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From analog dollars to digital pennies: The crisis in traditional media

How the core competencies of distribution-focused media companies are different than digital media websites
In this blog post, I’m going to discuss some random thoughts on about the evolution of media – I’ve recently been inspired by the conversations going on about the difficulties of transitioning from traditional media to the digital world. I thought I’d write down a couple notes on the media landscape and the idea that the skillsets of “pipes” companies – businesses that thrive on dominating distribution – are at a fundamental disadvantage relative to web businesses that promote interactive experiences.

Let’s get started with a rather famous person these days…

Miley Cyrus dominates because Disney dominates distribution (but for how long?)
For those that don’t follow the celebrity gossip blog as closely as I do, the girl above (who was born in 1992, which makes me feel old), is Miley Cyrus aka Hannah Montana. The Wikipedia article on her states:

Miley Ray Cyrus is an American child actress, singer, and songwriter. She is known for starring as Miley Stewart, “Hannah Montana” on the Disney Channel series Hannah Montana.

Cyrus became an overnight sensation after Hannah Montana debuted in March 2006.

Following the success of the show, in October 2006, a soundtrack CD was released in which she sang eight songs from the show. In December 2007, she was ranked #17 in the list of Forbes Top twenty earners under 25 with an annual earning of US$3.5 million.

What do Miley Cyrus, Britney Spears, Justin Timberlake, Christina Aguilera, Shia LaBeouf, Hillary Duff, Keri Russell, and the cast of High School Musical have in common? I mean, other than having ridiculous “pop” careers? Well, they were all, at some point, part of the Disney marketing machine that takes in normal kids and spits out billion dollar franchises.

And when you want to understand how this marketing machine works, you have to look at how all-encompassing the Walt Disney Company really is – here are the companies that all fall under the Disney umbrella:

ABC, ABC Family, ABC Kids, Walt Disney Distribution, Walt Disney Motion Pictures Group, Disney Channel, ESPN, Jetix, Walt Disney Studios, Walt Disney Parks and Resorts, Walt Disney Television Animation, Walt Disney Records, Walt Disney Pictures, Touchstone Pictures, Miramax Films, ABC Studios, Playhouse Disney, Disney Consumer Products, Pixar, Soapnet, Disney Interactive Studios, Muppets Holding Company, Disney Store, Toon DisneyNew Horizon Interactive, Hollywood Records

And with 137,000 employees and >$35B in yearly revenue – well, if you want to make a little girl like Miley Cyrus famous, turns out you can!

Media consolidation and vertical integration go hand in hand
The point is, Disney and the many companies that would be considered its peers (Viacom, Fox, Sony, Vivendi, and the like) own the entire value chain from start to end in traditional media. In the “content is king” model, the focus is on producing content, but then owning the marketing, the distribution, and everything in between.

Does it surprise you that Time Warner both makes movies, and publications that promote movies, as well as a cable company that can distribute them on-demand? Or that one of the driving forces for Rupert Murdoch to buy MySpace was to use it to promote its movies, as discussed in this informative article in Hollywood Reporter? The saying, “content is king” means that when you’re the only game in town, you’re able to use your considerable cross-channel leverage to boost whatever you want and make it popular.

The problem is, where does that leave the customer?

If media companies are ultimately “pipes” companies – ones that primarily focus on distribution – what is their incentive to serve the consumer? I think that in the tech world, when we’ve seen this happen with Microsoft when it achieved superior distribution leverage relative to all its competitors. It creates perverse incentives to to try to squeeze whatever you can out of consumers, rather than innovating new products to serve them. And I’d argue that a lot of what we see in the entertainment industry – endless sequels, manufactured pop bands, child-actor-to-paparazzi-bait actresses – are all indicators that this is already happening. Why take content risk when you can just out-distribute and out-promote whatever you want?

Is the Mummy 3 the entertainment equivalent of Windows Vista? (I guess I shouldn’t be too harsh, after all the movie hasn’t released and I haven’t seen it yet – maybe it will be good!)

How vertical integration weakens with the internet
Of course, this vertical integration strategy starts to fall apart when you’re talking about digital content on the internet. The reason is that it’s hard to dominate it in the way that you can dominate offline distribution. It’s hard to be the only game in town. When the game is to own cable wiring, satellites, movie theaters, radio towers, and all that jazz, then the big guys have a natural advantage – scale is rewarded, and the bigger you are, the easier it is to own a bunch of infrastructure and operate it efficiently.

But on the internet:

  • Anyone can set up a website
  • It’s easy to copy, pirate, and otherwise separate your content from your distribution mechanisms
  • With the advent of UGC, the engagement around media is also being captured off branded media sites as well
  • Passionate vertical web communities are more engaged and can serve their specific audience better
  • … and any entrepreneur with a couple hundred grand might end up with a website bigger than anything the old-school media companies can put together

So if you assume, at runrate, that any media you release will quickly (and virally) spread itself across the world, with or without your approval, and that people are likely to watch it at destinations you don’t own, then the traditional model starts to break. Things that you don’t expect to take off suddenly do, and the well-orchestrated launch of a “official” website for content might fall flat on its face. The problem is that the traditional source of power for media companies, the vertically integrated apparatus of content, marketing, and distribution becomes broken up into little pieces on the internet.

To this, I make the observation:

With the distribution efficiency of the internet, it becomes harder to control your consumers, and that’s a good thing :-)

So let’s talk about what companies might succeed in this new world…

The core competencies needed to succeed in digital media
If content becomes increasingly commoditized, and fragmented among many distribution vehicles, then what happens next? I’d argue that the new skills required to succeed in this era are NOT:

  • Understanding how to best own/operate pipes, like cable systems, satellites, radio towers, etc
  • Strong-arming partners and distribution to lock content into place
  • Finding media synergies to cross-promote content and “make” hits

Instead, I’d argue that the new skillsets will be around serving the consumer, not pushing them. This means that media companies will need to grok:

  • The economics of syndication and monetizing content off of “branded” media destinations
  • Search, browse, and other aggregations of media content
  • Personalization, recommendation, and social filtering

Will the traditional media companies make the leap? Or will they retreat into content, letting new players own the distribution layer? That seems to be what’s happening with YouTube, iTunes, and other strong players in the digital distribution world. The jump from controlling consumers versus serving them may be too big for these companies to make, but only time will tell.

Suggestions and comments welcome!

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