Friday, March 03, 2006

Audio Broadcast Flag legislation and Potential Price Fixing

After reading an Engadget post the proposed Audio Broadcast Flag, I considered the possible social and consumer implications.

Some in the music industry consider the necessity to control how listeners consume their content a central part of their business. The ability to control and restrict will allow the content publishers to resell the content and bundle it elsewhere, allowing them to increase top line revenue without taking a hit to margin. However treating the consumer with this much distrust can lead to a widening gap between the consumer's desires and that of the content owner's. Instead music and radio broadcasters should consider how to engage the customer in the way the customer wants to be engaged.

I do not think that more control is the answer. A certain amount of licensing control may be necessary but not at the cost of alienating customers. Since the introduction of cassettes, customers have been recording music. The real key is to increase the value add of non-music content (music videos), lower transaction costs of purchasing music (i.e. online sales), make a better product (high definition music DVDs) and such are much better forces to influence consumer behavior than restrictive behaviors.

A recent article on potential online price fixing by BusinessWeek brings to light some of the arguments that I brought up in my two part blog posts, "The Online Music Wars". The relative concentration of power of the major labels is much like an oligopoly. Many suppliers and vendors, other than major retailers like Walmart, have very little ability to influence the labels. However disruptive technololgies like Peer-to-peer and Apple's iTunes are shifting the power. In the face of dropping CD sales and an adjustment period to online sales, record labels are trying to preserve margins and profit by keeping prices high. These companies should instead focus on lowering its operating and supply-chain costs while lowering price (slightly) to increase adoption of online sales and weaning customers away from the more expensive CD sales. The labels should keep the customer in mind, and consider the customer's cost and reasons to purchase from the label. Though price is one factor, a successful brand will have customers focus on non-price characterstics, such as value-added, convenience, etc.

Netflix Throttling & Price Strategy Follow-up

If you have not read my post on Netflix's Business Paradox, I suggest reading it.

Recent articles about Netflix's "throttling" - that is where Netflix purposely slows down how many movies you receive based on your usage - strongly suggests that their pricing strategy is disconnected from their operational strategy, just as I discussed in my earlier blog post. Until Netflix considers changing its pricing or its operating practices, it is going to lose customers to dissatisfaction and competition.

Recently I had the opportunity to try out the Blockbuster service, and while Netflix's website and selection are still superior to Blockbuster's, it seems that Blockbuster's ability to leverage its retail outlets with its online rental business is a strong model. Blockbuster should continue to tie its online and offline to drive consumers into its retail stores (and vice versa). One way Blockbuster can do this is to place kiosks in their stores where users can access their queues and compare their queue to store inventory. This can also be used to print coupons for purchase of used movies based on the user's queue. There are many opportunities here for Blockbuster to use its multi-channel approach to drive sales in both retail and online venues.