accessories, and portable digital music players, and sells a variety of related
software (including server, OS, application, and mapping software), peripherals,
networking solutions, cloud services, and third-party online content and
applications. Apple also sells and delivers online content (including music,
movies, and books and other publications) and apps through its online stores.
Notable Apple acquisitions include Siri Inc. (an app developer offering a voice-
based digital personal assistant) and several mapping companies.
Facebook was incorporated in 2004 as a restricted-membership college website
to help students get to know each other. Facebook has grown to become the
leading U.S. social networking site that has a significant global presence. In
addition to social networking, Facebook currently offers email, a chat and SMS
service, a platform to help developers create social apps and websites, and an
analytics platform to help advertisers track their performance. A recent notable
Facebook acquisition was Instagram (a photo and video sharing website).
Google’s origins date to a 1996 graduate school research project to create an
Internet search engine. The company was incorporated in 1998. Google’s current
products and services include Internet search services, social networking, online
content, and content access tools; online products and services, including a Web
browser; email, voice, and text messaging services; mapping and geographic
services; cloud storage services; advertising services; operating systems and
platforms; and a variety of business-oriented products and services. Google has
partnered with several IT hardware companies to develop consumer electronics,
including smartphones, tablets, and Internet-connected glasses. Google also has
an ongoing project to develop a national broadband network by installing fiber
optics lines in communities in selected U.S. cities.
Notable Google acquisitions
include Motorola Mobility (a manufacturer of telecommunications equipment
including smartphones and tablets) and YouTube (a video sharing and viewing
Microsoft was founded in 1975 as a microcomputer operating system vendor.
Microsoft’s current products and services include software (including server, OS,
and application software as well as cloud-based software services); devices
(including PC accessories, smartphones, tablets, and gaming consoles); Internet-
based products and services (including a Web browser, email, Internet search,
cloud storage, and a Web portal and content delivery site); servers; developers’
products (including an online training and certification program); business and
Linzmayer, “30 Pivotal Moments in Apple’s History,” March 3, 2006; Guglielmo, “Apple
Acquisitions Are Few but Notable,” Fortune, October 4, 2012.
Facebook, Annual Report, 2012, January 2013; Associated Press, “Hits and Misses in Facebook
History,” May 1, 2013; Etherington, “Facebook Closes Instagram Acquisition,” Techcrunch, September 6,
Google, Annual Report, 2012, January 2013; Google, “Our History in Depth,” n.d. (accessed May 24,
2013); Google, “Google Fiber: About,” 2013.
Google, “Google to Acquire Motorola Mobility,” Press release, August 15, 2011; Google, “Google to
Acquire YouTube,” Press release, October 9, 2006.
Microcomputers were early forms of PCs. The name “Microsoft” is a combination of the words
“microcomputer” and “software.” Fortune, “Bill Gates and Paul Allen Talk,” October 2, 1995.
enterprise services and products; and online content, through a partnership with a
national broadcasting network. One recent notable Microsoft acquisition was
Skype (a VoIP service).
Digitally Delivered Content
Digitally delivered content represents the online versions of traditional content, and
includes Internet-delivered music, games, movies, TV, radio, and books.
that provide such content to consumers may operate exclusively on the Internet or may
also distribute traditional physical content; however, only the Internet-delivered portion is
within the scope of this investigation.
An increasing share of content is being delivered
over the Internet, though the share of, and effect on, physical sales varies by industry.
This section provides an overview of the economic effects of digital trade on U.S. content
industries, focusing mainly on the online music, games, videos, and books industries. It
includes discussions of the effects of online content on consumer expenditures and
employment; describes different business models used in content industries; and
highlights important trends in the growth of Internet delivery in the content industries.
Economic Effects of Digital Trade on U.S. Content Industries
It is difficult to isolate the effects of digital trade on revenues and employment in the
content industries as a whole from the effects of confounding fac
tors, such as the 2008‒
09 economic downturn, changes in consumer preferences, and others. Several content
industries report declining physical sales in recent years, while online sales have grown—
in some cases completely offsetting the declines in physical sales. However, in some
cases online content may not be a substitute for physical content, but rather an
inseparable complement. Particularly in the video game and TV industries, the content
delivered online may be a component of the larger experience. One computer and
communications industry report stated that, as a whole, the entertainment industry,
including music, games, videos, and books, is “booming.” That report points to more
content choices for consumers and more opportunities for businesses and artists to make
money as evidence of the health of the entertainment industry.
