Meeting the Surging Demand for Broadband

SAN MATEO (05/05/2000) - The emergence of broadband technology, with its promise to reach an even greater number of Internet users, is forcing many digital-media companies to rethink their business strategies. Specifically, companies such as Miramax , Sony Corp., Time Warner Inc., and Universal Studios Inc. try to take advantage of a channel that unites sales and delivery.

Scott Sander, president and CEO of online movie and music distributor SightSound.com Inc., in Mt. Lebanon, Pennsylvania, approached companies in the music and movie industries as early as 1993 with the idea of selling downloadable music and movies.

"They looked at us like we were from another planet," Sander said. "We told them if they don't do this, every kid on the face of the earth with a computer will be able to steal every piece of music ever made at will."

Sander's proposal to media companies in 1993 may now appear as prophesy. With college kids accessing the Internet via T1 lines installed in their dorm rooms, the way in which music, movies, and video games are bought and sold is being redefined. As broadband reaches an even wider audience, many companies are betting that the demand for digital content will grow as well.

The music industry in particular has been hit hard by the download dilemma.

According to Sander, piracy has become commonplace because music companies did not immediately embrace the new technology.

"One of the best ways to deter piracy is to make things available at a good price," Sander observes. "We have absolute rampant wide-scale piracy of music."

Media companies may be late to the party, but they are coming in droves, as evidenced by a number of media maneuverings in place or under way. Virgin Entertainment Group already sells digital music through JamCast .com, a joint venture between Virgin and Wavo. Universal Music Group, BMG Entertainment Inc., and Time Warner all have plans to offer downloadable music.

The movie industry may have learned from the music industry's mistakes, Sander says. Miramax is testing the waters via a partnership with SightSound in April to enable digital downloads of 12 of its movies.

"Perhaps the motion picture industry benefited from 20/20 hindsight," Sander says. "They've seen that the music industry tried to fight technology instead of channeling its power."

Gaming companies also are feeling the broadband lure. Sega of America will launch its own ISP this fall, called SegaNet, for downloading Sega online gaming and content. Also, Sony Corp. of America's recent investment in wireless broadband company Arraycomm Inc. is driven by Sony's gaming interest, says Herschel Shosteck, president and CEO at Shosteck Associates, an analyst firm in Washington.

But Sony's broadband interests may not be limited to gaming. The media giant recently declared its future is broadband, according to Kei Sakaguchi, director of corporate communication at Sony, in New York.

All of these companies face challenges in reinventing their sales and distribution systems to take advantage of broadband technology, says Shawn Willett, an analyst at Current Analysis, in Sterling, Virginia. These challenges include channel conflicts occurring both within the company and with external suppliers; pricing pressure, which essentially forces the company to compete with itself; and the loss of control over marketing and promotion.

"I think the big issue is pricing pressure, which is related to channel conflict," Willett says. "When you put out your product as something that's also downloadable, that creates tremendous pricing issues for that company."

Sony may be a prime example of channel conflict occurring within a company.

Sony Electronics launched Musiclub to enable digital-music downloads, much to the dismay of Sony Music, according to industry observers.

Willett says these kind of channel conflicts are indicative of the reinvention problems experienced by any company that wants to do business on the Internet, but those problems become exaggerated when the Internet becomes both the sales and delivery channel.

Sony addressed its channel conflict problem in April by creating Broadband Services Company to manage its broadband and cable-related interests.

Similarly, Time Warner last year created Time Warner Digital Media to manage its diverse digital-media businesses, which the company expects to be an important element of future growth. The division will create a companywide e-commerce infrastructure to explore digital content aggregation, Time Warner sources say.

In addition to channel conflict strains, loss of marketing control may pose a challenge to these companies, Willett says.

"When you have your own Web site, you do have some control over things," Willett says. "But when it's even one step removed from that, when it's being put into a third-party site or an e-marketplace ... now you've really lost control."

SightSound's Sander says the biggest challenge will be in overcoming the reluctance to embrace new paradigms.

"I think the biggest obstacle to all of these companies is that they have a very successful current business model," Sander observes. "That's not a bad thing, but it's often a hard thing to change."

Sander believes that any company uncertain about making the transition to digital download should simply go to a university and knock on any dorm room door.

"People always talk about convergence." Sander says. "You just walk into any dorm room and you'll see convergence. We have millions of broadband users on campuses that are using a personal computer for everything."

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