1. Copyright © 2004 Pearson Education, Inc. Slide 14-1 E-commerce Kenneth C. Laudon Carol Guercio Traver business. technology. society. Second Edition

2. Copyright © 2004 Pearson Education, Inc. Slide 14-2 Chapter 14 Online Content Providers: Digital Media

3. Copyright © 2004 Pearson Education, Inc. Slide 14-3 Learning Objectives Identify the major trends in the consumption of media and online content Discuss the concept of media convergence and the challenges it faces Describe the five basic content revenue models Discuss the key challenges facing content producers and owners Understand the key factors affecting the online newspaper, e-book, and online magazine industries Understand the key factors affecting the online entertainment industry

4. Copyright © 2004 Pearson Education, Inc. Slide 14-4 The Wall Street Journal Online One of very few online newspapers to successfully employ a subscription revenue model Reasons for success include:  Brand  Access to premium content  Fine-grained search engine

5. Copyright © 2004 Pearson Education, Inc. Slide 14-5 The Wall Street Journal Online Page 863

6. Copyright © 2004 Pearson Education, Inc. Slide 14-6 Content Audience and Market Average American adult spends over 3,500 hours each year consuming various media By 2005, expected to go to 10 hours per day, or 3,650 hours a year Most popular medium – television, followed by radio and recorded music Internet a distant 4 th, but growing so fast that is expected to overtake recorded music soon

7. Copyright © 2004 Pearson Education, Inc. Slide 14-7 Media Utilization Figure 14.1, Page 866

8. Copyright © 2004 Pearson Education, Inc. Slide 14-8 Internet and Traditional Media: Cannibalization versus Complementarity Time spend on Internet reduces consumer time available for other media Internet uses view television only 11.2 hours per week, compared to 16 hours per week for non-users Internet users spend 15% to 20% less time reading books, newspapers and magazine, and less time on phone or listening to radio Conversely, Internet users consume more media of all types than non-Internet users Internet users also often multitask, using other forms of media at same time as using Internet

9. Copyright © 2004 Pearson Education, Inc. Slide 14-9 Media Revenues Entertainment (box office events, movies, home video, etc) has largest share of media revenues (43%) although represents only 5% of consumer media hours Television 2 nd largest producer of media revenues (34%) Consumer Internet constitutes only about 15% of media revenues, but has grown rapidly since 1998 (3%)

10. Copyright © 2004 Pearson Education, Inc. Slide 14-10 Media Revenues by Channel Figure 14.2, Page 867

11. Copyright © 2004 Pearson Education, Inc. Slide 14-11 Growth of the Online Content Audience Online content – digital information for direct consumption made available over the Internet Includes both free and paid content Differences between consumer content (B2C) and business content (B2B) markets 2003 – Total direct consumer paid online content revenues in U.S. about $2.6 billion This amount does not include expenditures for e- learning for secondary and higher education markets (about $200 million) or access to digital archives ($800 million) Including these amounts brings total direct consumer paid online content revenues to $3.6 billion in 2003 Expected to grow to $10 billion by 2007

12. Copyright © 2004 Pearson Education, Inc. Slide 14-12 Type of Content and Its Characteristics Table 14.1, Page 868

13. Copyright © 2004 Pearson Education, Inc. Slide 14-13 Direct Consumer Paid Online Content Revenue Forecast (Millions) Table 14.2, Page 869

14. Copyright © 2004 Pearson Education, Inc. Slide 14-14 Fee or Free? Major challenge facing online content industry Most content on Web is free, and most Web users expect it to be free Movement toward paying for content will require significant enhancement to content providers’ customer value propositions

15. Copyright © 2004 Pearson Education, Inc. Slide 14-15 Media Industry Structure Media content industry prior to 1990 was composed of many smaller independent corporations specializing in content creation and distribution in separate industries Still organized largely as separate vertical stovepipes, with each segment dominated by a few key players Growing use of digital creation tools and growth of Internet as delivery vehicle offer promise of convergence toward a more unified creation and distribution platform