Microsoft, “Microsoft: Products,” 2013; Microsoft, “Microsoft Officially Welcomes Skype,”
October 13, 2011.
These examples are illustrative of traditional content industries that have a significant or growing
online presence. Other parts of the publish industry, such as newspapers, magazines, and scientific
periodicals, as well as the photographic industry, also derive increasing amounts of their revenue from online
For example, a traditional broadcast radio station may also broadcast its programming over the
Internet; the Internet, or online, portion would be within the scope of this report, but not the traditional
broadcast. Similarly, a cable TV network may supplement programming over cable networks with the same
programming available through a website; only the portion viewed via the website is within the scope.
Amazon sells physical books as well as downloadable e-books online; only the e-books are within the scope
of this report.
Masnick and Ho, The Sky Is Rising, January 2012.
Online Content’s Effects on U.S. Consumer Expenditures
Digital trade has increased U.S. consumers’ access to a rapidly growing amount of online
content. However, particularly in light of the 2008–09 economic downturn, slow
economic recovery, and other factors, including lower prices for online content and
increased piracy of copyrighted material, it is not clear that digital trade has led to a
significant change in overall U.S. consumer spending on content in general, or
specifically to an increase in consumer spending on online content.
Recent data show that overall average annual consumer spending on entertainment—both
physical and online—decreased 1.2 percent from 2006 to 2011, while total average
annual consumer expenditures increased 2.7 percent over the same period.
in consumer spending on entertainment resulted in a decline in the share of consumers’
annual expenditures accounted for by overall entertainment spending, from 4.1 percent in
2006 to 3.9 percent in 2011. While this overall decline may indicate that consumers are
enjoying less entertainment, the fall in consumers’ entertainment spending may also
reflect the increased availability of online entertainment accessible at a lower cost and the
proliferation of ad-supported free content. Also, the decline may reflect consumers’
having easier access to pirated copyrighted online content—a substantial concern of the
content industries, as reported by witnesses at the Commission’s public hearing for this
Copyright issues are discussed further in chapter 5.
There is some evidence that online offerings have led to an increase in overall online
content consumption. For example, according to one recent survey, 30 percent of those
who have read electronic content—meaning books, magazines, newspapers, or journals
in digital format—reported spending more time reading since the advent of digital
In general, people preferred reading e-books when they were traveling or
commuting or when they wanted to get a book quickly, all these scenarios representing
instances where reading might have been foregone in the absence of digital content.
There may also be an analogous trend across many content industries. As noted in
chapter 1, the widespread availability of high-speed Internet access and the proliferation
of Internet-connected mobile devices have extended the amount of time spent on the
Internet and have made accessing digital content more convenient.
Online Content’s Effects on U.S. Employment
The impact of digital trade on U.S. employment in content-related industries is also
mixed. No data are available distinguishing employment in online content industries from
employment in traditional content industries; consequently, the data presented in this
section are a composite of employment in both online and traditional content industries.
From 2007 to 2012, employment in the content industries declined by 14 percent
Entertainment includes fees and admissions; audio and visual equipment and services; and other
entertainment supplies, equipment, and services. Spending on pets, toys, hobbies, and playground equipment
are excluded from these calculations. USITC calculations based on U.S. Department of Labor, Bureau of
Labor Statistics (BLS), Consumer Expenditure Survey, 2006–2011, September 2012.
Several witnesses spoke of piracy concerns with respect to online entertainment content at the
Commission’s public hearing for this investigation. See USITC hearing transcript, March 7, 2013, 240–42,
330–31 (testimony of Greg Frazier, Motion Picture Association of America); 348–49 (testimony of Mitch
Glazier, Recording Industry Association of America); 262–63 (testimony of Stevan Mitchell, Entertainment
Software Association); 251, 256, 293, 300–302, 327 (testimony of Michael Schlesinger, International
Intellectual Property Alliance).
Rainie et al., “The Rise of e-Reading,” Pew Internet and American Life Project, April 4, 2012.
The declines were most pronounced in the publishing (book, newspaper,
and directory) and sound-recording industries. Employment in other information services
(NAICS 5191) grew 38 percent. This growth was driven by growth in Internet publishing
and broadcasting and Web search portals (NAICS 519130), which account for 71 percent
of employment in NAICS 5191; employment in the NAICS 519130 group grew
67 percent over the same time period. This is noteworthy because the employment
growth in the NAICS 519130 group is exclusively attributable to online products and
services, including search engines, whereas the other sectors include both online and
Content industries are defined to include all of NAICS 51 except for non-game software publishing
(only a portion of 5112 is included); 518 (data processing, hosting, and related services); and 517
As noted in chapter 6, this trend of declining employment in traditional industries accompanied by
increasing employment in comparable online industries is referred to as creative destruction—that is, the
technology-driven creation of new industries and jobs and consequent decline in industries and employment
associated with older technologies.
