The Iger sanction

Are the major media companies finally starting to embrace the disruption to their business wrought by digital technology? Alas, I wouldn’t go that far. But there are signs that some of them are at least starting to come to grips with it and its implications for their future. A recent case in point was the interview with Disney CEO Bob Iger at the Deutsche Bank Media & Telecommunications conference this week, in which he provided what, for the head of a public company with recession-battered shareholders to consider, was a pretty progressive perspective on the state of the business, particularly with respect to the home entertainment sector.

The essence of his comments was that the gross margins generated by media companies’ traditional transactional business model are gone, probably for good, and that companies like Disney–and their shareholders–are simply going to have to adjust to a life of lower-margin, service-based business models.

There’s a pretty big debate about how moving video content into a VOD or rental model is margin destructive and revenue destructive, so not only are margins going to go down but the total revenue we may reap from that business is going to go down compared to the business we’re used to. But what people aren’t realizing is that the business we’re used to may be over [nervous chuckle] and the business we’re going to see may be quite different.
[…] Now the music industry made a decision a long time ago that they were going to try to hold pricing on a multi-song CD and not move content cheaply one song at a time or ala carte or whatever to new technology platforms. I would argue they had a better ability to monetize the new platforms even though it did not feel right to them, I think they were comparing it to what was and not what was going to become.

Not a terribly original thought, to be sure. But Iger then segued into this:

I think we make mistakes when we try to get in the way of technological change. And I’m not accusing anyone else of doing this, but we’re really trying hard to figure out ways to make it work for us, to not fight it from happening. And I really believe we’ll get to a point where there will be growth in what I’ll call an online rental model that might be better than the alternative, which is piracy. Not necessarily as good as we’re used to but it may end up being, from a volume perspective, pretty damn good, still.

I also think–and we’re looking at this pretty hard–that there’s a possibility of creating a subscription business, too. We’re focusing on it because of the Disney brand. I like the day when you could have a very, very robust online Disney movie club or movie subscription that gives you the ability to have the digital [physical?] goods sent to you, or download a digital file. But it also may stretch beyond just movies, to TV and all sorts of other Disney experiences.

That’s one of the reasons we’re focused on developing a more robust CRM strategy for the customer, because the Disney consumer is not just a consumer of one Disney product, typically they’re a consumer of almost all Disney products. And when you have a consumer [who is] willing to buy packaged goods that are electronic in nature, like movies or games, as well as packaged goods that are clothing and pajamas and games and all kinds of things, as well as theme park vacations, you have some interesting opportunities in the marketplace for subscriptions and affinity clubs and those sorts of things.

A lot of commentators took that last part as an indication that Disney has Netflix in its sites, but that’s not how I read it (although there’s a case to be made that if the online rental business  is going to be a subscription-based it’s better to own the customer yourself than to let someone else claim the relationship). I read it as Disney starting to think about its media businesses in terms of average revenue per user (ARPU) instead of profit per transaction, and all that that implies with respect to its cost structure, distribution strategies, revenue recognition and relationships with distributors:

When it comes to moving content onto new platforms, there’s an inevitability to it, there’s also an inevitability to tension being created between traditional partners and what I’ll call new partners. You can’t please everyone all the time but we’re trying to maintain some sort of equilibrium because we’re still getting a huge amount of value from our traditional partners, whether they’re big-box retailers or multichannel provider.

Disney may be better positioned than other entertainment companies to exploit subscriptions because it has a genuine brand it can leverage across multiple products and services and multiple platforms. It also has more experience building businesses around ARPU thanks to its theme parks, which are machines for sucking money out of users.

Eventually, though, if not sooner, all the media companies are going to have to start figuring out how to maximize revenue per user rather than profit per unit, or profit per title. Digital platforms, and the Internet in particular, are not hospitable to sales-based business models, and no amount of DRM, copyright legislation or lawsuits will ever make it more than marginally more hospitable.

Iger was at least seems to be making the right noises, even if Disney hasn’t fully embraced the sound.