Destructive Internet Business Models Continued: Cinram Revenues Plunge

I've hypothesized before that the Internet generally creates a destructive paradigm for the business models it seeks to replace (e.g. instead of adding value it just cannibalizes existing models through price point competition). In the newspaper industry for example, you can replace a relatively large economic supply chain of loggers, transport trucks, pulp mills, paper mills, printing presses, delivery trucks, professional journalists, paper boys to deliver newspapers to hundreds of thousands of homes, etc with a couple of servers that can accomplish the same thing. You can argue that saving trees is a "good thing", but that's entirely besides the point at the moment.

When we analyse a micro-economy like news delivery from an end-to-end supply chain perspective, we need to take into account the relative size of the micro-economy in question. The least debatable notion is that the size of the GDP per capita of any region is an indicator of it's economic strength. That is to say, that producing goods of monetary value where there is a demand for such goods produces wealth in a monetary system. However, many Internet industries theoretically replace fairly large economies with fairly small economies.

Nowpublic.com is an example of an Internet business that has theoretically replaced a very large news delivery economy with a much smaller one. Nowpublic delivers news to a million unique visitors per month (source: compete.com) and doesn't pay any writers or journalists (readers don't pay either). It's tough to quantify their revenue stream, but my observation is that their advertising is poorly targeted and likely brings in fairly low CPMs. It's therefore fairly obvious that the their audience doesn't generate nearly as much revenues as the bricks and mortar business that it theoretically replaced.

Initial research we're performing is showing that the size of the advertising economy on the Internet is also smaller (economically speaking) than the mediums it's replacing (newspaper, magazines, etc).

So what does any of this have to do with Cinram? If you didn't already know, Cinram is one of Canada's largest companies with past revenues approaching a half billion dollars per quarter (yes that's over a billion dollars a year). They produce media such as Compact Discs, DVDs and Blu Ray discs. However, revenues have been on the decline, with analysts attributing much of the decline to digital downloads and Internet video delivery. Cinram's 2009 revenues were approximately 25% down over 2008 revenues. Today, Cinram announced losing one of it's biggest customers, representing almost 30% of Cinram's revenues. Warner Brothers terminated their six year long deal with Cinram.

Cinram's shares tumbled after the announcement by approximately 70% and I personally doubt there is any recovery in sight for them.

Cinram is likely a good example of how the Internet can dramatically affect billions of dollars in revenues while not providing a similarly sized "replacement economy". For example, bandwidth costs for downloading a DVD over a CDN is approximately $0.52 (Amazon's current price per GB on CloudFront starts at $0.13 per GB) and declines rapidly. For example, at the 1,000 TB per month level, the cost of downloading an entire full size DVD declines to approximately $0.20. Now this is the Direct to Home delivery cost. There are very few (if any) replication costs associated with delivering the consumer their unique digital copy. However in the DVD/Blu Ray method, you need to duplicate a disc, package it, warehouse it and deliver it to a store or deliver it directly to the consumer's home. It's easy to see how the end-to-end delivery costs are likely much larger in the DVD/Blu Ray method. A corollary is that the economy behind DVD production and delivery is larger. Who will hire the Cinram displaced employees?

There seems to be little consensus on how the Internet is affecting the economy as a whole and whether the sum is greater or less than what it's replacing. It bears study and analysis to see what the net effects are.