TABLE 2.2 U.S. employment in the content industries (online and traditional), 2007–12
Newspaper, book, and directory
Motion picture and video industries
Sound recording industries
Radio and television broadcasting
Cable and other subscription
Other information services
Total content industries
1,496,684 1,457,790 1,327,936 1,322,567 1,291,258 1,292,933
Content industries’ share of total employment
Source: USDOL, BLS, Quarterly Census of Employment and Wages, total private employment estimates as of September; September 2012 data are
Note: Data for game publishers are not broken out by BLS. Data here are based on an estimate that game publishers represent 6.4 percent of total
software publishers (5112). This figure is provided by the estimates in BLS, Economic Census, 2007. The percent changes reported here
consequently reflect changes in software publishers as a whole, and not specific trends for game publishers.
Effects of Online Content on Content Creation
The effects of expanding digital trade, and the consequently increased availability and
consumption of online content, is most visible at the content delivery or retail stage of the
content creation value chain.
The increased availability of Internet-delivered content
also affects activities, costs, revenues, and employment at other stages of the value chain.
In some cases, online content eliminates the need for traditional content intermediaries
such as distributors, marketers, and advertisers.
Because of lower digital distribution costs and the higher visibility that can be gained
through social networking, authors, songwriters, musicians, and other content creators are
now able to reach consumers directly much more easily. For books and music, the
following trends have been observed:
Books. Some independent authors—including those rejected by traditional
publishers—have met with successful sales by self-publishing e-books and have
gone on to license movie and other rights.
Self-published e-books are also
gaining increasing prominence in online bookstores, where they are typically
priced lower than traditionally published e-books.
Retailers have begun to
embrace self-published books with featured virtual shelf space, such as
iBookstore’s “Breakout Books.”
Retailers do this for a variety of reasons,
including the ability to offer books at lower prices and the ability to offer
increased diversity thanks to unlimited Internet shelf space.
Music. Independent songwriters and musicians, similarly to independent authors,
are able to make their music available online without going through music labels.
In theory, the lack of an intermediary affords the musician or author higher
royalty payments, though the size of the royalty stream depends on the digital
format and licensing agreements.
Content Delivery and Online Business Models
Online content may be accessed in several forms—most commonly via downloading or,
increasingly, streaming. Table 2.3 describes the most common online content delivery
mechanisms. While downloads are by and large the most prevalent online content form,
streaming is growing across content industries, enabled by faster broadband, shifting
consumer preferences, and new business models. Streaming is many users’ preferred
The content creation value chain in this instance refers to the creators—including authors, game
developers, and composers—who then sell or license their creations to publishers (software publishers, book
publisher, music publishers) or other intermediaries who facilitate reproduction, distribution, marketing,
advertising, and licensing for the content creators for sale to the public.
Although this section is focused on the delivery of content via the Internet, content industries are
increasingly using the Internet and Internet (digital) technologies in the sense that the production of the
content itself may rely on digital networks. For example, in the movie production industry, digital
technologies have lowered production costs and facilitated certain activities, such as digital animation and
postproduction editing, which can be done remotely with an Internet connection. Even delivery of movies to
theatres is increasingly handled digitally via a satellite link or broadband Internet connection. Digital
technologies in general have eliminated the need for costly traditional film (most film makers now use digital
files) and reduces the cost of film editing and assembly.
Emburg, “Big Publishers Terrified of Kindle Mavericks,” October 23, 2010.
Coker, “Why eBook Retailers Are Embracing Self-Published Authors,” February 12, 2013.
According to Coker, a self-published book priced at $2.99 nets the author about $2.00; for the author to make
$2.00 on a traditionally published book, it would have to be priced over $11.00.
Kaufman, “Apple to Highlight Self-Published Books,” February 5, 2013.
TABLE 2.3 Digital content delivery mechanisms
Users download a digital file, akin to purchasing a physical product in that the user has a
copy of the content that can be accessed offline at the user’s leisure. However, rights of
digital download owners are arguably more limited than the rights of those who purchase
physical copies of content in that terms-of-use agreements and technical safeguards
frequently limit the transferability of digital content, tethering it to a particular device or set of
devices. For example, an e-book purchased from Amazon may only be read on a Kindle e-
reader or on a mobile device via an Amazon app, while purchases from Apple can only be
read on Apple devices.
