The Content Industry's Online Distribution Strategies (Or Lack Thereof) In Emerging Markets

Let me just start by saying that one of the main themes of this blog are likely to be issues related to how businesses are handling (or mishandling) their existing operations or expansion projects in Latin America and Emerging Markets as whole. It sounds like an appealing theme these days when most “established markets” seem to be too stagnant to secure continuing growth for most consumer markets, and when most big companies are aiming emerging markets as the only way to grow their businesses more than their domestic markets would otherwise allow.

However, on this very first post I will focus instead on the much more curious, and similarly important, subject of how consumer oriented large corporations (mostly content owners and its online distribution counterparts) are rather screwing up their market growth potential (not to mention shooting themselves in the foot as far as the war on piracy is concerned) in emerging markets.

As someone who has been splitting its time equally between US, Europe and Latin America for the last 10 years, I have collected a rather large compilation of rants about how some very well known brands have been scandalously ignoring, and most of the times even flat out blocking, their potential new consumers residing outside of the US and Europe.

E-commerce Risks

Let’s start by pointing out the obvious here: everybody knows that emerging markets are riskier as far as online credit card transactions are concerned. And as such, many important e-commerce big names have decided that the added risk of having credit card transactions being charged back was not worth the risk of doing business in such regions.

I suppose that has been true for, well... ever. But things have been improving a lot lately as credit cards are finally becoming the standard mean of payment across countries like Brazil and China and as credit card operators themselves are improving security for online transactions across the board. Besides, new forms of payments such as PayPal and other pre-paid systems are also helping reduce a lot of the risks involved in selling online throughout emerging markets:

“Merchants and risk management providers are getting smarter about how we deal with credit card fraud. New payment methods are going live all the time that minimize or eliminate fraud through prepayment or cash-based transactions. For merchants that have difficulty with maintaining compliance with chargeback levels the options are pretty clear. Pay hefty penalties and fines from the network providers (Visa, MasterCard, AMEX, etc.) or just stop taking credit cards altogether and offer an alternative method of payment.”  Steve Levy, Global Director of Publishing at NCsoft West (read full interview here)

But despite the risks involved with online transactions, e-tailers also benefit from much lower operational costs to allow them to serve emerging markets if compared to their brick and mortar competitors, specially when considering companies that do not even have to ship physical products, such as those selling digital goods only (which also goes a long way to reduce their losses even in cases where there is fraud involved).

App Stores

Let’s consider, for starters, the case of marketplaces for smart phones applications where most paid apps are restricted in most markets outside of the US and Western Europe. Although Apple and Google will say that developers themselves can set which countries they want to sell their iOS or Android apps in, the truth is that developers can only opt to sell in those few countries where these app stores are previously allowed (again, usually focused only US and Western Europe) for paid apps by Apple and Google (although it is fair to say the list is slowly, but steadily, growing). So, if you’re not American or European, there is a good chance that you’ll probably have to be contempt with mostly free apps. Which might not be a terrible thing as a starter, since there are many good free apps. However it is not uncommon to see cases where you can get the free demo of an application (with its limitations), but then you can’t buy the full version depending on where you are on the planet.

Palm/HP on the other hand goes even further in their apps distribution policies as I, the unlikely owner of a wonderful Palm Pre 2 bought unlocked directly from HP online store in the US a couple of months ago (before all the current kerfuffle about HP dropping WebOS based devices and putting the OS itself in a limbo state), found out recently: In HP’s app store on the internet you can’t even get free apps if you live anywhere in the world outside a scant list of just 7 countries, as they tie the apps download process to the carriers by asking for your local mobile phone number in one of the countries they support (US, Canada. Mexico and 4 others in Wester Europe) to send you SMS messages with the links to download the chosen apps (be them free or paid ones). You can get the crappiest free apps directly on the phone, but, for some unthinkable reason, some of the best free apps for the WebOS platform, such as Accuweather or LinkedIn ones, are not available on the phone’s App Catalog. But yeah... who cares about WebOS apps you say, right? Well, maybe if HP would allow emerging markets to join in the action maybe they would have a slightly better chance of increasing the size of the developer base for such platform. If they already sell factory unlocked phones, why not allow everyone to get the apps to go with those phones?

To be fair, there seems to be at least one app store that does a good job to cater emerging markets, which is Nokia with its Ovi store. But I suppose that is to be expected, since Nokia’s market share in emerging markets is orders of magnitude larger than their presence in North America. But then, as a counterweight to that fact, Nokia has other much more “fundamental problems” hampering their ability to grow their smart phone business today anyway (and which they hope to fix by switching OSs).

Hollywood Old Licensing Model

But let’s face it: to find the biggest example of how stupid an industry can be, one doesn’t need to look any further than the example set by the Hollywood and the music industry. As anyone living in most emerging market countries will be able to attest, it is virtually impossible to by online music and movies legally. You can try, but you won’t get it... Apple iTunes? Hulu? Amazon Prime Instant Videos? Netflix streaming? eMusic? Pandora? Spotify? Nope! None of the above! (Believe me, I’d tried them all...)

