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Disruptive technology or industry savior?

Tech-savvy consumers want on-demand offerings, challenging the entertainment industry's established marketing models and distribution channels. Who holds the plug?

By Aubrey Henretty

Six years after the Recording Industry Association of America felled Napster and two years after the Motion Picture Association of America — and the U.S. Department of Homeland Security — dismantled the massive movie-sharing aid, consumers still flock to the Internet for music and video, legal and otherwise. They cling stubbornly to the notion that they should be allowed to dictate the terms of their entertainment experience.

This flagrant disregard for the rules of commerce is clearly a problem without historical parallel. Or is it?

Professor Mohanbir Sawhney  
Professor Mohanbir Sawhney  Photo © Nathan Mandell  

"We have seen this movie before many times," says Mohanbir Sawhney, the Kellogg School's McCormick Tribune Professor of Technology.

Though the actors vary, the plot stays the same: Technology meets aging business model, consumers embrace technology, flustered industry condemns this interloper, technology proves essential to industry's survival. Sawhney recalls the panic that swept through the film industry with the advent of the affordable videocassette recorder. The VCR was simply a tool of pirates, cried executives and their lawyers. Meanwhile, VCRs were popping up in living rooms everywhere and the crunch of microwave popcorn was drowning out industry objectives.

But the show wasn't over. Reluctantly, the film industry discovered that it was dealing with a new kind of consumer, one who wanted to watch movies on her own time, even in her own home. Eventually, the industry learned to love the sinister playback device, in turn creating untold billions in revenue through home video rentals and sales. So, concludes Sawhney, "What saved the movie industry? The VCR."

Sawhney, also the director of the Kellogg School's Technology Industry Management Program, says anxious managers in traditional media production and distribution companies should loosen their white-knuckled grip on the reins. "They need to get past the mentality that they are in control of everything," he says. "So what if somebody takes a five-minute clip of 'Desperate Housewives' and posts it on YouTube? That's advertising."

Part social networking site and part file-sharing hub, YouTube (acquired by Google Inc. in 2006 for $1.65 billion) became the latest online craze to drive traditional media companies nuts with its meteoric rise from obscurity to ubiquity. Users could upload video clips, watch others' clips and even embed YouTube's player in their own Web pages.

  Chris Maxy '97
  Chris Maxy '97

"[YouTube's founders] came up with this great interface — which is now copied by just about everybody — that made the user experience very easy," says Chris Maxcy '97, vice president of business development at YouTube, who adds that the site appeals to the next generation of media consumers in part because it allows users to control their entertainment experience. Users found creative ways to express this freedom. Some uploaded hours of home videos of kittens battling household objects; others produced cleverly choreographed music videos to promote their rock bands; and others still dumped digital collections of old commercials and — to the frustration of many rights holders — clips of TV shows onto the site's servers.

"The No. 1 priority with the company, ahead of everything else, is the user," says Maxcy. "At the same time, we do respect our copyright holders. That's sometimes where the rub comes in."

Indeed. The average 18- to 34-year-old takes a notoriously dim view of copyright law. Members of this deep-pocketed, media-hungry demographic grew up programming their parents' VCRs to record network sit-coms and copy rented movies, and many of them exhibited no qualms about posting copyrighted material to YouTube.

While some TV networks cried foul and demanded that their clips be removed from the site, others accepted YouTube's olive branch: a chance to reach the site's massive audience on the networks' own terms. "The companies [that have partnered with YouTube] really see us as this incredible new distribution model," says Maxcy, who adds that CBS — one of the first networks to form an official partnership with YouTube — found that when it promoted its programming via clips posted to the site, ratings rose.

"We take [copyright infringement complaints] incredibly seriously, and so we act quickly to remove any content that may have been uploaded by someone who doesn't own it," Maxcy says.

Media ownership, it turns out, is tricky business. If a consumer pays for a piece of copyrighted music or video, who "owns" it — the consumer or the copyright holder? If the consumer, then how will the copyright holder protect the material? If the copyright holder, then what exactly is the consumer paying for?

Brian Shults '05  
Brian Shults '05  

Brian Shults '05, director of new business development at BMG Music Publishing, says questions like these are critical to address if the industry is to leverage the digital technologies foisted upon it.

But traditional ways of doing business can sometimes slow the way that some companies react to these changes, he suggests. While music publishers may be eager to embrace new platforms — provided the platforms include proper compensation for rights-holders — technology often outpaces copyright law, he adds. The key to answering questions about ownership, Shults says, is to spell out the rights at the time of purchase. He posits that one-size-fits-all pricing and distribution have passed: "Consumers should be willing to pay for the number of rights they want to have."

Shults adds that music companies also can benefit from understanding how consumers want to listen to the music they buy. Do consumers just want to audition a track a few times? Do they want unlimited listens? Do they want to be able to copy the track or album? If so, do they want to make one copy? Five? Fifteen? Once record companies figure out exactly how consumers interact with their media, says Shults, the market will determine appropriate consumer prices for each use.

Sound simple? It isn't. Media isn't just for televisions, computers and music players anymore. With cellular phone networks rapidly approaching broadband speed, says Paul Bernard '98, market development director at Nokia Inc., content producers, cell phone service providers and device makers are suddenly vying for media-savvy consumer affections.

"Everyone wants to control the end-user experience," says Bernard, and as service providers cut exclusive deals with content producers, device makers like Nokia must choose which formats to support or bypass their sister industries with new formats of their own. "What you are finding are these breakthrough devices" designed to do one thing extremely well and to integrate all aspects of the market, he says, citing the Blackberry, a portable e-mail device with its own e-mail provider, and the iPod, a portable music player with its own music store.

Though Bernard says it's tempting for device makers to add many functions to their gadgets simply because they can, they are better served by asking themselves, "What are the things that the user really wants to do with the device, and what is the context?" He adds, "Can you use your phone as a remote control for your TV? Yeah, probably, but the remote actually works pretty well."

Bernard says that no matter how complicated new technology becomes, no matter how drastically it changes the market or consumer expectations, simplicity will remain the most direct line to the consumer's heart.

"If you can package it in a way that's easy — brainlessly easy — for the end user, that's when things are really going to take off."

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