IPTV & the Music Industry

I attended the National Association of Recording Merchandisers (NARM) convention in San Francisco this week. This group represents music retailers including record stores as well as music etailers.

It held a Digital NARM conference that focused on the issues that digital media has brought to the music industry. CDs were developed before anybody thought that they could be read on a PC. Consequently, CDs were created without encryption or other copy protection techniques. This has made it easy to rip CDs and pull the tracks off of the CDs. It also enabled Napster peer to peer music sharing that generated a huge amount of distribution of music across the Internet.

While this was going on the revenues of the recording industry dropped by 40 percent, according to one of the speakers. The consensus was that only about 10 percent of the music tracks distributed over the Internet are purchased and generate revenue for the industry.

There were a number of interesting observations that were made by the speakers at the conference:

• The consumer is in charge. The industry has to provide what the consumers want to buy and not vice versa.
• The industry does not understand the degree to which free distribution stimulates sales.
• Several speakers said that it is possible to sell against free music. They pointed out that people buy water in bottles when they can get it free from a fountain. Others thought that was a weak analogy.
• Digital rights management (DRM) has created significant consumer dissatisfaction. Some speakers felt that DRM is dead. Others felt that DRM will be important in the long term, but the rules need to be acceptable to and understood by consumers.
• 80 percent of CDs sell less than 100 copies. Obscurity is more of a problem than piracy for most artists.
• The problem with long tail is discovery. People have to be able to find what is there.

The industry is searching for new business models. Track sales is the dominant method for buying digital music today. There is hope that subscription models will catch on, but there is no evidence that it will. There is also hope that bundling music with the device as Nokia will do with some phones later this year will catch on. (This is effectively a subscription service with the first year included in the price of the phone. Nokia will permit the tracks to be used even after the subscription lapses.)

There was one discussion that applied directly to video on demand, in my mind. A digital music executive stated that the digital content must be included as part of the over all marketing campaign. Digital music sales will be lost if the digital version is not available when the marketing campaign hits its peak.

I think this is a big reason why IPTV video on demand has not caught on. The video on demand release is generally after the DVD release and well after the theatrical release. By the time the video on demand release is made, the marketing campaign for the film has been complete for quite a while. The late video on demand release window assumes that the viewer will remember that he or she wanted to see the film and to wait all that time. This is just not likely to happen that often.

Orca Introduces Content Search

Orca Interactive has introduced a content recommendation engine called COMPASS as part of its IPTV middleware software system. COMPASS will be in beta test at a small number of IPTV service providers in 1H08 and will be released for general availability before the start of 2H08.

There are three components to COMPASS:

• The user interface
• The recommendation engine
• The backend management console

Orca's goal is to make the user interface simple so that the recommendation service will be easy for viewers to use and, consequently, useful. The tool will cover broadcast content, video on demand content, content recorded on the local DVR or the network PVR service, and user generated and other kinds of long tail content.

The recommendation engine is the software that generates recommendations. Its recommendations will be based on popularity, recommendations, and user preferences as defined by past selections. The recommendation engine that Orca provides is based on research work funded in part by the Israeli government.

The backend management console permits the IPTV service provider to define how the selection process works. For example, the IPTV service provider can define:

• The relative importance of each type of recommendation type in the results. For example, the weighting of popularity, ratings, and user preference can be adjusted to favor one over the other to optimize the results for the service providers specific subscriber population.
• The IPTV service provider can include recommendations from premium packages that the viewer does not subscribe to to encourage up selling and increasing ARPUs.

Orca has found out that it is important to give individual viewers to filter out content that they do not want rather than to positively select content. For example, families without children, will filter out children's programming.

I think that Orca is onto an important feature here. Identifying content and having interesting content presented to you without having to search for it will be a key to IPTV and other long tail services. It will be interesting to see how well Orca's efforts pan out.