As anyone who’s ever worked with international content licensing will tell you, the blame is largely with the content owners themselves, who have a glut for punishment when they decide to serve some audiences in detriment of others when releasing new products (and thus creating the imbalances that produce demand for pirated content), rather than with the retail channels listed above. But that does not make the situation any more excusable. I mean, where do you draw the line on who gets the right to buy the content or not (remember, we are talking about BUYING content here, we’ll get to piracy later)? Let’s take a few examples.

iTunes and eMusic are two of the few services with a fair and straightforward policy on who can buy which content on their services. Basically, if you have a credit or debit card issued in the countries where they operate (and where the content is supposedly licensed to), you’re welcome to their stores. So, if you’re american or european and would like to buy some songs or catch up with your favorite TV series while traveling abroad, you’re good to go. Since I also happen to be one of those rare exceptions of someone who has bank accounts in more than one country, I have been able to buy content from both this stores for a long time regardless of which country or region I’m in at the time of purchase. Fair enough... I guess.

What about Amazon? Well, this is a weird case. Although Amazon is one of the most international friendly e-tailers out there, allowing international shoppers to buy whatever items the shopper’s country of residence will allow to be imported without import duties, they are unusually harsh when selling digital music and video. Besides demanding the aforementioned credit/debit card issued in the “privileged zone”, you also have to be physically located within those privileged countries to be allowed to buy such content, and they’ll check you IP address against a location/IPs database to decide if you can buy the content or not. Naturally, if one happens to have bank accounts within authorized countries, he or she would have to jump through yet another hurdle, setting up a proxy connection within the authorized country in question, to only then be able to make the purchase and the subsequent download. And what about Amazon streaming videos? Well, since proxy servers are usually bandwidth starved, you’d be out of luck with that.

The same applies to Netflix, Pandora, Spotify and other streaming services. They’ll check your IP address and won’t let you, poor third worlder, anywhere near their sacred digital goods designed only for the pure souls of the few countries with higher per capita incomes. “But I have the money and I am willing to give it to you!” you say. Nope! They can’t touch it.

Let There Be Piracy...

Ok. So, by now you know where all of this is going, right? I mean, it doesn’t take a genius to understand that all this idiocy will lead to piracy. Simply because there are so many ways to get pirated content today (and they are all so much easier to use and obtain the content you want, they have no region or Digital Rights Management restrictions and, oh yeah, they’re free...) that you’d think content owners would notice or care. But no...

As panelists were discussing in a “This Week In Tech” episode (jump to 1:15:00 for this discussion) Hollywood fails to realize that their competition is not other legal distribution channels (they were talking about web distribution of TV programing through Hulu competing with other traditional distribution channels such as Cable and Satellite), but rather Bit-torrent and other means of getting pirated content. And if this happens to be the case in US and Europe, imagine what happens within emerging markets where people are getting the same promotional videos and “trailers” on Youtube, the same Press Releases being translated and reproduced by local news outlets, and the same buzz about a new movie, album or game, just to find out they cannot buy it legally not even if they want to.

Rather, the content industry seems to believe that all of these billions of increasingly tech-savvy/high-bandwidth-people in South America, Russia, Asia and Africa will gladly wait weeks and months to buy physical discs or sometimes even years until a particular TV show gets syndicated locally. Well, I’ve got news for them: not gonna happen!!!

Piracy is not, however, the main focus of this essay, as my intention here is to focus more on the online distribution blocks, obstacles, imbalances and inefficiencies as far as emerging markets are concerned (notice that I’ve not even touched an equally important part of this discussion, specially when piracy is concerned: pricing). But it is fair to say that both subjects are tightly coupled as it is impossible to explain piracy in such markets without understanding the pricing and distribution imbalances that leads to such practices.

At any rate, if you’re interested in understanding content piracy in emerging markets, as a fallout of bad international pricing and distribution strategies from content producers and owners, you should look no further than the comprehensive study made by The Social Science Research Council, and their dedicated piracy studying team, in their 2011 report entitled “Media Piracy In Emerging Economies” (which you can download, legally I might add, here). This is the most in depth and balanced study about the subject, specially concerning emerging markets.

The Old Model That Still Seems To Work

Book distribution has been a completely different beast throughout the years. In this market, the old model of getting local partners seems to have been incredibly resilient to modern technology. Sure, photocopying books was probably the oldest type of content “piracy” ever invented, but without the convenience and the network effect of the internet, not even Xerox machines made a serious dent in the book publishing industry anywhere in the world.

Another important factor was the need for content translation. You see, music, games and even films (which can be easily subtitled) are usually consumed in their original languages without the need for expensive translation work. Books, however, are a different matter. And because of this, local publishing partners managed to secure their business by offering, not only the traditional local printing, distribution and promotional advantages, but also by including translation and content adaptation to their local markets. Which, it has to be said, is a seriously tough work to do specially if one single publisher had to take care of not only international physical books distribution, but also translating them in over 20 languages or more (which is usually the case with big best sellers).

