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412 Part Three Key System Applications for the Digital Age

and legitimate online music sales are estimated to be approximately $4 billion
in 2012. As cloud streaming services expand, illegal downloading will decline
further. In that sense, Apple, along with other Internet distributors, saved the
record labels from extinction. In 2012, digital music sales accounted for over 50
percent of all music revenues for the first time. Yet the music labels make only
about 32 cents from a single track download or from a streamed track.
Hollywood has not been similarly disrupted by digital distribution platforms,
in part because it is more difficult to download high-quality, pirated copies
of full-length movies. To avoid the fate of the music industry, Hollywood has
struck lucrative distribution deals with Netflix, Google, Amazon, and Apple.
Nevertheless, these arrangements are not enough to compensate entirely for
the loss in DVD sales, which fell 50 percent from 2006 to 2012, although this is
changing rapidly as the online distributors like Netflix are forced to pay billions
for high-quality Hollywood content. In 2012, for the first time, consumers will
view more and pay more for Web-based movie downloads, rentals, and streams
than for DVDs or related physical products. As with television, the demand for
feature-length Hollywood movies appears to be expanding in part because of
the growth of smartphones and tablets. In addition, the surprising resurgence of
music videos, led by the Web site VEVO, is attracting millions of younger view-
ers on smartphones and tablets. Online movies began a growth spurt in 2010
as broadband services spread throughout the country. In 2011, movie viewing
doubled in a single year. In 2012, about 60 million Internet users are expected to
view movies, about one-third of the adult Internet audience. Online movie view-
ing is growing faster than all video viewing (which includes TV shows). While
this rapid growth will not continue forever, there is little doubt that the Internet
is becoming a movie distribution channel that rivals cable television. Table 10.4
describes digital goods and how they differ from traditional physical goods.

10.2 E-COMMERCE: BUSINESS AND TECHNOLOGY

E-commerce has grown from a few advertisements on early Web portals in
1995 to over 9 percent of all retail sales in 2012 (an estimated $362 billion),
surpassing the mail order catalog business. E-commerce is a fascinating combi-
nation of business models and new information technologies. Let’s start with a
basic understanding of the types of e- commerce, and then describe e-commerce

TABLE 10.4 HOW THE INTERNET CHANGES THE MARKETS FOR DIGITAL
GOODS
DIGITAL GOODS TRADITIONAL GOODS
Marginal cost/unit Zero Greater than zero , high
Cost of production High (most of the cost) Variable

Copying cost Approximately zero Greater than zero, high
Distributed delivery cost Low High
Inventory cost Low High
Marketing cost Variable Variable
Pricing More variable (bundling, random Fixed, based on unit costs
pricing games)

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