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How the digital age has changed profitability for the music and video gaming industries

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How the digital age has changed profitability for the music and video gaming industries

Postby MrFredPFL » Tue Jul 31, 2018 10:42 pm

Story :

We all know the digital disruption story now. Along comes cavalier new entrant wearing the cloak of new technology, slashing prices and delivery times and destroying ancient business models. But it's not only the cavaliers who are enjoying the benefits of a new world in which everyone is connected at high speed, all the time. Big players in the music and video gaming industries who used to sell their product in a physical format - vinyl, cassette, shiny disc - have been reborn in the digital flames, and this is in turn affecting how investors are looking at this once volatile market.

The music industry has maybe seen the greatest turnaround in its fortunes. From its 2000 high on the back of a boom in the new CD technology, industry sales declined relentlessly for a decade, halving by 2014. Digital distribution was the culprit. The spread of mp3 technology saw every song ever recorded become a small compressed file, easy to transfer from computer to computer.

Piracy hit the industry hard, and the apparent white knight of iTunes turned out to be a false friend. Its saviour has been streaming. Here was a service that for $10 a month, gave you access to the entire past and present of musical history, streamed to your digital device in real time via wifi or high-speed mobile connection. As the service improved, customer take-up at Spotify and its peers accelerated dramatically, drawing a reluctant Apple into the fray in 2015. Amazon and others have followed. In 2016 the industry grew for the first time since 2000, and in 2017, it was up by 8%. Spotify listed on the NYSE recently and is currently valued at over $30bn.

For music labels, the benefit has been greater than just a return to growth. Profitability is higher, as digital delivery removes physical costs of product, transportation and inventory write-offs. Retailer margin is replaced with the margin of the streaming provider, but there are now competing platforms rather than the monolithic iTunes, and only three big music labels to supply them, so the balance of negotiating power is more equitably split. But maybe even more important, the revenues become much more steady and predictable, and much less dependent on the latest greatest hit band. As such, the industry has gone from declining, volatile and barely profitable, to one that is growing, much more predictable, and increasingly profitable.

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