The presentation summarized major trends in the digital entertainment industry based on a series of charts. While the overall transition from physical to digital media is evident, there are important regional variations and subtends. Across music, video, and books, digital media will surpass physical media globally by 2019. However, the music industry saw a 25% decline in revenues during this transition due to loss of pricing control to digital aggregators, unlike the book and video industries. The amount of content is growing exponentially due to ease of digital creation and distribution, but consumption is growing arithmetically, resulting in declining average unit revenues. New financial models are needed to support commercial content creation in this environment.

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2. The following is a summary of a presentation
given at the World Future Society 2016 Annual
Conference. It consists of a series of charts
illustrating the major trends in the digital
entertainment space. Although the aggregate
trends are self-evident and already well known,
there are important regional variations and sub
trends that are worth pointing out.
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4.  No real surprises here. Digital media overtook
physical media in the music business on a global
basis in 2014, the crossover point for video in the
United States will occur in 2016 and for books in
2017. On a combined, global, basis for all media,
digital media will surpass physical media in 2019.
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5.  There is no consistent definition of what constitutes
an industry’s “sales.” Sync revenue, for example, is
not always included as part of the music industry’s
revenue base. Ditto for revenue from college book
rentals. These kinds of discrepancies may affect the
timing of the cross over point but they do not
change the overall trend toward digital media.
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Music & Copyrights
May 25, 2016

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Motion Picture Assoc.
of America, 2015

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Consumer spending: traditional vs. digital (US $ millions)
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
2009 2010 2011 2012 2013 2014 2015 20162017 2018 2019
Digital1
Traditional2
Global Media Report,
McKinsey & Co., 2015

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12.  Digital penetration for the top four music markets in
the world is as follows: US (72%), Japan (17%),
Germany (22%) and UK (45%). The US market
represents $4.9 billion in total revenues, the other
three markets represent a combined revenue of
$5.33 billion. The overall digital share in those
markets is 21%. If these markets approach the
same level of digital penetration as the US it will
represent an increase in digital revenues of over
$2.6 billion.
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13.  It’s unclear to what extent cultural factors may
affect the overall level of digital penetration.
Secondly, it’s not clear whether those markets that
have lagged behind in digital penetration will make
the same transition to downloads and then
streaming or whether they will transition directly to
a streaming model and skip the download phase.
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14.  Secondly, for the first time in the history of the music
business there has been a sharp reversal in the
market share of new release titles versus catalog.
Historically, new release sales, anything less than 12
months from release date, represented 60% of new
release sales and catalog, those titles more than 12
months from release date represented 40%. New
releases had higher unit sales per title but offered
less margin. In 2015, for the first time catalog sales,
122.8 million units, exceeded new release sales,
118.5 million units.
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15.  These numbers are based on data supplied by
commercial record companies. They show both a
decline in the average unit sales of new releases as
well as a decline in the aggregate number of new
titles. If one factors in “amateur” or “non-commercial”
titles, it’s possible that the number of new release
sales may still exceed catalog sales.
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16.  In media, the business model revolves around the
rate of recoupment. What the data suggests is that in
a digital media world, rates of recoupment are falling
to the point that many new projects are being
shelved. The digital space is an excellent arena for
recycling older titles, but it is less economic for titles
that are not blockbuster hits or are produced for very
little cost.
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17.  Ultimately, the digital music industry will have to
move to a split pricing system, as it was in the days
of physical media, where new titles sell for higher
prices than catalog titles. Otherwise the industry’s
offerings will increasingly be limited to a combination
of blockbuster titles, “non-professional” content and
historic recordings.
 Since streaming is less profitable then download
sales, its likely that “availability windows” (as in the
days of video rental versus pay-per-view) will
become standard practice, especially for
“hits/bestsellers”
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18.  Finally, the composition of digital revenue varies
widely by market. In South Korea and Scandinavia,
for example, streaming represents over 90% of
digital revenue. In Australia and Canada, on the
other hand, digital downloads still represent 80%+ of
digital revenues. Not surprisingly, the demographic
of streaming users skews heavily young. Digital
video also shows dramatic differences in utilization
by country. These differences, however, may simply
be a reflection of the prevalence of online piracy in
certain markets and the degree to which commercial
video streaming options are available.
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Billboard, “The World’s Top 10
Music Markets”, May 25, 2016

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Billboard, “The World’s Top 10
Music Markets”, May 25, 2016

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26.  The most significant variation in each industry’s
aggregate revenues is that in the case of books and
film/video, the overall revenue has grown
notwithstanding the transition from physical to digital
media. In the case of the music industry, however,
aggregate revenues declined by about 25%. The
difference is that the book and film industry retained
control of pricing in the digital space, whereas the
music industry lost control of its pricing to the digital
aggregators.
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Firstnews.com.vn

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31.  Not surprisingly, it is easier to create and
disseminate content in a digital environment than it
is in a physical one. The result is that the amount
of new content is growing at a geometric rate. Two
graphs, the number of music tracks on iTunes and
content creation on YouTube, illustrate this trend.
Apple no longer publishes the number of tracks on
iTunes. Its estimated that the number now exceeds
35 million tracks.
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32.  Of those, about six to eight million were tracks that
were commercially released. There is a lot of
duplication of material so that number could be as
high as 10 million. The rest are tracks that were
generated from what the industry euphemistically
refers to as “non-commercial” sources, i.e.
amateurs. Ditto for YouTube, where every second
more than 120 hours of new video content is
uploaded.
 When availability grows faster than consumption
average unit revenues must decline.
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Extrapolated from Apple
Announcements, 2003-2010

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36.  By the end of this decade most forms of
entertainment content will be distributed and
consumed digitally. The typical financial models for
new content creation in the physical world
breakdown in the digital space except for “hit/best
seller” product and for low production cost “non-
professional/amateur” content. This is particularly
true of music content. I believe it will increasingly be
true for film and book content as well. New financial
models will need to emerge to justify new content
creation in a digital world.
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37.  The music industry was the first content industry
impacted by digitization and many of its
experiences, mostly bad, have been avoided by the
film and book industry. The larger trends, however,
mushrooming content creation and overall declining
prices on a unit basis, are impacting all three
industries.
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38.  Historically, the music industry has had two primary
channels of commercialization – physical media
sales and concert touring. Digitization has not really
affected concert touring, and the two channels, once
heavily codependent, are increasingly divergent.
The film and book/print industries have historically
had multiple, somewhat parallel channels of
distribution. These are increasingly merging. In a
digital, online world, for example, the distinction
between newspapers, magazines and books is
increasingly blurred. Likewise, the distinction
between pay-per view, streaming and rental are now
obsolete.
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39.  Coping with ever increasing amounts of content,
balancing the need for curation against the danger
of censorship by dominant market players, and
developing financial models that justify new content
creation are the three principal challenges faced by
the media industries in the brave new digital world.
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40.  Most entertainment content will be obtained and consumed
digitally
◦ What happens to portability?
◦ The Orwellian Ministry of Truth factor
 First Mover Advantages are huge and self-sustaining
◦ Market dominance versus censorship?
 Content owners have to control the pricing model or
industry revenues will decline
◦ Who should decide the value of content?
◦ Who should decide the business model?
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41.  Content will grow at a geometric rate while
consumption will grow arithmetically
◦ unit revenues will decline
◦ one price fits all models are unsustainable
◦ the problem of curation
 The future of content as a service versus a
product
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