Who’s going to pay? (part 2)Posted: March 8, 2013
Catch up (a summary of the first essay in this series)
Before we get to the current disruptive infrastructure change, the internet, let’s summarise the story so far.
With Hollywood we had a simple model. Films were made, and money was extracted from consumers at the cinema. Originally this whole chain (studios and cinemas) was owned by the one business lobby, but even when this was broken up by law the whole thing worked in thrall to simple interdependency.
Television arrived and introduced new infrastructure that could be described for the 1st time as industrial, and was, as a result, shepherded and regulated by government. Consumption moved into people’s own homes, which changed the money extraction problem. Hand in hand with the new but fundamental government role, this was solved by the introduction of advertising in the States, and a TV licence fee in the UK. Alongside Hollywood the TV networks also became content producers.
Finally moving from an exclusively terrestrial system of distribution to cable and satellite technology, introduced further changes on both the content and the monetisation sides.
The key change was the introduction of subscription as the cash extraction mechanic, which in turn led to a proliferation of channels and an ability to service multiple smaller audiences, sometimes even defined by a single sporting event.
Importantly the cable companies also made inroads into content production taking the fight competitively to Hollywood by making movies, as well as the programming we more traditionally associate with television.
With each change the number of players increased, and yet to date, everyone who ever played the game is still playing.
- Content: Hollywood, terrestrial, cable and satellite TV companies
- Infrastructure: Studios, movie theatres, televisions, terrestrial broadcast (analogue to digital switch is ongoing), cable networks and satellites
- Monetisation: Cinema receipts, advertising and subscriptions
There is another broad, but important, trend here, one that will get more pronounced when we examine the impact of the internet. At each stage industry control has diffused; consumption has moved from a communal public space privately owned (cinema), to a private personally owned space (home) while at the same time the number of options available to the customer has massively increased. And then, on top of that, video introduced time shifting and portability. Video, interestingly enough was the first time we heard the big content companies start to complain and litigate (at scale) over issues of intellectual property.
The internet, nothing will be the same again
Now at this point it does start to get more complicated even though the infrastructural changes themselves are actually fairly straightforward in many ways.
There is one big reason why the game is substantially different this time, but before we get to that lets look at how the model I showed in the first essay fares in a world with the internet.
The infrastructural change of note (beyond the internet itself), with regard to movies and TV content, is streaming technology as provided today by Netflix, LoveFilm and a host of others. It hasn’t yet (and it may not) change in a substantial way, the actual format or style of the content being produced, as TV and cable both did. The content currently available on streaming services, is the same style of movie and TV show that we are already very familiar with. This is no accident as, alongside Netflix and the other new entrants are the incumbent big content players, HBO, Time Warner and Sky amongst others. They have developed their streaming channels as another distribution point alongside their existing portfolios.
My model suggests that there should be changes in both the style of the content and in the monetisation mechanics. The issue of content is subtlety oblique and I tackle that in the 2nd half of this post. Changes to the business model are more straightforward.
The 2 big changes that we can comfortably identify right now, that are inspired by streaming technology, are both losses of control, the loss of staggered geographic releases and the loss of scheduled viewing.
The existing incumbents have resisted making these changes because they challenge certain enshrined elements of their existing business practices. It’s a sphere of discourse that has played out against the backdrop of content piracy and what to do about it. Those who oppose the more draconian measures to stop piracy such as DRM, spyware and certain bits of dangerous legislation have consistently pointed out that there is, and always has been a substantial audience willing to pay happily for content delivered to them in the way they want it (I am one such person).
Two elements that have caused much consternation to potential customers (who therefore become potential pirates) are the aforementioned limited geographic rollouts and staggered scheduled releases. So, Game of Thrones, became the most pirated TV download of all time because it was only available to certain subscribers (HBO subscribers – it wasn’t something that could just be downloaded on its own – on a scheduled release) and because it was not available legally outside the US at the same time as it was available inside the US. In the face of these restrictions people turned to piracy en masse (1 episode alone racked up 4.28 million illegal downloads).
The current streaming incumbents are moving to make their geographic releases more sensible. Most recently the Game of Throne’s producers have announced such a change, but are still stalling on the ability to download the content without a full subscription.
