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Can Streaming Offset Losses In Traditional Revenue?

We've all heard that traditional revenues in the media and entertainment space have been slipping, with the music industry held up as the primary example. Yet, for those of us in the streaming industry, we're compelled by the strong belief that digital delivery not only offsets traditional revenue streams but has the potential to exceed them by growing the customer base.

Recent statistics support the fact that streaming continues to grow, including a recent IDC report on first-time streaming users, which found that 92% of people who've watched movies online want to do it again.

What happens in the interim, between the time that online revenues meet or exceed traditional revenues, is a bit more nebulous, and a series of earnings reports and strategic research papers (including this one from Oxford Analytica, published at Forbes.com) released over the last week paint an interesting picture.

On the upside, pure-play video rental services such as NetFlix, which owns no brick-and-mortar stores but has a market share that continues to dent its more traditional rivals, announced its earnings late last week, citing streaming as significant to both current and future growth.

"The inclusion of streaming in our service has broadened the appeal of Netflix and is driving growth," said Netflix CEO, Reed Hastings in an earnings call where the company beat estimates and raised its outlook for the rest of the year.

"Essentially, both Netflix and Redbox are growing at the expense of video stores," said Hastings, noting that tech-savvy area around Silicon Valley has more than double the number of Netflix subscribers elsewhere in the nation, which he attributes to streaming capabilities.

"The tech innovation factor around streaming is very high [in the San Francisco Bay area]," said Hastings, "and high-speed cable broadband is widely available. Because of all of that, growth in our subscribing households in the Bay Area is increasing at about 2% points per year. We believe the Bay Area is a leading indicator of Internet behavior elsewhere in America."

On the flip side, the music industry is reporting a drop in revenues for traditional CDs that has yet to be offset by on-line digital delivery.

U.S. album sales fell to 428.4 million units in 2008, a drop of 14 percent from the previous year. Interestingly, while starting out strong on iTunes, where an album can typically be purchased for $9.99, consumers have shifted towards the purchase of tracks and away from albums, meaning that online album sales are not yet offsetting loss in traditional album sales.

One reason that this trend toward per-track sales may be happening, at least from the music industry's perspective, is that today's digital albums only contain a PDF digital booklet, somewhat akin to liner notes, but that there is no way to view this content interactively with the album. As such, ignoring the rumors of an Apple tablet that may help integrate music and multimedia content, a recent Financial Times article touched on ways that the music industry hopes to boost album sales.

"The labels and Apple are working towards a September launch date for the project," the article stated, discussing what is being called 'Cocktail', "which aims to boost interest in albums by bundling liner notes and video clips with the music."

The article quoted an unnamed executive that wants to bring back the glory days of the LP, at least from an entertainment perspective.

"It’s all about re-creating the heyday of the album when you would sit around with your friends looking at the artwork, while you listened to the music," the executive said, adding, "it’s not just a bunch of PDFs; there is real engagement with the ancillary stuff."

So what does an industry like the music industry do to push overall revenues back into the black? An answer might be found in a set of data released from a UK royalty collecting group.

The report, titled "Adding Up the Music Industry for 2008" notes that the UK music industry grew in 2008 by 3% based on consumer spending and that total music industry revenues are up by 4.7 percent.

How is this possible, especially given the fact that sales of recorded music in the UK fell by 6%? While physical music sales dropped 10% and digital music sales were up 50%—not enough yet to offset traditional sales—the live event market grew by 13% pushed along by concert ticket sales and some live streaming of a few of these concerts.

"The aim of this report was to not only add up the revenues generated by the UK music industry," said Will Page, Chief Economist for the royalty-collecting group PRS for Music, "but also to show how it all hangs together. Reading beneath the top line, recorded is down and live is up – reflecting the success of so-called "heritage" acts on the road. Historically record companies have been the primary investor in new acts so the question the industry should ask is this: who will invest in developing the "heritage" acts of tomorrow?"

Beyond the pure play companies, the return of traditional revenues seems even more elusive. Take, for instance, the Starwood chain of hotels: a recent report notes that Starwood's upper-end hotels (W and the flagship Sheraton) are seeing a significant dip in revenues for in-room movies, despite the addition of large flat panel displays in hotel rooms. The culprit? Streaming media.

"Streaming media—movies, TV shows, Internet radio—now occupies about 40% to 50% of Starwood's hotel Wi-Fi traffic," said Starwood's Brian McGuinness, noting that the Aloft chain, which attracts a younger traveller demographic, sees almost 60% of its Wi-Fi traffic from streaming media.

In the end, not only does Starwood see the trend away from traditional entertainment revenues, but also the additional cost of having to boost Wi-Fi and Internet connectivity to compensate for the additional bandwidth requirements.

With other hotel chains offering free Wi-Fi, the potential is high for streaming media to become a significant cost, rather than the profit center of in-room entertainment, perhaps skewing the stance of Starwood and other hoteliers in the re-emerging discussions over net neutrality.

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