These downloads are limited either by time, by the number of uses allowed, or by the devices
they are accessible from. For example, users can “rent” a movie online (or via app) from
iTunes at a lower price than it costs to “buy” the movie.
Streaming enables viewing or listening in real time, requiring Internet access for the duration
of the content. Streaming services do not allow a user to store the content offline for later
use. Streaming is often offered through a subscription service where users gain unlimited
access to vast libraries of content (for example, Netflix or Spotify) rather than make individual
Streaming may be interactive, i.e., “on demand,” allowing users to specifically request
particular content, such as with Netflix, Hulu, ABC.com, Spotify, and Rhapsody. Interactive
streaming refers to the transmittal of a digital file to the user to be played contemporaneously
with the request.
Alternatively, streaming may be non-interactive, such as with Internet Radio, where users
choose among webcasts over which they have less control (i.e., Pandora, iHeartRadio, live
news feeds). Here, services provide live or predetermined music programming to multiple
This model combines the idea of purchasing to own with online rather than offline storage.
This may involve purchasing online content through the service and storing it, or uploading
an existing content library for storage and access across devices. Already common for digital
music, the movie industry is also promoting use of an online “locker” to store purchased
Source: Compiled by the USITC.
Hiltzik,“E-book Restrictions,” December 22, 2012.
Harry Fox Agency, “Digital Definitions” (accessed February 28, 2013).
Webcasters may operate exclusively on the Internet or may retransmit traditional radio content. Harry Fox
Agency, “Digital Definitions” (accessed February 28, 2013).
Through a service called UltraViolet, consumers can store movie and TV episodes they purchase online, allowing
them to stream or download them to any connected device. In a partnership with TV and Blu-ray player
manufacturers, consumers who purchase certain hardware will get free UltraViolet titles from participating studios,
including Sony Pictures, Twentieth Century Fox, and Warner Bros. Orden, “Online Movie Sales Log Rare Increase,”
January 8, 2013.
method of listening to music, as well as the most common way users access online
E-books, by contrast, are almost exclusively downloaded. Entities involved in
the delivery of online content may use a combination of the delivery mechanisms
described above and monetize them in different ways. Common business models include
charging per use, offering subscriptions, and providing advertising-supported content for
free—or various permutations of all three approaches. Additionally, many companies
have adapted their strategies to account for mobile Internet use. U.S. copyright laws may
also affect content providers’ choice of business model and digital delivery mechanism.
Streaming is a way of delivering and receiving multimedia content in which the multimedia content
is constantly received by and presented to an end user while being delivered by a provider. Content may
include music; movies, TV programming, and videos; radio broadcasts; games; financial data; and closed-
captioned text. Streaming is made possible by the faster broadband Internet connection speeds.
Charging per Use
Some online content providers charge per use—most often per download or per “view”
of a video. Charging per use allows consumers to target their purchases most closely to
their desired volume of use. Charging per use also allows content providers (online
distributors or intermediaries) to charge for single downloads (for example, a single
music track, a single TV episode, or a single book volume), which may encourage users
to return to buy additional tracks, episodes, or volumes, or even the entire album,
episode, or collection. The online distributor or intermediary retains a percentage of this
fee. This so-called “agency model” is also a common business model for e-book
Subscription-based models are commonly associated with content streaming over the
Internet, both interactive and non-interactive. Users pay a set monthly or annual fee for
unlimited access to a library of content. For example, U.S. Netflix customers pay a
monthly fee for unlimited streaming of their movie and TV content. A Rhapsody monthly
subscription combines music streaming and downloads,
while Audiobooks provides
similar subscription services for audio-recorded literature. Subscription services’ primary
benefit to consumers is their vast content options available for a fixed payment, giving
users access to more content than they could purchase outright. Subscription streaming
services may also generate value for consumers by recommending content that fits a
user’s listening or viewing patterns, introducing them to new films, authors, or artists that
they might otherwise never have discovered. Nevertheless, some users may prefer
“owning” content in the form of permanent downloads, and may use subscription models
to identify content that they proceed to purchase through the same service or another
Subscription streaming services require Internet connectivity for listening, though other
subscription services may allow downloads for a period of time, which can be stored and
listened to offline.
A challenge for the providers of subscription-based services is
maintaining large enough content libraries to attract and keep subscribers.