It’s quite instructive that the director of Game of Thrones and HBO disagree about how much of a good thing piracy has been for Game of Thrones, or not, as this divergence of opinion reveals a fault-line in this new internet distributed world. The artist, the auteur, wants as wide a release as possible and with a massively successful piece such as Game of Thrones that would be most easily achieved by making it easy to buy as a one off and not as a subscription. On the other hand, for HBO, runaway successes are essential as they effectively become lock in’s that justify the subscription fees that their customers pay month in and month out. They can’t imagine life without such revenue controlling mechanics.
Ok, so we can see that the Geographic restriction will be eased what about scheduled release?
Well, this is where it gets particularly intriguing because, surprisingly, this is also a business model issue, and one that is directly enabled by the arrival of streaming technology. Let’s take a look at what Netflix has been up to recently.
Firstly, as a new entrant, as all new entrants in my model have done previously, they have become content producers. It wasn’t always so, and until only recently, when they produced and released House of Cards, Netflix licensed all of its content, something that was becoming increasingly expensive for them. On its own this is not a significant challenge to the incumbent’s business models, indeed as my model shows this mechanic over time has been a major reason why incumbents and new entrants tend to align quite quickly. What is a significant challenge, however, is that Netflix have made the full run available as soon as you have bought your subscription. In short this means that you could buy one month and then cancel your subscription having watched every episode in a monster weekend House of Cards marathon. This is a huge change in the monetisation model as it effectively makes it possible to buy individual pieces of content and not a full subscription.
Netflix obviously hope that people will maintain their subscriptions anyway, as a result of giving them what they want – the ability to consume on their own terms – and only time will tell if it works (although early indications are good). This is an inspired way, in my opinion, of delivering to customers what they want while still, potentially, maintaining the long term subscription revenue base. Inertia can be a powerful business tool.
Meanwhile, even though, HBO has moved to make subsequent productions of Game of Thrones available globally on a more sensible timeline, with US audiences only enjoying a 1 week advantage over the rest of the world, they have not invalidated their perceived lock-in as Netflix have done, by killing the staggered release. I suspect they will eventually have to align and the new infrastructure will have once again fundamentally changed the monetisation model, as well as the consumption habits (indeed because of the consumption habits).
Ok, so that’s what’s going on as far as my model is concerned. We can safely predict that if Netflix’s experiment with monetisation is successful, then the rest of the industry will follow. Geographic staggered releases are already being eroded and we also have a new content style in terms of the mass of user generated content (I will explain shortly how this affects these established content companies).
For now the biggest observation is that the changes to the monetisation equation have been negative changes (loss of revenue generating mechanics), whereas previously they were always additional new ways to extract money. This alone is enough to explain why the incumbent content players have been slow to adopt the internet and have seemingly fought against it every step of the way.
Nonetheless this is still only half the picture, there is something else also happening in the internet space that makes this particular infrastructure handover more destructive to the incumbents than previous changes.
The new kings have arrived
If you recall, we noted that through all the preceding changes no group was forced from the industry. Movies, terrestrial/network TV and cable were all able to co-exist as legitimate profitable businesses. Part of the reason for this, was that each new technology also enabled a significant increase in the volume of content consumption, the market, therefore, was always growing and there was enough room for the new entrants.
Each group of new entrants (always arriving via infrastructure) was eventually forced, as noted above, to develop a niche of content, and to become the producers of that content. This is an important observation. Why do I suggest they were ‘forced’ to become content producers? Certainly it wasn’t done at the pointed end of a knife.
On the one hand there were the realities of the differences between the different consumption paradigms. Television was particularly suited to, for example, news broadcasting (and required to provide it via government legislation) in ways that cinema was not. Similarly the concept of short drama programming (30 minutes) on an episodic basis was also more suited to TV. The subscription model, as previously explored made niche viewing profitable. Someone had to make these new content formats. And also, beyond these logistics it is simply basic business strategy that you just aren’t going to give up such a fundamental part of your leverage.
If content is King, and it is, and if distribution is King Kong, which it is. Which do you want?
The answer is both. And that meant that the opportunities afforded by the new content formats needed to be grabbed and controlled. And they were. There are, as we all know, production companies that make content but that don’t own or control infrastructure. But there are no companies, so far in this tale, that own the critical infrastructure but that do not also make content. If the opportunity to play in both hemispheres of your market is offered only a fool would decline.
This leads us to the big thing that is different with the internet.