And yet, even this might be about to change with the eBook revolution that took so long to arrive, but which is finally becoming a reality with all the efforts Amazon has done in this front in the last decade. As eBook readers and multi purpose tablet computers become more and more popular from now on, the adoption rate of eBooks is likely to skyrocket given the cost efficiencies of distributing books in digital form instead of shipping tons of dead trees in the form of traditional paperbacks and hardcovers.

What remains to be seen, is how the book publishing business will go about dealing with the content adaptation/translation in this new reality. To be fair, nothing will stop a book publisher in London or New York to hire translators directly and start producing international versions of their books directly, since now they can sell and digitally deliver the books to customers anywhere in the world through the web without the need of a middleman.

The undeniable truth here is that, given some time, there are no barriers that new technologies can’t overcome. I would not be so quick in dismiss the importance of local book publishing partners, since they also help promote books rather than just translate and print them, but the role Amazon is playing in the business of promoting books cannot be underestimated at this point (the cost for Amazon to create portals in each language just for promoting and selling translated eBooks to international audiences would be almost insignificant to them). At least the hardware part has been figured out by Amazon for international audiences with their Kindle 3G International Edition or the simpler Wi-Fi only version which they’ll gladly ship worldwide.

But until that happens, traditional bookstores will continue to hold their ground in emerging markets for the foreseeable future and the eBook revolution might take a bit longer to arrive in these shores.

The Exception: PC Games

Well, I would be unfair if I also didn’t mention one glaringly positive exception (for the most part) in this subject: game studios. Overall, most game studios are pretty good in being regionally agnostic when it comes to collecting money. Well, that is one advantage of an industry that was born digital even when digital distribution didn’t even exist. Sure, they sometimes still impose some weird embargoes on some regions, but, even those, are never more than a few days apart. But game studios of all sizes, seem to have been proactive in getting their collective acts together much sooner than other content industries, as far as international online distribution is concerned.

I remember when game distribution in South America worked almost exactly the same way as music and films did during the 90’s. You had large local distributors that would press the discs, print the manuals, put everything in a box, shrink wrap it and negotiate shelf space in computer hardware and software stores. But those days seem to be long gone. Most major game studios terminated these types of agreements around here and are now relying mostly on Steam (which has pages in dozens of languages) or their own online distribution/communities (such as Blizzard/Activision and more recently EA’s Origin) for global distribution, which makes nothing but sense.

Naturally, PC games seem to be the better example here since console game sales still rely heavily on physical media. But even console game sales seem to be heading to digital downloads only route. 

Some studios go as far as to have differentiated pricing schemes for emerging markets, such as Blizzard did with the popular Starcraft II launch. All of this, has helped such studios to have much better chance to fight piracy in these markets just by making their products more easily available and more compelling to buy by pricing it accordingly to each region’s wage standards. By the way, Blizzard uses some of the same technologies already mentioned here (cross check your IP against a database of locations/IPs), but not to restrict access to content and rather to enforce different pricing (usually cheaper) for emerging markets. This way they can protect their profits in wealthier markets while gaining ground in emerging markets at the same time without price cannibalization.

Suggestions?

Sure! What about all major content industries take a page out of the game studios playbook and throw away the old distribution models based on 19th century practices (when goods actually took months and years to arrive on colonies by boat) and embrace this real time thingie called Internet, which reaches instantly the entire planet?

Again, as someone who’s been dealing with international content licensing for a while, I know that Hollywood has their incredibly lucrative deals for tiered and time embargoed distribution (movies first go to movie theaters, then to pay-per-view channels, then to DVD/Bluray releases, then to cable, then to network channels, etc...), but I also know that consumers in this day and age of instant gratification couldn’t care less about whatever profitable schemes the content industry would like to continue using. Gosh, if let to Hollywood to decide how to sell their wares, we would probably have never had VHS tapes to begin with.

So, its up to the content industry itself, with the help (and pressure) from its web distribution partners, to renegotiate these deals in such a way that they do not alienate and marginalize emerging market consumers when it comes to digital distribution. It’s not like I’m suggesting they do anything different from what they already do in major markets. They should at least extend those same online distribution policies to the rest of the world and, preferably, at the same time (for their own good). Sure, a lot would have to change about the way traditional content distribution is currently timed. None of this would make much sense if a particular TV show or Film is released online in emerging markets in tandem with their major markets counterparts, but continue to have local TV networks and movie theaters taking months, to display the same content. But hey, welcome to the 21st century! It’s about time to have such discrepancies fixed by now as well.

I’m sure studios and labels could find a way (it is not like they don’t know how to throw their weight around to get what they want when they want it) to renegotiate their distribution deals in each region in a way that includes local distribution partners when these are interested (and ready to take their share of investments and promotional efforts) or exclude them completely of online sales profits when they are not interested or ready to do their part in this new model. But I can assure you most local partners in emerging markets would get their act together if content owners put pressure on them.

The problem again, is that much of the traditional content businesses have been so accustomed to making killing profits the same way for half a century, that laziness (and even their occasional bully mentality on trying to enforce outdated rules within their markets) has become the main reason for this industry to drag their feet into the brave the new world of international online distribution. But NOW would be as good a time as ever for this industry to finally wake up and do something positive and concrete about this problem.