Who Holds the Power in Media – Content or Distribution?
On Friday night, Chris Dixon (@cdixon), Jonathan Glick (@jonathanglick), Peter Kafka (@pkafka), Todd Sawicki (@sawickipedia) and I had a conversation on Twitter about media concentration and where the power lies these days. It was inspired by an Erin Griffith (@eringriffith) post called “Spotify’s Best Chance at Beating the Digital Streaming “Suicide Pact” Is With Ads“. Chris assigned me the homework of blogging about it, so here goes.
Typically, as a distributor gains scale with lots of customers, we expect market power to accrue to them and provide them negotiating power over rights and rates of content from the content owners. As we will see below, this is true in some forms of media, but not in others. What types of media are more prone to distributor power? Jonathan offers us a framework:
- Content tends to be more fungible and less likely to benefit from concentration when it takes less time/cost to create a hit, the value of a hit is in decline, many substitutional offerings exist, aggregators have existing strong market power, and/or a strong motivation exists for self-publishing.
- Content tends to be less fungible and offers concentrators great benefit when it takes significant time/cost to create a hit, the value of a hit is increasing or sustained, there are few substitutions available (by regulation, uniqueness or otherwise), aggregators have low value, and/or content creators have strong and sustaining brands.
- A shift seems to occur allowing distributors to amass power when a disruption materializes in the format/form of the media object itself (usually the new object has higher volume, velocity, virality). Some recent examples, perhaps, are YouTube clips, Tweets and Kindle singles.
- Any media that’s worth owning is worth concentrating and there will always be capital available to do so. Only limit is regulators, until a format disruption occurs.
One assumption many people have made about Spotify is that, while their current economics as provided to them by label licensing rates are essentially unsustainable, once they reach scale, they will have leverage over record labelsand will be able to reduce their on-demand royalty rates. The reason this won’t happen is because of extreme continued concentration of supply. In 1999, when Napster was the harbinger of the demise of the recorded music business, there were six major labels who controlled about seventy-five per cent of the commercial recorded music market. With the EU’s recent approval of UMG’s purchase of EMI, there are now only three major labels. They control about seventy per cent of the world’s music catalogs. Indies have made a good run, and have grown in importance, but the world’s superstars are, for the most part, on major labels. And you just can’t operate a digital music retailer at scale without hit music content. I tried, when I ran eMusic for five years. We were the largest online retailer of indie music, but only reached about a half a million subs at our peak and came to believe that we could never be significantly larger than that without major label content.
So, suppose Spotify reaches 50M listeners and 10M paid subs? Or even 50M paid subs? Will they be able to demand better rates? No. Because they don’t have a service without the full catalogs from those three majors. If even one of them pulled their catalog, at least twenty per cent of all Spotify’s content would disappear. All the playlists on the service would break. And a third of the hits would be gone. Paying consumers would never stand for it and the service would crumble. The labels know this. They know they have fully concentrated power. In fact, I would bet that if Spotify ever reaches that scale, the majors will demand even higher rates, and they may be able to get them. Highly concentrated popular content allows owners to extract unprofitable rights deals. Even though Spotify is building listener scale, the absolute dollars they pay to labels still small, given that streaming rates are very low per play.
Does this mean Spotify has no future? That’s a different discussion, and my view is they do, if they diversify into other content types. But the music business for them will be, at best, a twenty per cent gross margin business (it was two per cent last year), and that is tough. (Remember, even Apple, the world’s largest music retailer did not have leverage to hold rates steady and gave in to rate increases imposed by the majors.)
So, in music, the power is in the hands of the content owners, not the distributors. Will this change? Will there be fragmentation among ownership? I hope so, and it is conceivable, but the amount of time it will take for a highly fragmented market to occur could be 10 – 50 years. At this rate, we will likely have two major labels within the next three years.
I blogged about Hunter Walk’s view that TV content sits in three main buckets, No Substitute, Nice to see, and Filler. If you want to be an MVPD, you must have the No Substitute and the Nice to see content. Sure, you could try to operate a service without the Filler, but that is not how programming is sold. It’s sold by the channel, and each channel has its mix of each of the three tiers above. (Actually, it is sold as a package of channels, to be more precise. If you want MTV, you must also take Logo, etc.) Whenever an MVPD gets in a rate dispute with a programmer and the channels get pulled, the customers go crazy, put huge pressure on the MVPD, and start switching services. The MVPD generally gets beat. This is why Comcast bought NBC…to finally have some hedge protection against the power continuing to concentrate in the hands of the programmers. So, in traditionally delivered TV, the power is in the hands of programmers. I am told the NFL Sunday Ticket deal leaves DirecTV with essentially no margin in ways similar to online music rights deals.
How might this change? Well, one scenario is that the rise of IP-delivered TV programming (Netflix, Amazon, Apple TV, YouTube, etc.) breaks the channel model back into shows, since that is all we care about as consumers. In that case, the supply is quite fragmented. You can operate an IP-delivered video service withoutall the content (in fact, all of them do today, since none of them offer a package as complete as an MVPD). The challenge here is that the programmers are pricing their hit content in such a way as to make it economically challenging for you to assemble all of your shows on-demand, and/or they are witholding key programming from IP delivery unless you authenticate as a paying MVPD subscriber. Note that YouTube is attacking this market differently, and is going after the time we spend watching Filler programming. I think they will succeed.
In this category, supply is highly diversified. Content is highly substitutional. While important brands exist here, and we show a preference for many of them, the power exists in the hands of the distributor. Audience size brings increased revenue (whether ad supported or consumer paid). This content category is highly fungible. A storm-is-a-brewing because of social media, however. Many prominent writers (and ones less so) are building enormous social media brands sometimes bigger and more loyal than the audience size of the news distributors themselves.
As Benedict Evans (@benedictevans) points out, there is considerable diversity on the supply side here, with many book publishers and one dominant eBook distributor today in Amazon. In traditional book retailing, there is less of an all-or-nothing phenomenon It is possible to create retailers without complete book catalogs. Nevertheless, a hit dynamic happens here too, and it’s hard to be a leading seller of books/eBooks if you don’t carry Harry Potter or whatever 4-5 titles dominate the bestseller lists. Today, in eBooks, Amazon has the balance of power and is certainly exercising it on pricing. Publishers hope Apple and B&N pose some competition here.
Generally, we expect the distributor to have power when supply is highly fragmented, and most media follow that axiom. While the internet has allowed a massive diversity of publishers and contributors to enter the market, big media ownership of “hit” content has been consolidating to extend their grip on pricing in the short-term. It’s reasonable to expect, however, that more and more “hits” will come from outside the consolidated super-structure. In TV, one could argue that nothing stops Netflix from buying high-end video programming direct from content creators, for example. But in the last few years, the networks (who often own/fund production companies) have worked hard to prevent this from happening and try to extract full value from their content before it gets into Netflix’s hands. In written media, super-blogs employ well-established mainstream writers. And in music, Adele is signed to an indie. But where hit media remains consolidated, media giants will exercise leverage.