The Digital Media Layer Cake
D.A. Wallach

The Media Industry is About Demand, Substitutes and Controlling Access.

Just like all businesses

Any business model you can think of can be boiled down to getting paid to provide access to some good or service. Whether it’s my daughter buying Slurpees at Mulberry’s (our town store), my parents still subscribing to the print edition of the New York Times or the advertisers who are paying to get me to watch an ad in the Super Bowl, commerce is about buying and selling access to something or someone.

Often in analyses of the media/industrial complex, false distinctions are drawn between content and distribution. Yes, there are people and companies who create stories, music, movies, TV, plays, games, etc. And yes, there are other people and companies who distribute such content to other entities or end users. But no dollars have ever changed hands without the ability to control access to that content. Whether I am a solo musician, HBO, Comcast, Apple or Google, I’m getting paid based on a) the demand for my songs, TV shows, internet access, iPhones or search audience and b) my ability to control access to such things.

Take the market for high end art for example. In April 2011, George Embiricos sold Cézanne’s The Card Players to the State of Qatar for $273M. Why? Because for whatever reason the art world has determined this painting to be important, and it’s value is in the object itself — it can’t be copied. There is only one, and it would be incredibly difficult/impossible to counterfeit a painting as famous as this. Demand curves are high, and access is easy to control, so this market has not been subject to disruption, other than from general economic conditions.

But this digital representation is financially worthless (from wikipedia).

If demand drops or a company or industry loses control of access to its product (as happened in music with digital file sharing and is sort of happening in the movie industry), then the ability of that company or industry to capture economic rents is seriously impaired.

Interestingly, this doesn’t mean such economic rents dissipate into thin air — in many cases they just go somewhere else in the digital media layer cake. It’s not surprising that Apple is the most valuable company in the world, given they’ve shown an amazing ability to capture the economic rents not just from other consumer electronics players, but content businesses as well; the argument has been made that basically all of the profits the music industry lost around Napster essentially were transferred to Apple, mostly via iPod sales. Similarly, the growth in free content and application choices on the internet have made it very difficult for publishers to charge users directly for their services, but collectively have created a steadily increasing demand for internet access, being captured nicely by the cable and wireless industry and (here they are again) Apple, as we can see in steadily increasing cable and cellphone bills and lines around the corner to buy the new iPhone 6.

Ad supported business models really aren’t any different. Google, Facebook and Twitter are able to deliver perceived value to their customers and effectively control access to that value. I learned this powerfully the other day when we looked at buying “blog” as a Google keyword. It cost $6.25 per click. $6.25!! No wonder Google has money gushing out of the ground like an OPEC nation. (Maybe Google should have bought The Card Player). And I say “perceived value” deliberately, because it’s actually more important that a buyer believe a good or service has value than it is for that good or service to actually have value. Over the long term I suppose perceived and actual value should converge (but then I listen to Maroon 5 and wonder if that’s really true).

I think it’s this issue of perceived value and differentiation that led Bill Gates to say “content is king” in 1996. It’s been a highly misunderstood concept. What he was getting at, I think, is that controlling the rights (or access) to demonstrably high value content was a good business, vis-á-vis providing the distribution mechanism that gets that content to end users. But really, that equation differs quite a bit depending on the specific dynamics at play in a given market. ESPN commands a king’s ransom because it has made itself a requirement for any pay TV service — it’s essentially inextricable from distribution, such that every pay TV subscriber in the US pays about $6.50 to have access to ESPN, regardless of whether they ever tune in. Whereas HBO is very different — it has established a gold-plated brand via demonstrably high value content and has perhaps paid a market penalty by its subscribers having to get digital cable first — (“buy-through” in industry parlance) in order to subscribe to HBO. (I’m sure Comcast et al. would argue with some merit that they do a lot to market HBO.)

[Digression: Observers have made a big deal about HBO deciding to sell direct to end users, but that isn’t really surprising or that impactful. It isn’t part of the cable bundle. I think it’s strategically much more significant that CBS is offering CBS All Access as an OTT streaming service. Yes, it’s been somewhat declawed, with no NFL games, local TV only in 14 markets and 1 day delay in primetime shows outside of those 14 cities. Still, HBO is not part of the bundle, and CBS is. It will be interesting to see if other “bundled” networks follow suit and how cable responds. I still think they are ultimately in good shape — even if cable TV as we know it crumbles, they can charge more for internet access. I wouldn’t want to be DIRECTV though.]

Thinking about all of the strategic dynamics of big media and technology is endlessly fascinating, but perhaps we’re missing something. It’s become a cliché, but it’s certainly true that it’s never been easier or cheaper to create digital content of whatever type. To date, as I mentioned, the economic rents from all of these Lilliputians is flowing into the Brobdignagian coffers of big ISPs and hardware providers, but does that always have to be true? I’ve been thinking a lot about crowd-funding platforms like Kickstarter, Indigogo and Patreon and their impact on content creation of all sorts. Basically, what they are doing is pushing the access control upstream, all the way to before the content is created. You want me to make my music, my publication, my movie? Then pay me first. If there is demand to fund a project at a level set by the content creator, then the project moves ahead. Right now this is happening with small scale producers, but why couldn’t that model extend up to better known content creators?

We’re seeing a hybrid of this in the publishing industry. Andrew Sullivan, Jessica Lessin, Ezra Klein, Steven Levy, Nate Silver, soon to be Bill Simmons. I think it’s likely this trend will continue, and possibly you could see a name-brand writer crowdfund a project. How many donors/funders could David Brooks get? It could happen in music, movies, TV, etc. as well.

In this scenario of course there will be larger companies that supply products and services to the creator class, but the relationship would be inverted; content creators would become the customers of the large companies. You’d buy video serving just like you pay your electric bill.

I get this scenario is somewhat utopian and maybe unlikely. But it seems like something worth trying to make happen. I can’t take any more Maroon 5.