Monday, December 3, 2012

Some thoughts about where we are regarding digital distribution in 2012 (excerpt of an upcoming book chapter)

Digital distribution has surpassed physical distribution in key markets like the USA or UK and, thus, established as the dominant distribution practice.

While the media often speaks of the next killer app that will revolutionize music consumption and dominate music distribution, the analysis of the current situation suggests that different forms of distribution will coexist. The reason is that consumers value music differently, prefer different formats and expect different experiences from consumption. The same applies to content providers. Each artist or record label is in a specific situation pursuing different goals. As a result, a variety of different distribution models have emerged, each with pros and cons for a certain situation. For content providers it is important to choose the appropriate distribution model that supports the overall strategy.

The most striking development in digital distribution is the blurring line between promotion and distribution. This refers to the fact that, on the one hand, lowering barriers to access music creates a strong promotional effect due to the facilitation of rapid music circulation. On the other hand, heightening the barriers to access music causes an artificial scarcity through excludability, which is essential to implement a business model based on selling musical recordings. The following graphic illustrates this trade-off and the position of each distribution model.

Trade-off between promotion effect and direct revenues
Figure 3: Trade-off between promotion effect and direct revenues

Different distribution models can also be combined parallel or subsequently. In this way, content providers can apply different strategies in different career stages or for specific consumer groups with particular listening preferences. However, if applied at the same time, cannibalization effects may eventually occur. For example, if an artist distributes her music via the free model and a pay-per-download model at the same time, the free model will likely cannibalize revenues of the pay-per-download channel.

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