PRICING MODELS FOR INTERNET DISTRIBUTION OF CREATIVE GOODS AND SERVICES
For a long time, economists have suggested new forms of pricing strategies and business models in order to adapt to the diffusion of digital ICT (Shapiro and Varian, 1999). Traditional creative industries have often had difficulties in adjusting to digitization.
By now, technological innovation and e-commerce have affected business models in the cultural and creative industries, particularly in those industries that cater for the end user market and for goods that are in digital form. The public goods characteristics of online distribution often make the traditional price per unit model used for most cultural products unworkable, and new models have developed for Internet access to them. Not all types of transactions in the creative industries are changing, however. In the business-to- business sectors of industrial design and commercial graphic design, for example, there is no apparent trend to new business models (3D-printing may come to instigate extensive change, however). In the film industry, business-to-business deals with TV broadcasters remain largely unchanged.7.6.1 Two-sided and Multi-sided Markets
A long-standing business model in the creative industries is the two-sided market model, widely employed, for example, by commercial broadcasters. TV or radio stations often make programs available to viewers without direct payment. The broadcasting stations then finance themselves by selling airtime to advertisers and sponsors. The market value of advertising depends on the number of users of the ‘free’ service, and roughly speaking, this makes the market two-sided (Armstrong, 2006; Rysman, 2009). More recently, twosided or even more complex, multi-sided markets are being developed for many applications on the Internet such as search engines, social networks, illegal download platforms and others (Farchy, 2011; Rochelandet, 2011).
Two-sided markets are associated with positive network effects, where the individual utility of a bundle of goods and services increases with the number of other users.5 The optimal pricing scheme may then be to supply some services free of charge to attract users on one side, while charging on the other side for access and information on a large user base. The search engine Google illustrates the principle. Google provides its search engine service for free and charges for advertisements, ratings and advertorials (entries that look like regular entries but are, in fact, advertisements). Information gathered on users allows for more targeted advertising and may also become a commodity in its own right. What is more, the search engine improves with use. The search results are based on a ranking influenced by the individual consumer’s behavior as well as by the behavior of the masses and therefore every entrance to the search engine influences future results. The more people use a particular search engine, the more accurate the results get: every entry to the search engine benefits not only the person searching but also other Google users and the company itself.
Some of the most successful Internet-based services - the social media sites Facebook and Twitter, as well as the Google search engine - operate in two-sided or multi-sided markets and exploit the associated network effects. The principle is familiar from older parts of the creative industries, and they are gradually becoming more important throughout the creative economy. Online newspapers, for example, are experimenting with user postings and other means to foster community building around their core products. Nevertheless, incumbent firms in the traditional creative industries have found it hard to develop sustainable business models based on multi-sided markets.
Network effects are associated with entrenched large incumbents (Liebowitz and Margolis, 1998). If the value of a bundle of services per user increases with the number of users, large firms enjoy a productivity advantage over smaller competitors.
The point is that smaller competitors cannot exploit network effects to the same extent. Thus business models based on multi-sided markets and network effects may bolster the superstar and winner-takes-all features already observed in the consumption of cultural products.7.6.2 Subscription Models
Subscription models have become more important in some markets for creative works. Some subscription models allow members/subscribers access to a narrow range of club goods. In the cultural sector, this model has long been used for book clubs and for clubs that support arts institutions (‘friends of’ associations). It has been applied in a digital environment by a couple of music bands such as the German band Einsturzende Neubauten, who sold live streams and allowed direct interaction with the band during the creative process. Subscribers further received the CD prior to the public release and packaged as a special edition.
Subscription models that allow access to a much broader catalogue of content have been more important in markets for cable TV, mail-order DVD rentals, and streamed video. However, so far they do not account for a large market share for any general type of creative products. Nokia launched one prominent example under the title ‘Nokia comes with music’. In 2007, the company started to sell an optional music subscription service with their mobile phones. Subscribers were able to access and download the catalogues of the major music companies and some independent labels. The project failed to attract many subscribers, probably because of tight usage restrictions. The initial idea had been that downloads could be used indefinitely. In practice, downloads were only accessible for the period of the subscription. Other restrictions were that the service could only be used with a Nokia mobile phone, and the music could only be played on the phone and one computer. More recently, enterprises like Rdio, Rhapsody or Spotify have offered similar music subscription services, some of which are financed through charging music users and some are financed through advertising.
Whether this way of marketing music can significantly contribute to creators’ income remains to be seen.In the film industry, comprehensive subscription models are fairly new.6 Online video stores such as LoveFilm and Netflix initially developed a business model where subscribers can order a certain number of (physical) DVDs.7 Customers can keep these DVDs as long as they want, but needed to send them back through mail in order to get new movies. It is a permanent rental contract for a flat rate one-off payment and provides access to a wide range of titles. Many pure online subscription models for commercializing a broad range of films are either illegal or located in a legal limbo. Rapid Share, Megaupload (now replaced by Mega) or other such services sell downloading capacities on a so-called ‘freemium’ basis: with some restrictions, downloading is free of charge, while users can pay for a ‘premium’ subscription with fewer restrictions. While such enterprises try to limit their legally relevant involvement with copyright infringements, the services are widely used to download movies, which seems to work more reliably and faster than in most free P2P file-sharing networks. Copyright holders are not remunerated and rights are infringed in most jurisdictions, even though it is unclear whether the supplier of the downloading capacity is accountable. That these subscription models do attract paying members, suggests that the movie industry proper may have a chance to sell convenient access to movies online under current market conditions. This is the niche that Amazon, Netflix and other online (subscription) services have been cultivating with considerable success (see Sherman and Waterman, Chapter 22 in this volume).
7.6.3 Taxes and Levies
Though not a business model in the conventional sense, a mandatory flat rate charge is often applied in the cultural sector to finance the provision of public goods and to compensate for losses occasioned by unauthorized copying.
Even before the development of the Internet, flat rate license fees were used (and still are) to finance public service terrestrial television (Maule, 2011). In some countries, a levy is charged for blank, recordable data carriers or photocopying. Such levies were introduced as a last resort to compensate creators and rights holders for unauthorized reproduction and use. The levy is typically collected from retail sales and paid to the relevant copyright collective rights organization for distribution to copyright holders. Levy systems have been criticized for distorting market outcomes, leading to the misallocation of resources. The copying technologies for which levies apply typically have uses other than copying of copyrighted materials, which makes it hard to set adequate rates. What is more, it is hard to develop adequate distribution schemes among rights holders, which would closely reflect the actual use of specific copyright works. In any case, levy systems vary substantially between different types of works and different territories (Kretschmer, 2011).In some countries, more extensive use of levies, and statutory intervention to install them, are discussed as a means to mitigate current copyright conundrums online. This would probably involve the collective administration of copyright. However, copyright collecting societies have come under increasing scrutiny of late (Handke and Towse, 2007). In any case, most economists are skeptical regarding extensive use of levies, as such a system could choke the market mechanism (Liebowitz and Watt, 2006).
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