Content owners find nothing going on but the rent

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Rent or buy? The house-hunter’s dilemma is becoming an increasingly serious question for media companies as they contemplate the digital era’s latest upset to their businesses models.

Content companies have long mixed various methods of making money into their models, notably advertising, taking a cut of subscriptions to services such as cable television, or selling physical media such as CDs, DVDs or video games.

According to a thick report on the industry out this week from PwC, global advertising revenues rebounded by 5.8 per cent last year from their slump, and TV subscriptions were up 5.9 per cent. But recent figures on what media consumers actually buy, particularly in the most advanced media markets, are much less reassuring. US consumer spending on home video fell 3.3 per cent last year, according to the Digital Entertainment Group. DVD sales, even including Blu-Ray discs, have been falling since 2007, and the US physical video market was down 14.9 per cent by the middle of May, IHS Screen Digest reported.

Digital music downloads from stores led by Apple’s iTunes are now sputtering, rather than compensating for the long slide in CD sales, and the US video game market hit a four-year low in May, according to the NPD Group, driven down by a 20 per cent fall in packaged software sales year-on-year.

Such figures can swing around with hits such as Harry Potter, Adele or LA Noire, but the trend is clear. As PwC’s global survey put it, “a significant shift is emerging – away from payment models that involve buying and owning content that is stored on a device and toward paying for the right to consume it on a rented basis via streaming from cloud-based services.” The tale of physical media substitution by less lucrative digital forms is a familiar one, but the shift from ownership to rental or access models could be as important a secular change. It suggests nothing less than a reappraisal by consumers of the value of media content.

Since Blockbuster’s video stores were booming, consumers have had the choice of borrowing a film cheaply, or spending more to own it. The calculation usually came down to how often they thought they would watch it, but other less rational factors played a part, such as the library-building desire for a shelf of Truffaut films that you might rarely watch but would impress your friends.

What should worry media companies is that Americans have become “a nation of renters”, according to a recent note by Michael Nathanson of Nomura. And where once they rented DVDs from Blockbuster, making studios about $1.45 per film, they are now choosing digital subscription services such as Netflix, which yield just $1.25, or Redbox’s rental kiosks, which pay studios just $1 per film.

As consumers move from high-margin purchases to low-margin rentals, Morgan Stanley estimated in March that studios’ annual profit per household would tumble from $135 in 2005 to just $89 by 2015.

The rent-versus-buy equation has been different in music, because people who might watch The Sopranos only once or twice would listen to a soprano’s album dozens of times. On-demand access for a monthly fee changes that equation, however, and streaming or access models such as Pandora and Spotify are gaining ground while downloads flatline.

In the digital world, owning big video files also hogs hard drive space, pushing consumers to streaming services instead.

Why, then, do most content owners see new services using storage in the digital “cloud” as an incremental growth opportunity? First, Apple’s iCloud and others actually encourage ownership: users get access from any device to content they have already bought.

High video on demand margins also prove that consumers will pay good prices for such convenience, and explain why Hollywood is racing to roll-out its own “buy once, play anywhere” models such as Ultraviolet.

Apple, Amazon and Google, with their huge reach, may also add value to dustier content (it was never easy to buy or rent a Truffaut film), as well as discouraging piracy and the second-hand market.

Finally, media owners know that there are rational and irrational reasons to believe that rental and ownership models can still co-exist. Anyone who has watched Toy Story countless times with their children will tell you that ownership will always make sense for some films.

With compelling content, and the right packaging, you can still persuade people to buy. Since The Beatles’ arrival on iTunes in November, 1.3m digital copies of their albums have sold, helped by extras such as exclusive documentary footage.

In short, if the packaged goods end of the media industry is to survive, content owners must get better at packaging.

Andrew Edgecliffe-Johnson is the FT’s media editor

andrew.edgecliffe-johnson@ft.com

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