16. Copyright © 2004 Pearson Education, Inc. Slide 14-16 Media Titans Table 14.3, Page 871

17. Copyright © 2004 Pearson Education, Inc. Slide 14-17 Media Convergence: Technology, Content and Industry Structure Three dimensions of media convergence: Technological convergence: Development of hybrid devices that can combine the functionality of two or more existing media platforms into a single device Example: PDAs that can also be used as cell phones and book readers Content convergence has three aspects Convergence in design Convergence in production Convergence in distribution of content Industry convergence: Merger of media enterprises into synergistic combinations that create and cross-market content on different platforms Best known example: AOL/Time Warner

18. Copyright © 2004 Pearson Education, Inc. Slide 14-18 Convergence and the Transformation of Content: Books Figure 14.3, Page 874

19. Copyright © 2004 Pearson Education, Inc. Slide 14-19 Challenges and Risks in Media Convergence Consumers still prefer traditional media Technology is not quite ready to distribute content effectively and conveniently Content creators (artists, writers, producers) do not yet know what features consumers are willing to pay for and are still creating content for each of the separate media types Profitable business model has not yet emerged

20. Copyright © 2004 Pearson Education, Inc. Slide 14-20 Online Content Revenue Models and Business Processes Five basic content revenue models  Marketing  Advertising  Pay-per-view/Pay-for-download  Subscription  Value-added  Mixed

21. Copyright © 2004 Pearson Education, Inc. Slide 14-21 Online Content Revenue Models Table 14.4, Page 878

22. Copyright © 2004 Pearson Education, Inc. Slide 14-22 Making a Profit from Online Content: From Free to Fee Many content firms have decided that there is more to be gained by offering either all free content or a mix of free and for-free Four factors required to charge for online content  Focused market  Specialized content  Sole source monopoly  High perceived net value (portion of perceived customer value that can be attributed to fact that content is available on the Internet)

23. Copyright © 2004 Pearson Education, Inc. Slide 14-23 Examples of the Growing Use of Mixed Revenue Models for Online Content Table 14.5, Page 881

24. Copyright © 2004 Pearson Education, Inc. Slide 14-24 Revenue and Content Characteristics Figure 14.4, Page 882

25. Copyright © 2004 Pearson Education, Inc. Slide 14-25 Key Challenges Facing Content Producers and Owners Technology challenges  Bandwidth issues  Client platform Cost challenges  Internet distribution more costly than anticipated and media companies face substantial costs in migrating, repackaging and redesigning content for online delivery Consumer attitudes Cannibalization of existing distribution channels Digital rights management challenges  Theft of copyrighted material  Royalties paid to artists and writers

26. Copyright © 2004 Pearson Education, Inc. Slide 14-26 Insight on Business: E-books and the “Tower of Dead Trees” NetLibrary: Was largest creator, packager, distributor, and seller of e-books in U.S.; raised over $100 million in venture capital but declared bankruptcy in November 2001 Reasons for failure: In many cases, had to pay cost of conversion itself Demand not high enough Little inventory of hot new titles, since traditional publishers often refused to sell rights Required libraries to buy copies of its e-books as if they were buying physical books and imposed limitation that only one person could gain access to an e-book at a time

27. Copyright © 2004 Pearson Education, Inc. Slide 14-27 Insight on Business: E-books and the “Tower of Dead Trees” (cont’d) Assets continue on, and are now owned by Online Computer Center Library, a non-profit organization Other companies with different business models include:  Questia  Ebrary  OverDrive  Fictionwise

28. Copyright © 2004 Pearson Education, Inc. Slide 14-28 Online Newspapers More than 5,000 online newspapers worldwide About 1,300 online newspapers in U.S. Over 80% of Internet users spend 30-45 minutes each week reading online newspaper Online newspapers one of most successful forms on online content to date Impact of Internet on content Enables premium archived content Enables fine-grained search Extends reach Extends depth of content

29. Copyright © 2004 Pearson Education, Inc. Slide 14-29 Monthly Unique Visitors at Major Online Newspapers Figure 14.5, Page 889

30. Copyright © 2004 Pearson Education, Inc. Slide 14-30 Top News and Information Sites Table 14.6, Page 890

31. Copyright © 2004 Pearson Education, Inc. Slide 14-31 Online Newspaper Revenue Models and Results Predominately rely on advertising model, with varying success Supplement revenues by using a pay-per- view/pay-for-download model for premium or archival content and/or subscription fees Only a few newspapers with strong offline brands such as Wall Street Journal have been able to successfully use subscription model

