Revenge of the Blockbuster

A few years ago, Chris Anderson described the phenomenon of the “long tail” for digital content.  Unlike the traditional bookstore, Amazon could carry a book selection approaching infinity, and someone would buy most of the books that never even appeared in a bricks and mortar bookstore.  More than half of Amazon’s book sales at the time came from books outside its top 130,000 titles.  Other online content outlets like Netflix and Rhapsody experienced similar phenomena, and costs for carrying this selection had gone down dramatically since you no longer needed inventory in local stores.  Anderson concluded that content industries, which had traditionally sought blockbusters to cover the cost of unprofitable long tail sales, would now be driven by those long tail products.

Anderson makes a great point from the perspective of the distribution channel.  Amazon, Netflix, and other companies have made a huge virtue of carrying a massive selection.  It’s both part of the value proposition, and to a lesser extent, a driver of profitability.  I’m less convinced that the long tail is a reality for content producers.  Can you really be profitable (or pay the rent) if you have the 100,000th most popular book on Amazon?  Content publishing, whether in books, music, or movies, has traditionally been a scale game.  Companies needed to maintain a big taste-making apparatus and also to subsidize up-and-coming works through hits.  Between piracy and a high cost base, the industry incumbents no longer have a viable economic model, but what will the new equilibrium look like?  Will they be replaced by a sea of mom and pop producers, or simply by a new wave of large publishers better able to deal with digital distribution challenges and opportunities?

Goodbye to variable costs

Variable costs are of course much lower with digital content.  They are practically zero for each additional copy, apart from bandwidth.  But fixed costs still exist.  You still have to create the content and edit it.  More importantly, you still have promotion costs, which tend to be fixed because you have to commit a certain level of effort and advertising before you know whether the product will be a success.  So you still need a certain level of sales to cover those costs and be profitable.  And there are still benefits to scale.  You can spread your fixed costs over more products, build knowledge of consumer tastes, and build and maintain expertise in production and promotion.

The audience becomes the gatekeeper

In the past, some great content didn’t even make it through the pipeline.  You had to go through a TV network, music label, or publisher, and they rejected most content with an eye to finding the next blockbuster.  However crudely, the taste-makers did perform the valuable function of sorting good content from not so good.

Big media companies are becoming less relevant, but there are still high hurdles to sales because 1) most content isn’t very good and 2) despite everything, it’s very hard to get people to pay attention to you.  Top-tier talent is still scarce.  The audience’s time and attention span are still as finite as ever, and the competition among media for that attention has grown exponentially.  The guerrilla/social/word of mouth alternative to traditional centralized marketing is much harder and more costly to pull off than is commonly acknowledged.  So the shape of the blockbuster landscape may have changed somewhat, but it still exists.  You can now have a niche success more easily in the past, but in each niche, it’s typically still a winner-take-all contest because getting heard above the din is so difficult.  If there are a dozen cooking bloggers making a living without being blessed by The Food Network or Conde Nast first, there are still thousands of others toiling in obscurity.

A thought experiment

To illustrate the point, let’s think about a solo book author before and after the rise of the long tail.  The author’s book sells for $10, and in a traditional scenario, let’s say she gets $2 per copy sold.  Using digital distribution, the per-copy margin is a much more generous $7 (with the rest going to Amazon or Apple).  If the author spends six months writing the book and expects to make $30,000 in income, what’s the break-even point at which book-writing makes economic sense?

In the before scenario, it would be 15,000 copies.  Note that the media company likely would be losing money on this book but subsidizing it from the latest Stephen King novel.

In the after scenario, let’s add one more complication.  Promoting the book requires an additional three months of time, whether blog writing, Tweeting, touring and speaking, or what have you.  Now we need to make $45,000 to make the whole endeavor worthwhile.  The resulting break-even is about 6,400 copies.  Less than before, certainly, but there is still a broad range of sales results where being a writer is a losing proposition.  The same is probably even more true for other forms of media.  YouTube may be doing a decent business in part on user-generated video, but only an infinitesimal fraction of the creators of those videos are earning a living on it.  In contrast, old-fashioned blockbusters do better than ever because there’s a bigger distribution pipe that reaches a bigger audience for that content.

What’s the upshot?

So yes, somewhat more content is rising out of obscurity to become a profitable hit these days.  But the long tail concept implies that content is profitable for the creators most of the way down the tail.  In reality, there’s a modest chance of high profitability (if you can become a hit) combined with a high chance of not making any money.  The best hedge is still a big portfolio of content that can cover your fixed costs and pay for specialized promotion.  Mid-tier content originators stand to gain because a moderate level of sales, and especially a loyal core following that mitigates marketing challenges, can now be quite profitable.  But the real long tail is still the province of the amateur, and less blockbuster profits will be available to subsidize bets on up-and-comers or to fund vanity content that is highly regarded but doesn’t sell.  The pool of winners is growing somewhat, but if you reside further down the long tail, it’s not at all clear that you’re better off.


Related Posts:

  • No Related Posts
  • http://topsy.com/trackback?utm_source=pingback&utm_campaign=L1&url=http://www.brekiri.com/blog/237/revenge-of-the-blockbuster/ Tweets that mention Revenge of the Blockbuster « The Business Research Blog — Topsy.com

    [...] This post was mentioned on Twitter by Freeconomics Eqentia. Freeconomics Eqentia said: #freemium Revenge of the Blockbuster – Source: The Business Research Blog http://ow.ly/16WGwU [...]

blog comments powered by Disqus