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Irvin Sha

High-speed Internet is rapidly emerging as one of the most powerful distribution channels for media content. Internet-based distribution channels are increasingly being viewed as serious competition to customary media outlets.

Disintermediation of the Traditional Media Companies

With the rise of the iPod as the preferred mode of private audio consumption, the need for physical media has been sharply reduced. This has most immediately impacted physical distribution channels, such as Tower Records which went bankrupt in 2004.

Due to the economies of scale that can be achieved through digital distribution, there has been significant experimentation with new "Internet-only" distribution models. For instance, the band Radiohead recently released its new album, "In Rainbows," for direct purchase over the Internet. Moreover, the band moved to a discretionary pricing system, allowing customers to pay any amount over a $1USD for the album. The move has widely been viewed as a shot across the bow of the record industry, as it essentially allowed the band to retain a far greater share of the record profits. Initial reports have shown sales of roughly 1.5MN albums. Although sales figures have not been released, a recent poll has suggested that the bulk may have been within the $5-9 price range[1].

Still, an argument could be made that total disintermediation is unlikely, as distribution channels will still be needed for media discovery and aggregation.

Music and Movies

Due to the significant difference in file sizes, digital distribution has been much more prevalent for music than it has for movies. However, as broadband access continues to expand in reach, this obstacle is increasingly becoming less problematic for end users. Conventional wisdom holds that the changes taking place in the record industry will be mirrored by future changes in the movie industry.

Emerging distribution channels

Online players (iTunes, Amazon, Walmart), BitTorrent, direct sales sites, blogs

Piracy and Industry responses

Trends in piracy - began with Napster and Kazaa. RIAA and MPAA responded through the use of litigation, although they have also made attempts to flood these networks with garbage versions of popular files.

Rise of BitTorrent. RIAA and MPAA have also responded with litigation and have sued sites aggregating and hosting these torrents. In response, sites have increasingly moved towards being hosted internationally, or on invitation-only networks, significantly complicating litigation efforts.

Discussion of AllofMP3.com, US litigation efforts.

There is a possibility that due to the length of time that pirate networks have existed without suitable legitimate alternatives, larger percentages of the public may have acclimated itself to piracy.

Affected Companies

Viacom (VIA) In litigation against YouTube, attempting to develop its own digital distribution channels.

Time Warner (TWX), Walt Disney Company (DIS), other media companies

New Players

Apple (AAPL) Current market leader for digital music distribution. Has primarily sold DRM-protected music through iTunes, but is currently expanding its DRM-free section, known as iTunes Plus. Has been some speculation that the iTunes store, while not necessarily a loss leader, is a customer retention device for high margin iPod sales, as songs purchased on iTunes cannot be used with devices made by other companies.

Amazon.com (AMZN) Recently entered the digital music distribution market. Selling DRM-free music at competitive rates.

Wal-Mart Stores (WMT) Recently entered the digital music distribution market.