32. Copyright © 2004 Pearson Education, Inc. Slide 14-32 Convergence in the Online Newspaper Industry Technological convergence in infancy with only published text moved to Web Content convergence has occurred in areas of production and distribution Industry structure has not seen much movement to cross-media convergence

33. Copyright © 2004 Pearson Education, Inc. Slide 14-33 Online Newspapers: Challenges Developing wireless mobile delivery platforms and micropayment systems to provide low-cost mechanism for selling single articles Consumer attitudes have remained intransigent on issue of paying for content Some online newspapers have experienced cannibalization of main distribution channel Digital leakage, where paid for and downloaded content is redistributed via e-mail or posted for few viewing on a Web site

34. Copyright © 2004 Pearson Education, Inc. Slide 14-34 E-books Many different types of commercial e-books Web-accessed e-book: Stored on a publisher’s server that consumers access and read on the Web Web-downloadable e-book: Can be downloaded from Web, stored as a file on client PC, perhaps even printed Dedicated e-book reader: Single-purpose device with proprietary operating system that can download from Web and read proprietary formatted files that can be read only on that device. Not very common; Franklin eBookMan largest selling General purpose PDA using Microsoft’s Reader for Pocket PC Print-on-demand books: Less well-known, but largest form of electronic publishing

35. Copyright © 2004 Pearson Education, Inc. Slide 14-35 Types of E-Books Table 14.7, Page 896

36. Copyright © 2004 Pearson Education, Inc. Slide 14-36 Dedicated E-Book Reader: Franklin.com Page 897

37. Copyright © 2004 Pearson Education, Inc. Slide 14-37 E-book Audience Size and Growth Reading books on Internet is not a popular activity Online e-book sales generated about $235 million in revenues in 2002 Expected to generate about $500 million in 2003 Future market for e-books depends greatly on how rapidly traditional trade book and academic textbook publishers move existing and new works to e-book format

38. Copyright © 2004 Pearson Education, Inc. Slide 14-38 The Growth of E-Book Revenues to 2007 Figure 14.6, Page 899

39. Copyright © 2004 Pearson Education, Inc. Slide 14-39 Advantages of E-books Instant downloading reduces transaction costs for user Increased accessibility to entire libraries from home or office Text is searchable and easily integrated with new text Content can be modularized down to sentence and word level Easy to update and change Lower production and distribution costs Increased opportunities for writers to publish Increased availability of out-of-print and increased value of book archives Reduced cost of library functions

40. Copyright © 2004 Pearson Education, Inc. Slide 14-40 Disadvantages of E-books Require expensive and complex electronic devices to use Less portability than print books Reduced quality of print on screen Multiple competing standards Uncertain business models Copyright management and royalty issues with authors

41. Copyright © 2004 Pearson Education, Inc. Slide 14-41 E-book Industry Revenue Models Primary model is pay-for-download Second e-book revenue model involves licensing of entire e-libraries of content  Similar to subscription model  Exemplified by NetLibrary Neither model is profitable at this time

42. Copyright © 2004 Pearson Education, Inc. Slide 14-42 Example E-Book Industry Firms Table 14.8, Page 901

43. Copyright © 2004 Pearson Education, Inc. Slide 14-43 Convergence in the Book Industry Technological convergence has been slowed by:  Poor resolution of computer screens  Lack of portable reader devices that can compete with the portability of a published book  Absence of digital rights management technology  Lack of standards to define cross-platform e- books so they can be viewed on different devices Potential solutions  Sub-pixel display technologies help enhance resolution of e-book reader display screens  Digital rights management software helps prevent illegal distribution of paid content over the Web

44. Copyright © 2004 Pearson Education, Inc. Slide 14-44 Standards for E-Books Table 14.9, Page 904

45. Copyright © 2004 Pearson Education, Inc. Slide 14-45 Convergence in Book Industry (cont’d) Content  Little progress toward content convergence from a design standpoint  More progress on production and distribution dimensions  XML and large-scale online text/graphic storage systems has transformed book production and made it more efficient Industry structure  Still dominated by a few titans  However, Internet has created new opportunities for authors, publishers and distributors

