduits for the entertainment industry. (And I am extending the definition of connecting people to also include connecting people to artists)

The telecoms industry has two choices. Either it becomes a conduit for the entertainment industry – which is itself in the throes of a massive transformation and is clutching at straws in attempting to squeeze revenue from 12 year olds (as in the RIAA suing 12 year olds ) OR it embraces its rightful place in ‘connecting people’ – including artists; a task which it has done globally through voice and SMS.

This mindset has a deep impact on the structure of the industry and one which the ‘Old guard’ in both media and telecoms refuse to accept in an ostrich like view of the world.

The problems and opportunities of disintermediation

Before we address the Mobile entertainment industry, let us understand the issues of content disintermediation. Disintermediation is affecting content distributors. However, disintermediation benefits both the customer and the content creator (artist). The Mobile operator portal is a type of distributor – and Operator portals are feeling the impact of disintermediation in a big way. A new category of player has entered the content value chain. We will call them ‘Web aggregators’ and they include Google, Yahoo and others. In the Web 2.0 world, Web aggregators now include the social networks like MySpace, YouTube, Facebook and others. A secondary impact of Web aggregators is the rise of social networks and the emergence of user generated content as a driving force (which reduces the importance of traditional content in real terms) .

Web aggregators(whether traditional Web players like Google or social networks), are directly facing the customer. The entertainment industry thus faces the problem of disintermediation because it no longer faces the customer.

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The value chain of the entertainment industry can now be depicted as above (we have put the advertiser at the far left of the diagram to depict the flow of money).

However, disintermediation is an opportunity to the content creator (artist). In doing so, the motivations of the content creators are not the same as the content distributors. In fact, the content creators are on the same side as the customers – with the distributors left disintermediated.

New media is talking about old media

If we further explore the idea of disintermediation of the content distributors (and the alignment of interests between customers and content creators), then we realise that ‘New media is talking about old media’.

Consider this excellent Joss Stone video

As at May 17 2008, it had 884,325 views and 1743 ratings

This is in the interest of Joss Stone (but not necessarily in the interest of the distributors since YouTube is free).

However, no matter how you look at it .. You cannot ignore the Web aggregators. With 50 million MySpace unique visitors, MySpace is comparable to the number of American households that tune to Super bowl. With 100 million YouTube videos every day, YouTube is comparable to Top 15 primetime shows in England (100 million viewers) or Top 4 American shows(source: Navigating the media divide: IBM institute for business value )

Artists have always pursued audiences .. That has never changed. So, we should not be surprised when what started with a few isolated artists like Prince giving their latest album for free in a Sunday newspaper, and with Radiohead allowing their album to be downloaded for free – other artists like Nine inch nails are now doing the same thing – potentially creating a wave of established artists taking this route.

Still not convinced?

Consider another of my favourite artists – Johnny Cash. Enter ‘Johnny Cash’ in youTube and you get a screen as below with Cash ringtones for sale.

Johnny%20Cash%20ringtones.jpg

Hence, YouTube competes directly with ringtones and other mobile portals. As far as I know, no Operator or mobile portal has YouTube’s figures. Hence, this impacts traditional business models

Winning the battle and losing the war

The impact has been truly dramatic.

In suing 12 year olds and shutting down Napster, the music industry has won the battle but lost the war.

In the Jan 12, 2008 issue of the Economist, I read this interesting story.

The music company invited some kids for a ‘focus group’ (a term going the way of the dinosaur in my view!) . After the meeting, as a token of their appreciation, they offered the kids a free CD. And none of them took the CD! (i.e. they were all used to digital downloads).

This is a case of completely missing the customer’s requirements in an example of the music industry’s Kodak moment(In the sense of Analogue companies struggling to transition to Digital)

Business models in the new world for content?

So, which business models will work in this world of content disintermediation? One of the answers is ‘mobile’ – but not in the way we traditionally think.

The same issue of the Economist (Jan 8, 2008) says that the music industry is facing a triple whammy. Firstly, CDs are selling less – so retailers like Wal-Mart are giving them less shelf space. Secondly, in an effort to cut costs, music labels are spending less on promoting artists and finally, music labels are not investing in the sectors of the music industry growing fastest for instance concerts and tours.

Contrast this with an interesting blog from David Cushman where he says that Robbie Williams had made five times as much money from his deal with T-mobile Sony Ericsson in one year than he had from his record label. He made most of all from touring

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Robbie Williams manager Tim Clark says

“We have to find ways of valuing music because if artists aren’t paid something there will be no music, I don’t just mean the huge megastars, but also people like King Crimson, who I worked with years ago, and who are still touring and making a living. We all have artists like this who have played a part in our lives and they are the bedrock of music.”

“The record companies world is changing. I don’t care if they can get the digital revolution or not, I work for artists. I have to find the best way possible to get the music from the artist to the fan.”

Interesting also that Sony Ericsson spent six times as much promoting Robbie’s latest album in Australia than EMI did.

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So, this points to an interesting trend – the managers for the artists(and consequently the artists themselves) are becoming more significant and are likely to do deals with the newer players(both Web and Mobile)

The music industry should have invested in new channels when it had the money. Now, it is too late. Increasingly, we are going to see established artists follow divergent paths from the music distributors – and ‘connecting people’ will extend to ‘connecting people to artists’ We are going to see new models like Advertisement supported music, subsidised services(people do not pay directly for the music), new initiatives like Nokia’s Comes with music which allows customers to download all the music they want and to keep it even when their yearly subs end or they change handsets

And nor is it confined only to established artists as Madonna found out to her surprise when an obscure techno band toppled her in the UK charts.

To conclude

a) Contrary to the Elephants analogy, there are more synergies between Telecoms/mobile as a connection mechanism (both people to people and people directly to artists) than in blindly adopting the arcane business practises of the entertainment industry

b) The entertainment industry is hobbled by outdated business models. These business models will not survive disintermediation

c) The interests of the artists and customers on one side are diverging from those of the music distributors on the other side.

d) Artists and customers benefit from the rise of Web aggregators

e) Extending the analogy of Johnny Cash ringtones, we cannot address Web and mobile in isolation. That’s why I believe initiatives like Mobile Youth are doomed to fail since they ignore the fundamental realities that the youth have a choice (often driven by the Web)

f) Far from mating .. Elephants are facing extinction. The dinosaurs are already dead :)

Many of these ideas are explored in my forthcoming book Open Mobile Ecosystems co-authored with Mauro Del Rio and Anna Gatti

As usual all comments welcome