The toys of the digital home—huge displays, personal video recorders, and interoperable gadgets—have the spotlight. Entertainment content delivery, meanwhile, has experienced far less innovation.

Partly to blame are the recording and film industries themselves, for sticking to outdated revenue models that can’t hold up against clever content delivery technologies. But necessity fosters invention: four years after the emergence of renegade file-sharing service Napster in 1999, the music industry had lost 23 percent of its value, according to the Recording Industry Association of America. That same year, 2003, iTunes—the first acquiescence to digital file trading—made its debut.

As broadband penetration deepens, the convergence of transfer speed, file quality, content range, and portability will make on-demand services an easy sell for consumers. Add in assurances of security and control, and it should get easier to pry the goods from labels and studios. But in the meantime, the on-demand industry will suffer through its awkward adolescence of tiny margins, content negotiations, and black-market competitors.

Music

Since the iTunes Music Store debuted a year ago, global paid downloads rose 10-fold in 2004 to over 200 million, according to the International Federation of the Phonographic Industry (IFPI). But that had an estimated impact of just 1.5 percent of record company revenues. Illegal music trading hasn’t significantly abated; online entertainment research firm BigChampagne estimates that 13 billion total unauthorized online songs were acquired on the public Internet in 2004. “All digital music stores are losing money,” says Steve Gordon, entertainment industry lawyer, consultant, and author of the soon-to-be-published The Future of the Music Business. “If they make a penny or two off of each transaction, that would be a lot.”

The Future of the Music Business

There are roughly five service models: per-item music downloads with digital rights management (DRM) to limit use; subscriptions for unlimited streaming music; a new hybrid with downloads by subscription; streaming radio of personal MP3 collections; and MP3s without DRM. While analysts agree that consumers are attached to the idea of owning music rather than renting it, the decision to purchase a song—even when it costs under a dollar—is a decision nonetheless. “Per-unit goods and the Internet do not compute,” says BigChampagne CEO Eric Garland. A more radical departure from per-unit models has been proposed by HarvardUniversity’s William Fisher, who suggests the formation of a collective blanket licensing organization that compensates rights holders for the unlimited, unencrypted content that consumers prefer.

Cost	Product/Service	Content	Portability	Similar Services
Apple iTunes	$0.99 per song or $9.99 per album	Downloaded music files with DRM to limit use	Over 1 million tracks from the Big Five music labels, many independent labels, spoken-word recordings	On five authorized PCs, seven burned CDs, and your iPod, provided you have the proprietary software and player	MSN Music, BuyMusic, MusicNow, Musicmatch, RealPlayer Music Store, Sony Connect, Wal-Mart, Weed (watch out for limited compatibilitywith operating systems and music players)
Rhapsody (Listen.com)	$9.95 per month, $0.79 per track to burn CDs	“Celestial jukebox”: access to unlimited streaming music	Over 800,000 tracks	Log in from any PC	Musicmatch, Streamwaves, MusicNet (distributor for AOL, Virgin, others) AOL
Napster To Go	$14.95 per month	Downloads that expire when you stop paying	Over 1 million tracks	Emphasis is on compatible portable players (from Creative, Rio, Samsung, et cetera, but not Apple) Rio	See above (combines elements of downloads and streaming)
Mercora	Free for now	Legal P2P: streaming radio of personal MP3 stashes	Anything and everything from other users’ “legitimate” file collections	Just your PC	AOL’s Shoutcast, Last.fm, iTunes’ Rendezvous (within local network)
MP3tunes	$0.88 per song or $8.88 per album	MP3s (no DRM)	Indie artists, for now	Anywhere	Audio Lunchbox, eMusic, the questionably legal allofMP3.com from Russia Russia

What’s next? Startup ArtistShare facilitates pre-orders of albums to fund the recording process. And digital labels like Magnatune.com and Digital Musicworks International avoid steep costs (like manufacturing, distribution, and advertising), and pass the savings on to artists. In November 2004, Universal Music Group became the first major music company with an all-digital label, UMe Digital.

