Media and Entertainment – Revenue vs Cost

“Old-media guys are always asking, ‘When will revenues rise to meet our cost structure?’ The answer, I say, is when hell freezes over.”

 – Clay Shirky, author, Here Comes Everybody: The Power of Organizing Without Organizations

This quotation appeared in an article by Michael Wolff published last year in Vanity Fair. The article, on internet predictions, touched on how advertising rates are often 10% of what you might get from TV or print. Studio executives are waiting nervously for the time when Blu-ray and digital sales will make up for the increasingly lean profits from DVDs. But perhaps this just won’t happen. What then for the sector?

Last week, Zeitgeist was privileged to hear from Marc Ventresca, lecturer in Strategic Management at Oxford University’s MBA program at Saïd Business School. Where supply meets demand, price emerges, hence the market dictates the price. The economist Schumpeter, though, posited the issue of “disequilibrium”. The key question then being not “how capitalism administers exisiting structures, … [but] how it creates and destroys them.”

What does creative destruction – of which Alan Greenspan was a key exponent – mean then for the media and entertainment sector? No one seems to be daring to look this far into the future currently and guess how we re-combine, re-purpose and reposition the sector. Is the answer to be found in Sony’s new Blue Violet format, or is something more radical needed? Also in the works from the same company is “Ultraviolet”, an aggregate service that “will help identify content, devices and services from a spectrum of familiar entities – including studios, retailers, consumer electronics manufacturers, cable companies, ISPs and other service providers – that will work together”. Something of this nature might reduce regulatory arbitrage, as well as consumer confusion. As Mr. Ventresca pointed out last week after the lecture, it is the platform that is now of paramount importance for consumers, even over the content itself.

Defining “Free”

From the October Zeitgeist…

Jean Baudrillard argues in his postmodern way that we live in a society devoid of absolutes. But what happens to an industry when values become arbitrary? Economic rationale suggests people would choose free as a price model. In a digital landscape, industries now find themselves trying to sell product the consumer expects to be free.

Napster and its revolutionary myrmidons made music freely available to users, with no barriers to entry. For music labels, this has led to a ‘tragedy of the commons’. When everyone has access to a commons – be it a park, or a lake for fishing – the economically rational thing to do is to maximise our own gain. The rest of the community suffers, ruining the parks; depleting the fish. This is ‘overgrazing’. The FT wrote recently on Elinor Ostrom’s winning of the Nobel Prize for Economics for her criticism “of the presumption that common property governance necessarily implies a ‘tragedy’”. Ostrom believes “regulations ought to be thought of as ‘experiments’” as their consequences are “hard to foresee”. Concerns over privacy and security clashing with a desire for increasingly tailored and relevant messaging represent such a challenge.

What does free mean today? Daniel McFadden, the 2000 Nobel Prize winner for Economics wrote, “The solutions that resolve the problem of the digital commons are likely to be ingenious ways to collect money from consumers with little noticeable pain… Just don’t expect it to be free.” Yet users currently live in a world where music, movies, books and access to social networks are all free. Malcolm Gladwell in The New Yorker reviews Chris Anderson’s “Free: The Future of a Radical Price”, which says it is futile “in the digital realm… to keep Free at bay with laws and locks”. He suggests musicians earn money through promotions such as apparel and gigs, giving their [subsidised] music away gratis. “There is a huge difference between cheap and free”, Anderson writes, playing on the notion, and advantages of, sampling. At a festival, a band’s music might be freely available for a ticket payer to sample and keep. Married with Radiohead’s ‘pay‐what‐you‐want’ model, it might encourage loyalty to both festival and band.

If product and distribution is free, why should we pay for it? The technical cost of intellectual property is zero, and Gladwell admits the “cost of the building blocks of all electronic activity… is now approaching zero”. YouTube is a classic example of why. Rampant video uploading is not only a “tragedy of the commons”, it reveals hidden infrastructure costs: “YouTube will lose close to half a billion dollars this year”, Gladwell notes.

Is there is a rising tide of recidivism? To encourage respect for IP, companies are once again creating scarcity, where none technically exists. Hulu, the FT, Wall Street Journal, The Economist and Twitter are all seeking remuneration models. So what does this mean for those who make and sell products to the masses? In truth, “Free” will probably forever remain as one of several possible operating models. Zeitgeist recently challenged the leader of the UK Pirate Party, Andrew Robinson, about whether all IP should be free, and even he conceded that a variety of payment models – including free – was the only viable route.