Crystal Ball for Studio Execs or WWJD?

My dad and I had a long conversation over lunch today (at In-N-Out 🙂 ) about my most recent blog post. He mentioned that the studios are keeping a close eye on what is happening in the music industry as a preview of their own potential future 5 years down the road, and that they are taking preventative measures based on what they see. I replied with two reasons why I don’t think that’s something to brag about. First of all, that 5 years is more like 2 years (if that) and it’s shrinking every day. The pace of technological progress has only accelerated since it first began to disrupt the music industry, and it ain’t slowing down. Secondly, the film industry’s approach to understanding the data has been merely to plot historical events and interpolate a trajectory. They have made no attempt to understand the underlying equation and thus extrapolate the end-result. In high-school trigonometry terms, they are plotting points on the left half of a parabola without understanding that they are part of the graph of y=x^2. How do I know this? Because you can see it in their actions, they are clearly trying to treat a growing number of symptoms with no clue about the nature of the underlying disease.

My dad agreed with me and then said there’s a lot of money to be made by the guy who can show them what the future really holds. Being the giving person that I am, I hereby offer it to them free of charge (and with charts, no less!):

Audience Graph
First of all, your audience is moving from conventional offline distribution channels to new online ones. You may think you have the control to slow this, but you don’t! At this point, you must consider it *axiomatic* that every genie will get out of every bottle. There are over a billion people on the Internet, and it just takes one to put your content on BitTorrent and all your anti-piracy efforts are rendered moot. Content consumption is moving from offline to online whether you like it or not. So, you have a choice: get on-board by giving consumers what they want and keep some of them as customers, or drive them away entirely by ignoring their needs. If you choose the latter, you probably won’t ever be able to win those lost customers back. And even if you choose the former, you will most likely never be able to aggregate the same size audience for a given piece of mass-market content online as you could offline. Mainstream media (or ‘head’) content is a first-class citizen offline, where there is artificial scarcity and so being first in line counts for something. But, there is an (effectively infinite) abundance of content online and what matters most is finding what is most interesting to me.

ARPU Graph
That’s the bad news. Here’s the good news, by moving online you can build deeper relationships with that smaller audience and explore variable pricing options to increase the average value of each individual fan (again I reference Josh Freese, who illustrates this point not without irony). However in order to fully engage your most passionate fans and get them to give you more money, you can’t continue to just sit back and pump out passive entertainment experiences with some snazzy marketing around it. You will need to invest in turning your content into 360° entertainment and change your mentality about selling it as a packaged good.

Cost Graph
Yes, I know that sounds expensive. It definitely won’t be cheap and will require you to build out new competencies you don’t have today. But you’ll be able to pay for it (and then some) with all the money you save by getting out of the very expensive mass-market content and offline distribution businesses.

So if you’re willing to become an online-first media company, I think I can promise you’ll return to profitability in 5-10 years depending on how quickly you move to jettison your legacy offline businesses. Now, your shareholders may not be so keen on all these restructuring costs and write-downs, not to mention all the money you’re going to be leaving on the offline distribution table by focusing on getting into the online business while you still can. But, that’s ok because they value the long-term survival of the company over short-term profits. Right? </sarcasm>

Mass-market content and offline distribution are declining businesses, but they are still quite profitable. Especially compared to niche content and online distribution, which are clearly ascendent but still a rounding error to the bottom-line of these major media companies (not to mention the corporations that own them). I believe the decline of the former is going to be a lot quicker than the entertainment industry thinks (because they believe they can control it and they don’t understand the exponential acceleration of technological progress) while the rise of the latter will be retarded by a lack of investment in developing the infrastructure to make it a profitable business. The film industry obsessively spends hundreds of millions of dollars to build the biggest anti-piracy stick they can while watering the online video carrot with an eyedropper. If they were to put meaningful time and money into figuring out how to make legal online content consumption compelling and profitable, it would be more effective than spending a hundred times that on anti-piracy efforts. But they won’t, instead they will continue to do everything they can to prop up dying (but profitable) revenue streams, including stifling the growth of the emerging revenue streams that could one day take their place. And so, the studios will some day (soon) find themselves with not enough offline money and not enough online audience from which to try to make money.

If I were the head of a studio, I would stop trying to figure out how to grow the buggy whip business by keeping down the automobile. I would also recognize that transforming my profitable if shrinking buggy whip business into a money-losing automobile business making it up in volume is probably not in the best economic interest of my shareholders. So instead of throwing good money after bad trying to keep the overall buggy whip market from shrinking, I would focus on getting as much share as possible while all my competitors spent their time futilely worrying about the cars. I would ruthlessly cut costs to maintain profitability in the face of shrinking demand. And, I would put all those profits into a dividend so my shareholders would stop pressuring me for growth that isn’t there. Finally, when it’s time to close my buggy whip factory’s doors, I would take all that dividend money I earned and put it into the best automobile company I could find (and then I would be sure to sell that ~80 years later 😉 ).

Reblog this post [with Zemanta]