The Content Wars — Episode 2: New Empires?

Change drives opportunity

Where’s there’s change, there’s opportunity

- Jack Welch

Consumers are ultimately content driven. The more unique the content and the more targeted the content to their interests, the higher the likelihood of them spending time and money on that distributor of content. The Internet has driven a lot of change by it’s very nature while at the same time offering opportunities for startups and organizations to leverage that change and create businesses via disintermediation. In the content (news, music, movies) business, this has created a potential disaster for existing content distributors while at the same time offering the opportunity for new models of satisfying consumer needs.

Branding matters

I never learned to cook, but I can write a hook

— Meghan Trainor

Newspapers performed the function of a distributor of content for decades but the advent of the Internet removed a lot of barriers of distribution. Hence we, as consumers have the ability to source easily and directly per our interests, all the various pieces of content that a newspaper aggregated and distributed. That mostly explains the hole that newspapers are in now. Newspapers have been struggling with the consequences of unbundling over the past several years. Music companies are facing some similar challenges with Spotify, iTunes and SoundCloud. The advantage that music distributors and creators do have is that the barrier to entry in music is much more as compared to the written word for the obvious reason that it is a lot more difficult to write, arrange and carry a tune (hence the above quote) as opposed to a so-called expert spouting off on things that they know little to nothing about. The music market is still evolving because as opposed to the written word because the individual creators (Taylor Swift, Meghan Trainor, Beyonce, JayZ etc.) are the brand and the quality of the content is mostly indisputable.

A lot has been written about unbundling especially in the context of cable TV. The cable TV industry has begun to respond to this change along with outsiders like SlingTV, PlayStation and others announcing disruptive plans and incumbents like AT&T announcing innovative options. But at the end of the day, the innovators (apart from AT&T) are not distributors i.e. they don’t control the last mile. And therein lies the opportunity.

Stepping back a bit, it is interesting to note that the current and possible future challengers — Amazon, Google, Netflix and Facebook are different in that they all took a distribution first approach — Netflix was a pioneer in the distribution space for movies, Amazon for physical products, Google for information and Facebook for curiosity about your friends’ personal lives. But all were geared around gathering as much information as possible about us as individuals.

Coming back to the media aspect of the post, Netflix was the first to establish themselves as the media conduit to individual homes. We all remember when Queues were (and still are) a thing and we were happy to rate movies that we watched. This, I would argue was Netflix’s hack to create a direct conduit to people’s homes. DVD queues gave Netflix a view into our preferences. When this was followed up by their announcement of direct streaming of movies in 2007, it was not a great stretch for us to sign up to that (as well or as a replacement) and that allowed them to gather much more detailed data. All this while media companies and other producers of content still relied on aggregate data and they, perhaps did not quite see the value of the data they had or did not know exactly how to capitalize on it without making major changes to the way they did business.

Once the conduit was established (Netflix through its DVD and streaming offerings, Amazon through Prime (and recently Twitch), and Google through YouTube), each of those players began the process of unbundling i.e. creating and/or allowing targeting of content to the individual consumer interests based on the data that they had on an individual level. In the media world, Netflix was the pioneer.

Mass customization

Luxury is in each detail

— Hubert de Givenchy

What Netflix did differently, was to understand the value of data and its implications on personalization of its service to its consumers at a detailed level. In 2012, five years after its announcement of the move into streaming, Netflix described this detail in its blog post on improved recommendations and I quote -

Streaming has not only changed the way our members interact with the service, but also the type of data available to use in our algorithms. For DVDs our goal is to help people fill their queue with titles to receive in the mail over the coming days and weeks; selection is distant in time from viewing, people select carefully because exchanging a DVD for another takes more than a day, and we get no feedback during viewing. For streaming members are looking for something great to watch right now; they can sample a few videos before settling on one, they can consume several in one session, and we can observe viewing statistics such as whether a video was watched fully or only partially.

In other words, they were able to refine preferences quickly leveraging a larger store of titles and viewing patterns. They expanded that later to also have profiles for each user in a household. In essence, what Netflix was now able to do was to get the holy grail of marketing data — individual preferences. We all have our preferences that can be described by some combination of “tags”— comedy, scifi, action, romantic comedy and many more. Netflix now had that detail at a household and individual level across millions of households globally.

This distribution hack allowed them to obviate the need for panel data i.e. the Nielsen and other panel data that organizations pay for to understand aggregate market preferences. Netflix could now understand preferences directly on a per individual basis. It could capture that data and tailor the viewing experience with appropriate recommendations. Is it too much of a surprise that they would shortly also create content to address each of those niches that it could see weren’t well served? Those niches wouldn’t show up as large $100 million openings in the traditional Hollywood analysis but were a significant market in and of themselves i.e. the long tail.

Similarly, Amazon’s ecommerce business is the embodiment of the long tail. So it is not very surprising that Amazon Video was born. While they didn’t have a lot of the detailed data on viewing that Netflix had, it had proxy data through the sales of DVDs and associated reviews not to mention the raw data they have through their acquisition of IMDB. I’m not entirely sure why Amazon Video does not have the feedback / rating that Netflix offers but I guess there might be some patents involved.

The evolution of YouTube has been an interesting progression to watch but it is now the de-facto channel for content produced by and for niches. Production values might not be as great as the professionally produced ones on Netflix although that is changing and will continue to improve as YouTube Red comes into its own. Similarly TwitchTV (now part of Amazon) and YouTube’s gaming channels cater to a different and highly profitable niche. An example of the value of a niche in the gaming world is easily illustrated by Geek and Sundry’s Twitch channel, which has had most of its success thanks to a live stream of D&D called Critical Role. In about 2 years, they’ve grown to about 35,000 paying subscribers each paying $5 per month or $2,000,000 per year!

In any case, the two capabilities I described earlier — a conduit to homes and a knowledge of the preferences of each member of the household allows Netflix and increasingly Amazon and Google to broadcast to niches at minimal extra cost. That in essence is the Long Tail theory i.e. as long as distribution costs are a non-issue, niches can be very profitable.

This post has hopefully clarified who the major players are and the distribution, brand and data advantages they have. The next post will focus on incumbent responses and other possible players in this evolving market.