46. Copyright © 2004 Pearson Education, Inc. Slide 14-46 The Effects of Internet Publishing Table 14.10, Page 905

47. Copyright © 2004 Pearson Education, Inc. Slide 14-47 Insight on Society: The Evolving E-book E-books are in process of evolving from original conceptions Might have multiple authors, or be authored by a community of readers Likely to evolve into much richer learning environments with substantial audio, video and community participation

48. Copyright © 2004 Pearson Education, Inc. Slide 14-48 Magazines: Online “Zines” Began appearing in 1995 Today, all of top 50 offline printed magazines have Web sites to extend brands to Web More than 50 million visitors in 2002 As with newspapers and books,few have turned a profit Challenge is to become profitable Most common form of online content, next to newspapers and books Primary motivation for visiting is exclusive content and convenience, not low cost Consumer Reports example of successful online magazine

49. Copyright © 2004 Pearson Education, Inc. Slide 14-49 Online Magazines: Content While content often repurposed from print editions, some advantages:  Searchable archives  Breaking news  Exclusive content  Chat groups and bulletin boards Typically articles are short and can often be printed for free

50. Copyright © 2004 Pearson Education, Inc. Slide 14-50 Slate.msn.com Page 909

51. Copyright © 2004 Pearson Education, Inc. Slide 14-51 Online Magazine Revenue Models Original model focused on advertising revenue, but this has largely failed  Not enough online readers  Cutbacks in online advertising  However, may be revived as online advertising expenditures expected to grow 30% from 2003 to 2007 Marketing model now more common and successful  Example – Style.com Some are trying to move toward subscription model

52. Copyright © 2004 Pearson Education, Inc. Slide 14-52 Style.com Page 910

53. Copyright © 2004 Pearson Education, Inc. Slide 14-53 Convergence in the Magazine Publishing Industry Not much convergence from technology standpoint Some convergence in areas of creation, production and distribution Industry structure has not changed significantly

54. Copyright © 2004 Pearson Education, Inc. Slide 14-54 E-commerce in Action: CNET Networks, Inc. Vision to be a global source of technology and commerce-related data, exchanges and services Has been successful in attracting Web’s largest information technology audience, but not in achieving profitable operations One of few Internet content companies that has “successfully” built business on advertising revenues Suffered significant losses in 2001 due to slow down in technology spending and Internet advertising, but but operating expenses and losses in 2002

55. Copyright © 2004 Pearson Education, Inc. Slide 14-55 CNET Network’s Consolidated Statements of Operations and Summary Balance Sheet Data 1998-2002 Table 14.11, Page 914

56. Copyright © 2004 Pearson Education, Inc. Slide 14-56 Online Entertainment Industry Defining Internet entertainment audience a complex task due to:  Difficulty defining entertainment  Different ways of measuring audience size and intensity Current and projected growth of “traditional” entertainment (films, music, sports, games):  Music downloads lead the list, followed by online games and film

57. Copyright © 2004 Pearson Education, Inc. Slide 14-57 Projected Growth in Traditional Online Entertainment (Millions) Figure 14.7, Page 919

58. Copyright © 2004 Pearson Education, Inc. Slide 14-58 Nontraditional Online Entertainment Includes hobbies, games, surfing Web Web entertainment can be characterized along two different dimensions: User focus User control Popular Internet entertainment sites offer users high levels of control and user focus In absence of Hollywood films and TV on Web, consumers are defining new forms of online entertainment that do not involve traditional media titans

59. Copyright © 2004 Pearson Education, Inc. Slide 14-59 Sites with the Highest Usage Intensity Figure 14.8, Page 920

60. Copyright © 2004 Pearson Education, Inc. Slide 14-60 User Role in Entertainment Figure 14.9, Page 921

61. Copyright © 2004 Pearson Education, Inc. Slide 14-61 Online Entertainment: Content Internet has greatly changed packaging, distribution, marketing and sale of traditional music tracks Is transforming consumer experience by providing premium archives, efficient search mechanisms, timeliness and enormous reach and depth of content Music sites and networks allow users to become their own music packages and distributors, creating a new musical experience for the consumer

62. Copyright © 2004 Pearson Education, Inc. Slide 14-62 Online Entertainment Industry Revenue Models Television and movie sites typically use a marketing model, attempting to extend their brand influence and audience for their offline product Most entertainment sites now moving toward a subscription model

