Streaming or retailing?

Despite an awful track record with predictions about technology, Gaurav Sodhi makes another; digital streaming will trump digital retailing.

I’m a technological laggard. I never have the latest gizmo, don’t have a clue about gadgets and have the rare distinction of having a perfect investing record in the technology industry; as my colleagues delight in reminding me, if you did the opposite of my technology predictions, you did pretty well. But predictions are fun (and easy). Being wrong – again and again – shouldn’t be a barrier against making them.

In that (misguided) spirit, I’m making a new prediction; digital content won’t be bought much longer.

The likes of Apple’s iTunes face the stiffest competition from online streaming services. The business model is very different; streaming services charge a monthly fee and allow access to a huge, instant library of content that can be streamed over the internet. Digital stores (like iTunes) sell albums, singles and videos in digital form, one at a time. The big difference is ownership. The streaming service rents out its content collection; the digital store sells it. So far content retailers have dominated distribution. But streaming services for both video and music are closing the gap. Hulu is the US, Spotify in Europe and Rdio, which recently opened in Australia, are starting to make headway. So far their financial success has been limited, but that could change fast.

The streaming service is a classic scale business. There are high fixed costs in establishing the content and infrastructure, but each additional customer attracts a negligible marginal cost. Retailing content, however, typically requires a profit on each sale. That means over the short term, streaming can appear unappealing. But once a critical mass is built, profitability can be explosive. And like any network, as more customers use streaming, more content will become available. Large, global networks could be very cheap to access.

I’ve signed up for Rdio and am amazed by the service; it’s brilliant. Despite my awful track record in such matters, I think content retailers should be very worried.

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