LESSONS FROM DIVX
What can the online music industry learn from the death of Divx.
I only briefly browsed the article after immediately finding problems with some of his core assumptions and analogies.
infobeads.com
(note that the html article has 4 large graphs)
OR text pasted below
June 21, 1999
Lessons for MP3 from the Death of Divx
Written by Miran Chun, Industry Analyst, Internet
Last week, Circuit City announced it was ending support for its proprietary Divx video-viewing technology. Why did it happen? And is there anything
we can learn from Divx's demise?
The main reasons for Divx's failure were its relatively high price, its lateness to market, and the meager supply of popular movie titles. Disgruntled
consumers complained that the format offered no real quality or price advantage and were all too wary of a Beta-VHS or Laserdisc repeat. Thus they
shunned Divx from the start.
Consumers weren't the only ones divided on this technology. Divx also divided consumer electronics manufacturers, retailers, and the motion picture
studios. With consumers and suppliers confused and unhappy, the technology was doomed, and Circuit City had no choice but to throw in the towel.
But the story doesn't end here. A similar battle on standards is underway in the music arena, with the popular MP3 format warring with a myriad of
other formats for consumer acceptance. It is a dangerous battle, one where the winning format could win the battle, but lose the war.
MP3 Rocking the Free World
Currently, MP3 is the de facto standard for digital music compression – "MP3" beats out "sex" as the most popular search term on the Web – but
there are other proprietary formats, such as Liquid Audio, RealAudio, and AT&T's a2b Music.
To make things even more complicated, under the hood lies a hodge-podge of anti-piracy standards. For example, the Secure Digital Music Initiative
(SDMI) was formed last year by 150 recording industry and technology companies to develop an architecture and specification for rights management
and licensing of digital music. But since its inception, many splinter groups have formed, impatient that the process was taking too long.
While the standards debate rages on in both players and security, consumers are voting with their mouse finger and downloading MP3 files in
ever-larger numbers. This has to make non-MP3 supporters awfully nervous. Because as the Divx example shows, open standards tend to win out –
doubly so if they have a head start. Offer a restrictive technology, and consumers get gun-shy. MP3 wins on any "openness" measure, given that its
core technology is in the public domain – anyone can produce players and encoders.
As a rule, open markets are larger and grow faster than closed ones. The experience of the software industry – and of Divx – has shown that if you
package and price products appropriately, without too many security trappings, consumers happily will be parted from their money to get the
products they want. After all, the Internet should make packaging and selling music easier, not harder.
But the absence of security isn't the only bee in the music industry's bonnet. Openness extends to availability of music as well. For example, music
lovers can choose from literally tens of thousands of MP3 songs available on the Internet. According to the International Federation of Phonographic
Industries (IFPI), the international trade association for music, around 3 million tracks are downloaded from the Internet every day.
The combination of piracy problems and a more open market for music has the industry very nervous.
Sizing Up Digital Music
To understand why, it helps to look at the numbers.
The IFPI pegs the global music market at nearly $40 billion, a third of which comes from U.S. sales. The Recording Industry Association of America
(RIAA) estimates that 1.1% of U.S. music sales last year were made via the Internet, compared with 0.3% in 1997. Forrester Research breaks those
numbers out even further between online CD and digital download sales, which are expected to reach $6.7 billion and $1.1 billion, respectively, by
2003.
Source: Forrester Research, Inc.
But piracy is a big problem, one that predates the current MP3 craze. While music purchased and downloaded still will account for only 7% of total
U.S. music sales by 2003, the RIAA knows that a lot more music is downloaded than that. The RIAA says it lost as much as $10 billion through
music piracy last year – illegal Internet downloads are only compounding that existing problem.
And the outlook for digital downloads is explosive. According to InfoBeads' Technology User Profile (TUP), as of January 1999, there were 121 million
PCs installed in the United States. Nearly two-thirds of those PCs used a CD-ROM or DVD-ROM drive, and 56% of those 121 million PCs had
Internet access (click here for more information). What does that mean? It means that at least in theory, more than 67 million PCs are ready and
waiting to download music (legal or illegal) from the Internet.
Source: Technology User Profile
But all these PCs aren't just playback devices. Practically, every new PC comes with a CD-ROM drive that can be used to convert songs to the MP3
format. Last year, TUP estimated that three out of four PCs were sold with either drive. By next year, that could be well over 80%. Writable CD-ROM
and DVD-ROM drives make it simple for music pirates, professionals and amateurs alike, to copy music on a grand scale. While the music industry
isn't going to raid your basement any time soon for copies you make for your own use, there is a large and growing contingent of organized pirates
who quickly add up to the $10 billion piracy figure quoted above.
Source: Technology User Profile
And, PCs aren't the only way to listen to digital music. Portable digital playback devices such as Diamond Multimedia's Rio MP3 player are
becoming popular – the company sold 200,000 units during the past year. Diamond recently successfully appealed a suit brought by the RIAA based
on the Audio Home Recording Act of 1992. In a slap against the RIAA, the federal appeals court ruled that Diamond and other computer peripheral
manufacturers could continue developing and selling MP3 portable players. With the legal path cleared, portable players could quickly become an
even more persistent playback thorn than PCs.
Source: Forrester Research, Inc.
The Road Ahead
Digital distribution of music represents both an opportunity and a threat to the music industry. The industry must learn to balance on the narrow wire
separating open and closed technology, trying to ensure piracy doesn't run rampant, but not making playback and recording technology so restrictive
that it has another Divx on its hands. Always-on technologies, like cable modems and DSL, are making it simple and fast to download music (and
even movies). This issue is being watched closely by the entire entertainment industry.
What can the music industry learn from the Divx debacle? Plenty. Standards battles may make for great boardroom entertainment, but consumers
get bored and unhappy quickly. What's more, standards battles slow down adoption by confusing consumers – and that is in nobody's best
interests.
So here's the question for music executives: Would they rather have 90% of a $1 billion market, or 10% of a $40 billion market? It's not a silly
question. Piracy – or at least some piracy – may be the price the music industry has to pay for growing their business in a more open future.
*InfoBeads reprinted data from Forrester Research with permission. |