It all comes down to one simple fact, which is this. The new technical infrastructure is not unique to the entertainment content industry. The new infrastructure has subsumed the entertainment industry, and pretty much everything else, by reducing it all to information, or more accurately perhaps, data – the lingua franca of the network. The management of this data is not in the sole preserve of the companies that make entertainment content simply because the movement and management of data, via the internet, is a much bigger enterprise than the entertainment industries are.
More specifically the new infrastructure doesn’t explicitly need to monetise entertainment content, and therefore doesn’t need to become a content producer. For the first time in this saga this pits the new world against the old world in a real fight, although not a terribly fair one if truth be known.
The new world is best characterised by 4 companies representing industrial business groupings that, seemingly, hold the future to monetising the internet. These companies are exemplars rather than exclusive players (also these categories are somewhat porous, and getting more so, particularly with regard to these specific businesses).
- Search – Google
- Retail – Amazon
- Social – Facebook
- Hardware/Software – Apple
I said I would explain why user generated content was relevant to this exploration of the business mechanics of the entertainment content industry. Here we go.
The fact is that we can now all produce hoards of ‘stuff’ across almost any content category you care to mention, as amateurs or would be auteurs. Writing, music and filmmaking are all now within the grasp of a huge common mass. Moreover functional access to both production and distribution is also within easy reach.
This ability to create content, both meaningfully and trivially, and (more critically) to have access to the infrastructure that can, for minimal effort, distribute it, is not a direct challenge to the content produced by the incumbent professionals. Even though it is quite possible to spend an hour or so lost on Youtube, and whereas there is much non-infringing video content online this dearth of legitimate user generated content, as a competitor for your time, is not the reason why big content is so unhappy with it (or rather the technology that enables it).
What it does is fill up the social networks, it gives you something to do with twitter and it makes a field of content so vast and so varied that you need Google to find your way around it. It is part of the reason why people trade their personal data for access to their ‘free’ digital tools, Facebook, Google, Twitter etc.
In short, it is a significant part of what drives the businesses of the new owners of the modern communications industrial infrastructure (as defined in this series of essays), the big 4. Without this explosion of freely created content the big 4 would, simply, be less powerful and less transformative.
As if that wasn’t destructive enough, incumbent big content has to contend with another model destroying conundrum. This is where the conflict becomes quite visceral. On the one hand we have the position that easy distribution and communication (and lets be honest, simple copying) builds creative markets (consider fashion, without copying there can be no fashionable trend), yet on the other hand we have the position that copying and distributing content deprives the true creators of their due rewards.
Both sides of the argument are somewhat correct. Paradoxical truths are, of course, very good harbingers of paradigm shifts. The internet is the classical, the most powerful, disintermediation tool we have ever created and big content is the classical mediator. As such it is facing catastrophic change. One such big change will be to realign who the ‘true creators’ are, in terms of who gets the rewards.
Whereas previous changes have produced new industry entrants, defined by the infrastructure they control, which have fairly quickly managed to align their interests (as a business group, not necessarily as individual companies) with the incumbent business lobbies, this time things are very different. There is no alignment, at least none that is obvious so far, and just as significantly these new power groups are also massively dominated by individual companies (more easily focused) that have very quickly become huge on a global scale.
This dynamic is demonstrated best by a cursory look at what happened last year with 3 pieces of legislation, SOPA, PIPA and ACTA. All of these were sponsored by the incumbent content industries via powerful, paid for governmental allies (senators and congressmen) that they had been building relationships with over the years, for exactly these kinds of situations, to get legislation passed that protects their interests. There is nothing controversial about this, we all are aware that this is how the system works.
This massive lobbying failed, and it failed in large part because much of the new world business grouping lined up against it. The reason being that these legislative approaches would quite simply have been highly detrimental to their businesses models, and regardless of the political manoeuvring of the hefty and not to be disregarded power of the RIAA and the MPAA, the new entrant’s business models proved to be more important.
However unfair this might be we simply cannot afford to break computing. But if we don’t then the business models of the existing entertainment content industry become untenable. The incumbents haven’t given up yet, but they really should, they cannot win.
None of this helps us with the problem of paying for the production of content. This is one of those immutable things not affected by your position on the piracy good/bad spectrum, the production of content costs money.
So, who is going to pay? I’m going to have a go at answering that question in the third and last essay in this series by looking at how the big 4 companies are positioning themselves with regard to the content industries.