Last month, Japanese wireless carrier KDDI announced it had sold 2 million songs in the first nine weeks of its mobile MP3 download program. Internet storage provider Xdrive has launched a music service that streams music to smart phones and PDAs, and a startup called MusicGremlin will soon release software for portable music players to buy and share music wirelessly.

Juniper Research predicts the market for full-track downloads on mobile phones will increase from just $20 million in 2004 to nearly $1.8 billion in 2009.

Video

Movie studios are less desperate than the music industry. They have multiple revenue streams—theater tickets, branding, rentals, sales, television showings—and less to gain from file services. Movie audiences expect and get nearly instant gratification and high quality—two assets even the fastest file-sharing services can’t deliver. It’s hard to get major studios on board for on-demand video; these days they seem to be more focused on taking down illegal file-sharers. But John Malcolm, director of worldwide anti-piracy operations for the Motion Picture Association of America (MPAA), is coming around. “These technologies definitely pose a real challenge, but they also pose real opportunities,” he says.

On-demand video is becoming more sophisticated than TiVo and ReplayTV’s bold innovation of pause-and-rewind television. CinemaNow is the closest thing to an online music store, with per-unit or subscription offerings of movies from most major studios. (Competitor MovieLink, run by a consortium of major studios, offers only per-unit sales, and has its own software rather than using Windows Media Player, but doesn’t have as many titles.) Kasenna and Arroyo Video Solutions have found their niche by avoiding the complications of end users, effectively giving broadband service operators, cable providers, hospitality providers, and enterprises a gargantuan TiVo box. Kontiki is trying to do the same thing but is incorporating peer-to-peer (P2P) techniques, which do wonders for downloading despite their questionable past. And buzz-generator Sling Media is tweaking the idea of on-demand by emphasizing portability—which is obviously the next frontier. On the whole, on-demand video gives users less control and fewer options than on-demand music; streaming is more common than downloads, and labels drag their feet when it comes to manipulated release dates and broadcast schedules.

TiVo

Cost	Product/Service	Content	Portability	Similar Services
TiVo	$99.99 to $399.99 for a box, plus $12.95 per month or $299 for product lifetime	Television programs saved for later viewing, and pause, rewind and slow-motion live TV	Whatever TV you’re paying for	TV, laptop, handheld, burned DVD (if you buy the souped-up box)	ReplayTV, Dreambox, Digeo’s Moxi, Microsoft’s MediaCenter MediaCenter
Kasenna	IPTV providers, et cetera, pay Kasenna; end-user fees vary	Streaming video	Movies from most major studios, specialty channels, games (up to provider)	PC, TV	Arroyo, 2Wire, soon Microsoft Microsoft
Kontiki	Content owners pay Kontiki; end-user fees vary	Legal P2P: streaming or downloads, restrictions set by provider	BBC content, indie films, movie trailers; no studio deals yet	PC, PVR, cell phone	Red Swoosh
CinemaNow	Usually $3.99 for a one-to-two day rental, $19.99 to buy; $9.95 per month for unlimited access to selected content, $29.95 per month for unlimited access	Like Netflix, but online; streaming or downloads of movies and TV shows on per-episode rental basis Netflix	Most major Hollywood studios, indies, plus concerts and television programs Hollywood	PC	MovieLink, SoapCity (for soap operas), Starz
Sling Media	$249 (not yet on market)	Streaming TV feed to any device	Whatever TV you’re paying for	PC, any Internet-connected device	Orb Networks, Sony

ON-DEMAND VIDEO SERVICES

What’s next? Portable on-demand video content is further away, but Sling, Orb, and Sony are pushing the envelope by enabling mobility. Leading Korean mobile carrier SK Telecom has satellite mobile video broadcasting in the works, which should be a big improvement over glitchy terrestrial mobile video broadcasting, but still just a stepping stone to consumer-dictated content. Aggregation of podcasts and video blogs may also offer opportunities to play with digital content whose creators are more amenable to digital distribution, just as independent artists who have seen the benefit of digital music-sharing.