63. Copyright © 2004 Pearson Education, Inc. Slide 14-63 Convergence in the Entertainment Industry Technology convergence: In music, technology platform has converged as PCs and handheld devices become music listening devices, PC has become a game station For movies and television, technology convergence has been hampered by lack of standards and slower than expected growth of broadband  Movielink the only site currently supporting Internet downloads of feature length films  Competing video streaming services:  Microsoft Windows Media Player  Real Networks Real System IQ

64. Copyright © 2004 Pearson Education, Inc. Slide 14-64 Convergence in the Entertainment Industry (cont’d) Content convergence Significant progress toward digital tools in areas of content creation and production  Filmmakers and television studios increasingly using digital cameras  Film editing done on digital computer workstations Distribution channels, not as much  Television and feature films still primarily use analog delivery vehicles

65. Copyright © 2004 Pearson Education, Inc. Slide 14-65 Convergence in the Entertainment Industry (cont’d) Emerging corporate model appears to be merger of content and distribution Many players and forces (including government regulators and courts) that shape entertainment industry Internet offers entertainment content providers opportunity to dominate industry value chain by eliminating distributors and retailers and selling direct to consumer

66. Copyright © 2004 Pearson Education, Inc. Slide 14-66 Entertainment Industry Value Chains Figure 14.10, Page 925

67. Copyright © 2004 Pearson Education, Inc. Slide 14-67 E-commerce in Action: Disney Disney case illustrates how even a company with strong offline brands and archives, financial strength, and ownership of distribution channels, can falter when making transition to online commercial content Originally tried portal strategy, with Go.com, but failed, with Go.com being shut down in January 2001 Now focusing on successful individual sites such as ESPN.com,ABCNews.com and Disney.com

68. Copyright © 2004 Pearson Education, Inc. Slide 14-68 Walt Disney Company’s Consolidated Statements of Operations and Summary Balance Sheet Data 1999-2002 Table 14.12a, Page 930

69. Copyright © 2004 Pearson Education, Inc. Slide 14-69 Disney Internet Group’s Statements of Operations 1998-2000 (in Thousands) Table 14.12b, Page 931

70. Copyright © 2004 Pearson Education, Inc. Slide 14-70 Insight on Technology: Hollywood Needs a New Script Digital videos available on P2P networks threaten existing Hollywood business models Industry system of distribution windows to stage release of new films being ripped apart by digital pirates Hollywood has hired a “police force” that trolls Internet looking for free copies of movies,and then sends infringement letters to offenders  Questionable how effective this will be Legitimate alternative: Movielink a joint venture of 5 studios

71. Copyright © 2004 Pearson Education, Inc. Slide 14-71 Case Study: AOL and Microsoft Together – Can Two Elephants Dance? Huge media mergers of early 2000/2001 such as AOL/Time Warner and Vivendi Universal have not worked as anticipated AOL/Time Warner advertising revenues dropped significantly throughout 2000-2002 Other empires within Time Warner were refusing to cooperate with AOL-led efforts to use content from films and magazine news sources as added-value features of AOL AOL/Time Warner lawsuit against Microsoft with respect to Netscape/Internet Explorer browser wars one ace in the hole for AOL/Time Warner

72. Copyright © 2004 Pearson Education, Inc. Slide 14-72 AOL/Time Warner Sources of Revenue in 1 st Quarter 2002 Figure 14.11, Page 938

73. Copyright © 2004 Pearson Education, Inc. Slide 14-73 Case Study: AOL and Microsoft Together – Can Two Elephants Dance? (cont’d) May 2003: Microsoft settles lawsuit with AOL/Time Warner, on following terms Agrees to pay AOL/Time Warner $750 million Grant AOL a 7-year royalty-free license to Internet Explorer Grant long-term license to Windows Media Player software Work with AOL to develop digital rights management software Both companies agree to work together on previously incompatible instant messaging systems

74. Copyright © 2004 Pearson Education, Inc. Slide 14-74 Case Study: AOL and Microsoft Together – Can Two Elephants Dance? (cont’d) Agreement represents a fundamental shift away from convergence between media and technology companies Microsoft retreating back to its original business as software and technology company AOL/Time Warner focusing on its content and distribution