Offering Content (Often Advertising-supported) for Free
A large portion of online content is free to the user, with revenue generated through the
sale of advertising space.
Consequently, most online content providers compete with
traditional forms of media for advertising revenues. The value of U.S. Internet
advertising reached $37 billion in 2012, second only to broadcast TV ($40 billion) and
ahead of cable TV ($33 billion), magazines ($23 billion), newspapers ($19 billion), and
Under the agency model, online distributors or other intermediaries act as agents for the publisher.
The publisher sets the retail price, and the distributors or intermediaries receive a predetermined margin. In
contrast, under a wholesale model the publisher sells the product to online distributors or intermediaries who
then resell the product at whatever price they like. E-book pricing has become an issue of legal contention in
recent years. Guardian, “Ebooks: Defending the Agency Model,” March 12, 2012; Wall Street Journal,
“What Is ‘Agency Pricing’?” April 11, 2012.
Rhapsody website, http://www.rhapsody.com/what-is-rhapsody/get.html (accessed May 24, 2013).
NPD, “After 10 Years Apple Continues Music Download Dominance,” April 28, 2013.
Cameron and Bazelon, “The Impact of Digitization of Business Models,” June 2011.
A number of online content providers provide both free, advertising-supported content and fee-based
content allowing users to access additional features and content or to eliminate ads.
radio ($16 billion). Internet advertising has surpassed all forms of media advertising over
the last five years except broadcast TV.
YouTube is an example of the advertising-supported model, where users can view for
free unlimited video content that other users have uploaded to the site.
network TV channels often have websites where users may stream free episodes
interspersed with commercials. Free tiers of use are becoming more common among
music-streaming services, which may offer both a free version with ads and subscription
versions uninterrupted by ads. At least one company offers the free tier without ads, with
the goal of attracting users who will eventually be willing to pay to omit ads from
This approach is also common among newspapers, which provide a
limited level of online access for free to draw in readers before requiring a paid
subscription. Others, however, embrace advertising as a central component of their
business model. Pandora continues to offer free access coupled with advertising as a
central part of its business plan
to compete with traditional radio.
Online content providers are also adapting their business models to incorporate mobile
software applications (apps) as users spend increasing amounts of time on mobile
devices, as described in box 2.1. Companies may take a variety of approaches. For
example, Pandora offers its mobile app for free, but limits the hours of free ad-supported
listening, requiring users to purchase a subscription for unlimited mobile listening. By
contrast, PC-based ad-supported listening to Pandora is unlimited.
decided to cap free listening on mobile devices because the royalties it pays per song are
the same, but advertising revenues per listener hour on mobile devices are less than half
than those generated on traditional computers.
Internet companies dependent on advertising are working to adapt their strategies to
attract mobile advertising. Within Internet advertising, ads on mobile devices have
increased rapidly, with revenues growing from $641 million in 2010 to $3.4 billion
and projected to reach $27 billion by 2017.
Because the shift to mobile device
use is an ongoing and rapidly increasing phenomenon, audience measurement and
targeting are less advanced than for PC-based advertising. Much of the content viewed on
mobile devices is accessed through apps, where consumer tracking, customization, and
other marketing measures reportedly are more difficult than for Web browsers.
IAB, Internet Advertising Report: Full Year 2012, April 2013.
YouTube also offers fee-based content.
Rdio offers a free tier of content without advertising, meaning that it is forgoing ads as a source of
revenue and paying royalties on the free music essentially out of pocket. Sisario, “For Many Digital Music
Services,” January 28, 2013.
Advertising accounted for 88 percent of Pandora’s revenue in 2012. Pandora, “Form 10-K,” 2012.
Sisario, “For Many Digital Music Services,” January 28, 2013. Pandora also offers a fee-based ad-
free service, Pandora One.
Pandora, “Form 10-K,” 2012.
Mobile listening hours account for around three-quarters of total listening hours. Pandora, “Form
10-K,” 2012; Sisario, “Pandora to Limit Free Listening,” February 27, 2013.
Search advertising, in which ads are linked to particular search terms, accounts for nearly half of
Internet advertising revenues ($16.9 billion). Search engines are discussed later in this chapter. IAB, Internet
Advertising Revenue Report: Full Year 2012, April 2013.
eMarketer, “Facebook to See Three in Ten Mobile Display Dollars,” April 4, 2013.
Lohr, “A Big Data Weapon for the Mobile Ad Challenge,” April 3, 2013.
Documents you may be interested
Documents you may be interested