The Last Nail

You know all there is to know about the disintegration of music publishing, in part because you’ve lived it, and in part because you’ve done your homework. You know the newspaper-publishing business is getting killed because you can hear Rupert Murdoch squealing. You know the movie business is hurting. And of course you know the book-publishing industry is coming apart at the spine.

But even as all this is happening in concert, and even as the internet looms large in every instance, there are still people explaining how what’s happening in one industry has nothing to do with what’s happening in another industry. Or how it’s the recession that’s causing these problems. (It’s not.)

To this litany of carnage now add the computer gaming industry. On Monday Electronic Arts (EA), one of the the largest developers and publishers of interactive titles, announced that it was cutting 1,500 jobs. If that was the end of the story we could chalk up the layoffs to the recession, but that’s not the end of the story.  

At the very same moment that EA is laying off 17% of its workforce, it’s also spending serious money to acquire an online game developer:

Electronic Arts bought Playfish, which makes social network games like Pet Society and Restaurant City, for $275 million in cash and $25 million in equity. Playfish could receive an additional $100 million if it performs well.

With the acquisition, Electronic Arts is trying to break out of its doldrums by focusing on a new breed of digital games.

“We are making tough calls to cut cost in targeted areas and investing more in our biggest games and digital businesses,” said John Riccitiello, the chief executive of Electronic Arts.

Remember that phrase: “…digital businesses.”

Electronic Arts wants its games to be wherever people want to play, whether on video game consoles, mobile phones or, with the Playfish acquisition, social networks, said John Schappert, the company’s chief operating officer.

Playfish’s games are free to play, and the majority of its revenue comes from selling virtual goods, like a cake or casserole in the game Restaurant City. This is a shift in thinking for Electronic Arts, which traditionally makes its money upfront, when it sells the game.

Another phrase to remember: “…free to play….”

Then there’s this, from Gamasutra’s story on the EA layoffs:

Another area that EA believes is likely to soften the blow to packaged goods is the digital distribution and online space. As recently as five years go, Riccitiello said, the company estimated the value of the digital segment to be less than 10 percent of the industry; now it’s more than 35 percent, and the company sees the digital space growing by 20 percent on an annual basis for the next five years.

In fact, when taking into account online revenues as well as retail revenues, the publisher actually expects the industry to see positive growth in 2009 — and with its Playfish acquisition, the company clearly plans to bolster its digital position.

“EA continues to transform itself from being almost totally packaged goods-dependent,” Riccitiello said, to being “a leading figure” in the digital sphere.

The word ‘digital’ here and in the New York Times article above doesn’t mean what it usually means. It’s not a distinction between analog and digital signals, it’s a distinction between physical and electronic content. (All computer games are inherently digital.)

What the word ‘digital’ means now is ‘the internet’. As in digital downloads. As in: the-internet-as-a-distribution-medium-is-killing-our-retail-channel. Everything EA makes and sells is digital, but it’s not all available online. Just as the book business cannot transmit physical books through the internet distribution channel, EA and other interactive publishers cannot transmit CD’s on the web.

EA is not laying off 17% of its workforce because it doesn’t know how to make digital products, it’s laying off 17% of its workforce because the internet is killing its business model in the same way that it’s killing the business model for film, music, news and books. And that’s the last nail in the coffin of the traditional publishing model, regardless of the industry, medium or content being published. Music is not different from books. News is not different from interactive. It’s all the same thing. In every medium, the internet is killing publishing as we know it.

Distribution of physical objects will not change, because it cannot change. You cannot beam a physical book to someone. Distribution of content will change because it can change. You can beam the contents of a book to someone. Or the contents of a Hollywood DVD. Or a newspaper article. Or an music CD.

When a digital-content titan like EA is having to cut staff and change course and move to a free-to-play business model in order to make it in the age of the internet, it’s not coincidental that other content publishers will have to do the same thing, it’s inevitable. The internet as a distribution pipeline for content is killing all businesses which depend on revenue from retail distribution. There will be no exceptions.

Update: As I was preparing to post this, I ran across an excellent analysis of EA’s current and previous acquisitions by Greg Costikyan. I don’t disagree with his conclusions. Beyond any inherent incompetence, however, EA is demonstrably trying to limit their exposure to the carnage that’s happening in other industries by embracing the internet as a content-distribution pipeline. To the extent that they may be moving in the right direction, however, they profit both from the experience of other industries and from a business environment in which there’s nowhere else to go. Hardly the stuff of visionary leadership.

— Mark Barrett