Media 2.0 Economics

ian c rogers

Presented at BarCamp LA

March, 2006

Media 2.0 Physics

orThe Blockbuster vs. The Snowball

or Why Running A Hit-Driven

Business Becomes Very Hard For Big Companies

orWhy Yahoo! Isn't In The

Content (Making) Business

orWhy Apple Isn't (Really) In

The Music Business

and Why DRM Sucks

andThe Next Five Years

(Or More) Are PURE CONSUMER

CONFUSION

Disclaimer

The following are my personal views, not necessarily the views of my employer (Yahoo!).

Also, I have no PowerPoint skills and even less free time so this is about content not presentation.  Sorry it's so

ugly.

The physics of the Media world are changing

From a world where attention is abundant and distribution channels are scarce

To a world where distribution is unlimited and attention is scarce

Media 1.0 vs. Media 2.0

• 1.0 is Blockbusters Larger and larger marketing dollars deliver the audience, spending more on quality delivers diminishing returns

• 2.0 is Snowballs Quality is hyperefficient, spending more on marketing delivers diminishing returns

Large Movie Studios and Major Record Labels are based on Media 1.0

Large up-front cash investmentson many different products for a diverse customer

base

leveraging centralized marketingand a stranglehold on distribution channels.

And Therefore Are Inefficient in a Media 2.0 World

Where distribution is trivial, unlimited, and available to all comers,

marketing to a captive audience is impossible,

returning to the same audience for each product is a requirement,

and creating "quality" content is paramount.

Digression: "Quality" is a Misnomer

Not "quality" in the Mozart ("intellectual") or Yngwie Malmsteen ("useless talent") way

"Quality" is really "Relevance" and is individual not absolute (“Tier 1 to me”)

In the future you will consume what entertains you most, not what is marketed to you most heavily.

Do the Record Labels Disappear?

Nope.

They become more important.

They just change their core competency.

Real A&R, Again.

As musician and producer Alan Elliot says,"A record label used to be able to look at a tree and

say, 'That would make a great table.'Now all they can do is take a finished table and sell it

at Wal-Mart.“

The record labels have to get back to taking raw materials and adding value to them. Real, old-

fashioned A&R.

Focus! Focus!

Also, focus on a core audience will be a huge advantage.

Successful labels have focus and return to a core, trusting, loyal, and ever-growing audience to sell

each new release.

When attention is scarce and distribution is unlimited it just isn't efficient to sell Josh Groban one day and Green Day the next. You don't get any scale out of

the network that is at your disposal this way.

Catalog Is Key

Jeff Ayeroff: "A record label without a catalog is like a speedboat with a hole in the bottom of it."

Antony and The Johnsons is catalog -- low risk initial investment, slow burn, great ROI over the long haul

Pussycat Dolls are not, 10 years from now their albums won't sell more than Spice Girls albums do

today -- high risk initial capital investment, fast burn, bad ROI over the long haul

The 10 failures you've never heard of that were meant to be this month's Pussycat Dolls -- large, high risk initial investment, no burn, no ROI (Pussycat Dolls'

success foots the bill)

Small Labels and Catalog Are Already Showing Growth

Independent music currently 27.5% of US market and is the only market segment that's

growing

Catalog 39% of CDs sold and growing

But What About Movies?

I know less about the movie business, but I am assuming the physics apply similarly.

Anecdote: Spielberg recently noted that for what it cost him to make Munich ($80M), he

could have made ALL FOUR of the other Oscar nominees for best picture. Quality appears to be becoming more efficient.

So, Is Content King?

No.

But great content is good business, and the ecosystems for creating these new,

smaller, more efficient content businesses are starting to gestate.

So Should Yahoo! be in the (Original) Content Business?

Like HBO before us, Yahoo! should only create content in two cases:

a) When it's maximized all the opportunity around distributing the content of others. Which, in a Media 2.0-leveraging-edge-competencies sort of way, is a LONG ways off.

b) Opportunistically: The way Music pursues original content -- sponsors drive original content, not vice versa), but...

The Real Value Yahoo! Provides

…is in providing great experiences around content (Personalization,

Community, Search) (to steal from Jeff Weiner of Yahoo! Search) helping

users Find, Use, Share, and Expand (on) whatever media is most relevant

to them

(shifting gears)Why Is Apple Winning?

For so many reasons (the charisma to align the record labels around a single model, great marketing), but

from a technology industry physics standpoint because, "When the technology is not yet good

enough, the integrated solution always wins." This from The Innovator's Solution, which goes on to

point out that eventually the technology overshoots what the consumer needs, allowing disintegrated

solutions to gain ground, and forcing the integrated solution up market.

Apple is Not (and will never be) A Music Company

It means that Music is just one stop on Apple's train. Apple is in the hardware business, not the Music business. As

they move up market, they move away from Music over time.

Yet We're Stuck With Their Legacy(oh the irony!)

Customers trained on a low-margin a la carte download model meant to drive

hardware sales

A lot of files purchased that only play on one company's device (the 8-track

tape of the 21st century) Wrapped in a proprietary DRM

Proprietary DRM Is Like Bad Airport Security

It punishes the honest and is merely a speed bump for the potential pirate.

It also creates a convenient technology platform lock-in for Apple and Microsoft, who have

capitalized on the Media companies' fear of their business models changing to further

their own interests.

And the problem is getting worse, not better

As poorly conceived DRMs are moving to our cell phones and living room

devices what we're really locked into is Five more years of PURE

CONSUMER CONFUSION.

And I've been saying that for five years.

Doh!

The music industry has handed the keys to their business over to two

companies that DON'T CARE ABOUT MUSIC. I think Jobs really does love Bob Dylan, but he is not in the music business (in fact he promised Apple records he never would be, and I'd

argue he's kept his promise).

What is the Path Out?

Please appreciate: it was not great technology that drove the Internet boom, but great

standards.

Great technology gave us AOL, Compuserve, and Prodigy.

Great standards (TCP/IP, HTML, and HTTP) gave us unprecedented opportunity (the

Web).

We’re Still Lacking Standards in Digital Media

Similarly in digital media Great technology has brought us iTunes, iPod, and Windows Media Player.

Great standards (XSPF, XIPF, Web services loosely coupling together services like eMusic with

applications like Songbird) can give us unprecedented opportunity.

But relatively few standards exist to serve the digital media ecosystem.

GO CREATE AND USE STANDARDS

If we have one collective mission, fellow campers, one place to focus all our energy, it's to create standards

that decentralize and create platforms of opportunity.

“What if Internet Explorer only went to Microsoft’s site?” (Rob Lord) This is where we are in Digital Media

today. The amount of unlocked opportunity due to lack of standards is enormous.