Last Tuesday Apple announced two major changes to their iTunes music distribution service. The first does away with the uniform $0.99/song pricing structure that has been in place since the service launched in 2001. Most songs will still cost $0.99, but more popular (premium) songs will sell for $1.29, while older or less popular songs will cost $0.69. The second change frees songs from consumer-maligned digital rights management (DRM) copyright protection. Without DRM, purchased songs can be easily shared or played on non-Apple digital music players that support Apple’s AAC encoding format.
The latter change reflects the increasing level of comfort the music industry has with the concept of digitally distributed music. While music labels have been pushing for variable pricing to make the digital space mirror how retail CDs are priced, they have traditionally been strong advocates of DRM, arguing that without its protection they would lose potential sales through rampant sharing.
With this recent development in mind, below are a few more digital distribution threats to keep your eyes on over the next few years. To keep customers coming into stores instead of finding their media content online, bricks and mortar retailers will have to focus on service, interactivity, and finding creative new ways to provide a compelling shopping experience.
Books
Barnes & Noble and Borders already face significant book sales competition from Amazon. However, Amazon’s growing Kindle service allows users to instantly download electronic copies of books (over 250,000 currently), magazines, newspapers, and blogs over a wireless connection for viewing on the Kindle device. The Kindle device features an easy-to-read E-Ink display that resembles the experience of reading from the printed page, but some users have been hesitant to adopt because of the high price point. So in early March of this year, Amazon substantially expanded their potential market by opening up Kindle content for viewing on the iPhone.
As consumers become more comfortable curling up with their Kindles and iPhones, book retailers could stand to lose substantial market share. The lower price point (most books sell for only $9.99) is likely to attract many customers, especially those valuable shoppers that read in large quantities. And if Kindle content or that from competing services catches on in a big way, expect for a residual effect to be felt by Half Price Books and other used book sellers.
Movies
Blockbuster, ailing from a combination of a heavy debt burden and competition from mail movie rental giant Netflix, has acted quickly to deal with the growing popularity of streaming movie content and its effect on retail sales. Blockbuster movie content is available on 2Wire’s $100 MediaPoint player, and Roku’s $100 device similarly can play Netflix and Amazon video content streamed over an internet connection directly to the user’s television. Netflix functionality is also available through Microsoft’s Xbox Live service using the Xbox 360 game console, and both Microsoft’s Xbox 360 and Sony’s Playstation 3 game consoles allow users to rent movies and purchase individual episodes of television shows from the comfort of the couch.
Look for Best Buy and Wal-Mart to see DVD sales drop as consumers substitute to the more convenient and less expensive alternatives increasingly available to them.
Games
The used game market has been a point of pain for many game publishers, whose revenues are tied to initial sales. GameStop knows this market well, and through consistent growth and acquisition remains the number one new and used game retailer.
However, the big three videogame console manufacturers (Nintendo, Microsoft, and Sony) all offer the ability to download content through their services. Arcade games and other content purchased over these services cannot be resold, and publishers are increasingly turning to digital content as an additional revenue stream. While full-priced retail titles are not currently available for download and must be played using a disc, it is only a matter of time before publishers push for simultaneous digital and retail release. The incentive is definitely there for publishers; Valve Software has been delivering its personal computer game content through both its Steam service and traditional retail outlets for years now. If console videogame publishers succeed in selling full-priced titles digitally, expect declines in new and used game sales at retail.
Justin Tischler is a Senior Research Analyst at Buxton.
Tags: Apple, Best Buy, digital distribution, Digital shopping, retail competition, WalMart