The Consumer is King - Not Content After All!

By Eleanor Haas

A decade ago, the cry was “Content is King” as we tried to make sense of digital  technologies that were changing everything about how we received and used information, did business and related to one another.

Now technology has not only enabled new kinds of media unimaginable even ten years ago but has empowered consumers in ways that enable them to control the information they receive, once the exclusive province of publishers. Most serious of all, technology has transformed so much so fast that today’s adults are no longer competent to forecast what happens next. As Strauss Zelnick, founder, ZelnickMedia, pointed out at yesterday’s digital breakfast, our media habits today are those we formed by the time we were 16.  Look to the 16-year-olds for what’s cool and try to understand how they use and experience media.

Listening to media business leaders discuss the future of digital entertainment – and digital “entertainment” now encompasses all digital “content,” another startling convergence – right after reading Chris Anderson’s piece on “Free!” as the future of business models throws light across the full spectrum of the media universe and related business models. The business leaders spoke at a GothamMediaVentures event sponsored by Frankfurt Kurnit Klein & Selz. They were Ellie Hirschhorn, Chief Digital Officer, Simon & Schuster; Andrew Lack, Chairman, Sony BMG Music Entertainment, and Strauss Zelnick. Richard Hofstetter, a Frankfurt Kurnit partner, drive the discussion with probing questions.

Digital Business Models

Hofstetter described the digital platform as a source of new opportunities for monetizing consumer relationships and for bringing customers to media brands – i.e., supporting the traditional entertainment business model of advertising, subscription and pay-per-view or pay-to-use. This is certainly true. In many ways we are, in Zelnick’s words, moving increasingly away from a paying economy to an advertising economy. But that is only part of the story.

Anderson takes the story to another level, talking about radical new business models enabled by low-cost digital distribution, such as free video content online while theaters make money from concessions and sales of a premium movie-going experience. Google is free to consumers, he says – and generates revenue from advertisers who want to reach those consumers.

“Technology is giving companies greater flexibility in how broadly they can define their markets, allowing them more freedom to give away products or services to one set of customers while selling to another set,” he writes, adding that “anything that touches digital networks quickly feels the effect of falling costs.” Web technology is all about scale, he explains, and transistors, which he calls “the atomic units of computation,” are now close enough to costless that storage, bandwidth and processing power are being offered free by companies like YouTube and Google, and IT developers can afford to focus on delighting computer users, not just on running algorithms efficiently. As a result, we have increasingly sophisticated user interfaces, new forms of digital entertainment and a flood of new ways to make “free” part of business models.

The New Economics of “Free”

Attention and reputation are the new scarcities, not money, writes Anderson, and it’s to acquire these that “free” exists for the sake of a business model. It’s a seismic shift in our values as society.

Anderson clusters variations on the theme in six categories:

• “Freemium” – the subscription model – a free basic version,      supported by premium versions with more features.
• Ad-supported – free content, services, software, etc., paid for online by ad banners, text ads, affiliate ads, site sponsorships, search results inclusions, paid listings, lead generation, product placements and paid personal connections on social networks.
• Cross-subsidies – giving away one product (razor) in order to sell another (blades).
• Zero marginal cost – a de facto business model: the product becomes free because distribution costs nothing. Example: online music.
• Labor exchange – the user creates value for the publisher by supplying information and gets free access to Web sites and services.
• Gift economy – beyond money to altruism and sharing now that zero-cost distribution makes this economically viable – Wikipedia, open source software and UGC, for example.

New Business Models for Digital Music

Looking back, Zelnick says “we (the record industry) drove people to piracy.” How? By not having the technology to support peer-to-peer sharing except for free and by so fearing what had happened to the film industry with VCR rentals – retailers made money but not film studios – that the music industry would not allow retailers to make money with digital music.

Anderson’s point about cost-free distribution supports this. Consumers saw what was possible and acted on it. The record industry lacked the access software and the strategy to take action.

Now new business models have emerged that make online music economically viable with multiple revenue streams, including two of

Anderson

’s categories: ad-supported and paid premium subscriptions.

· Entertainment content download sales are booming at both iTunes and Napster.

