Recorded Video Business Unlikely to Suffer Fate of Music Industry

According to Bloomberg News, recorded music sales in the U.S. fell 6.1 percent (to $4.9 billion) in the first half of 2006, led by a 14 percent drop in CD sales. Declines in demand for CDs, tapes and other traditional formats far exceeded the 86.6 percent jump (to $945 million) in digital sales that now account for about 11 percent of the total recorded music market.

This makes total intuitive sense. Physical copies of media are less desirable now that you can get almost any song or video you could ever want online. Not really new news. The only surprising thing about these statistics is that they do not tell a darker story.

There are some who will tell you that illegal downloads exceed legal downloads by several orders of magnitude. That sounds intuitively right but there’s really no way to verify just how many billions of illegal files are traded annually. It’s anyone’s guess. This is not a fad, it’s a trend and you cannot put the toothpaste back into this tube. As everyone knows, a file is a file is a file. This is axiomatic. Files can be traded at will … or can they?
 
Is it axiomatic that the fate that befell the music industry will also cause economic havoc for the recorded video business? Before you can ask the question, you need to define what the recorded video business actually is. Is it long-form streaming content? Is it short-form? Progressively downloadable? Download to own? Pre-recorded DVDs? DVDs over the wire? All of the above???

And, much more importantly – where will it play? Music is now played back in a few digital file formats from a few types of players. All music files that meet a user’s arbitrary quality threshold will be perceived to be of acceptable aural quality. And, almost all audio files can be enjoyed through almost any audio playback system.

This is not true for video files. Not even close.

High-quality, long form videos are very big. They can not be casually moved around your home, let alone the public Internet. Many people speak of a time in the near future when this will not be true but they obviously do not understand the nature of the 802.11 (WiFi), 802.16 (WiMax), ADSL or cable modems. Sure, you can download at speeds exceeding 6 Mbps, but unless you have a very serious and expensive broadband connection, you can’t upload much faster than 768 kbps. Even with torrent and mesh technology, size is still the best copy protection for high-quality video files.

How about lower resolution .m4v files like Apple is now selling? These are relatively small files that can be moved easily and the picture quality is more than acceptable. As it turns out, these files are the video wildcard. If people are satisfied with these lower quality files, the recorded video industry is in for a very big shock. When? When you can play them back in an emotionally satisfying way. What does that mean? It means that there are only a certain number of people who will be willing to watch long form video in relatively uncomfortable environments. Watching a movie at your desk may not be a great option, but playing the same file on your laptop on a plane, train or bus might be just fine.
 
Apple’s new iTV box is slated to arrive during the first quarter of 2007. Will it really make your computer video library look good on your TV monitor? If so, critics argue you can be sure that the recorded video industry will start to see declines by the end of 2008. They argue there won’t be anyway to stop it. But, let’s not jump to quick conclusions.

As it turns out, personal music experiences are almost never interrupted by commercials. However, Americans have been tolerating, in fact, anticipating commercial and promotional announcements to be interwoven with video content for decades. This is a non-trivial difference. Video has legacy packaging and a legacy business model that will translate (however imperfectly) to a digital distribution model. Promos can be baked in or glued-on, but in every case people practically expect to see them.

There is also a very strong case for new wrappers and packaging. Video files all need players and the players have to be watched. You don’t need to see the audio player you are using (another non-trivial difference). As long as video files need playback software, there will be opportunities for monetization.

So the next time someone tells you the recorded video business is about to tank and they cite the fate of the recorded music business as the model, you can look them straight in the eye and say … no, not any time soon.