The savings of sin
Posted by aogFriday, 20 January 2006 at 11:39 TrackBack Ping URL

I went to a technical talk by the CTO of RiverGlass, a local start up company. While there I ran in to some former co-workers who had migrated over to that company and we got to talking about the tech industry (imagine that!).

The talk itself was about “context” and how context-aware applications were going to be the next big thing in information technology. By “context” the speaker meant everything from “who you are” to “where you are” and “what have you been doing?”. It tied in to something I’ve thought about for years, enhanced reality where rather than living in a virtual world, one lives in the real world with additional layers of virtual data layered on top, basically a heads up display for normal life.

Anyway, we shifted to the topic of the music industry and its imminent demise. We agreed that the root of the problem is that the current system generates so much money that the companies just can’t let go, like a sailor who sinks to the bottom of the sea because he won’t drop a bag of gold.

That got me to thinking — what if that behavior wasn’t so irrational? Could it be that the profits from just a few more years of the current system would have a larger forward-discounted value than switching over earlier? The choice would be, convert to the new system with much lower intermediary profits now or play legal games to delay the conversion as long as possible. If the profit difference were large enough, the latter plan could actually be more profitable long term, if the ROI of the additional profits was larger than the profits under the new system.

Let’s say that Sony makes roughly $5B / year profit from the current music industry model (the accounting is so irregular that it’s hard to be precise). I think it’s not unreasonable to figure that Sony would make 10% or so of the same profits under the new, emerging model, or $500M / year. That’s $4500M for every year Sony prevents the emergence of the new model. At say a 5% yield, that’s $225M / year in ROI. So just three year delay would mean Sony would profit more from the re-invested profits of the old model than it would from converting even if Sony is completely cut out of the emerging market. One is left wondering if Sony, normally a smart company, has done a similar calculation and decided to be dragged kicking and screaming in to the new model as a result.

Comments — Formatting by Textile
pj Friday, 20 January 2006 at 13:55

Yes, you’ve gotten it right. Sometimes the best thing to do with a declining business is to milk it, minimizing costs rather than trying to convert it.

But it’s not really either-or. Sony can milk the old business, and start a new business in the emerging model.

Annoying Old Guy Friday, 20 January 2006 at 14:17

Of course. However, Sony going in to the new model will legitimize it, so it may well be financially good for Sony to hold off converting as long as possible.

cjm Tuesday, 24 January 2006 at 18:09

there is an interesting site/concept “Longtail” where there is an article comparing the revenue produced by current syndication models, and from downloading direct to the viewer. the potential money from the former dwarfed the latter.

maybe it is possible for a company to embrace the new while preserving the old, but I can’t think of many/any cases. the part of the company with the mature product typically contributes the most earnings and has the biggest say — resulting in the new stuff being starved of resources. maybe setting up an independent unit to handle the new stuff will give it a chance of making it (ala Lexus/Infinity).

Sony is just plain messed up, at this point, and won’t be leading the way in changing the status quo.

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