· MySpace Music, announced less than a week ago, is a joint venture of MySpace with the big labels: Sony BMG Music Entertainment, Universal Music Group and Warner Music Group. For the first time, the most popular digital music community, My Space, is in partnership with leading music companies for purposes of marketing music content in a way that legitimizes downloads and generates multiple revenue streams. This represents a sea change from iTunes because it helps music titles bubble up in peer-to-peer interactions as opposed to being pushed down by large companies’ choice of materials. (The success of the joint venture will depend to some degree on the autonomy granted to partners who are otherwise competitors.)

· Device manufacturers are taking an “all you can eat” approach, loading devices with music so that consumers buy the music with the device.

 

Radiohead and other alternative bands left their record labels, released new albums on their own Web sites and invited downloads for free or whatever consumers wanted to pay. But by then they were already established and could use tours and other vehicles to generate revenue. (Anderson’s cross-subsidy model.)

The value record companies and movie studios deliver is discovering and establishing new artists, who need nurturing and a company behind them even if they no longer need the old distribution of traditional media.

Film Business Continues as Before

New films continue to be distributed and marketed in the traditional manner, and the studios continue to provide the financing. The business has not yet been disrupted because the Internet pipe isn’t fat enough for downloading movies.

Book Publishing has Yet to Adapt

Music, video and social media have been the first three waves of the digital content revolution, which the book publishing industry has sat out, according to Hirschhorn. Storytelling is still in demand, and people still read books. Opportunities are evolving for e-delivery and integrated e-commerce that can provide a rich media reading experience, but it’s early days.

Authors are assets as well as books. Like musicians, they have fan bases. Opportunities exist for them to connect with consumers, build personal brands and franchise and have a voice beyond their books.

What’s different from some digital entertainment businesses is that the book business is not in the ad sales business, looking to build audiences. Publishers want their authors out there broadly, leveraging syndication.

How Do Story-Tellers Get Paid?

One way storytellers get paid is apparently by developing online games.  Zelnick mentioned a new interactive game that contains eight hours of narrative!

Beyond this, however, how they get paid seems to be the $64,000 question. Technology business plans are clear. But content companies are under pressure. The middleman/distributor is in competition with the creative force. TV viewers zap commercials, and networks now give away content for free at sites like Hulu – online streaming video on demand, free snippets of programs. Creators are getting into their own businesses but have to rely on agents and lawyers to fight for the right to do their own exploitation. Will advertisers buy this? Yes, says Lack, advertisers will follow if consumers buy in.

It’s all about what consumers want. And that, in turn, is determined by our habits at 16!

New Directions for News.

TV news has begun cutting news-gathering costs, looking to outside sources. Yesterday, CBS was reported to be in talks with CNN about outsourcing some of its reporting operations. (Whoever thought the heart of the news business would ever be outsourced?)

In addition, citizen journalism has become a reality. CNN introduced ‘iReport” a year ago, soliciting UGC for consideration by CNN editors. Now ireport.com offers unvetted online content from users and bloggers. What happens to credibility with citizen journalism?

Lack characterized blogging aptly: “Blogging is part of grassroots bubble up content – some news, a lot of opinion and junk – a platform trying to find its place.” But, he added, it should not dominate serious news gathering. a lot of established companies have too much baggage for the digital age, he continued. The high cost of their infrastructure is challenged by digital media and will be replaced by some of these, including blogs.

But there’s no need to get news from an existing company. Social networks are rapidly becoming an alternative. Are they being overvalued? Zelnick’s answer to this is a good one: “News Corp. paid $580 million for MySpace and got a good buy – even though the valuation is too high.” Why? Because of the enormous growth potential of interactive entertainment, based in part on the same model as the traditional movie business: give consumers what they want and grow with the demographics.

And the reason for this is what might be termed the new economics of consumer control.  Social networks add a measure of consumer control that has never before existed.  Content bubbles up in peer-to0peer interactions instead of being pushed down by large companies.  Being incontrol transforms the value proposition for consumers.

What’s Next?

 

The next business to be disrupted will be television, and it will be an ugly transition, predicts Lack, but this will take longer than we think – as did the battle between videotape and 35-mm. film, which took decades.

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