What’s left for the Labels and Studios, Networks or Channels?

It seems that somewhere along the line we adopted a national culture that embraces the idea of “eliminating the middle man” as a societally desirable goal. Sound fair, unless you’re the middle man. In technical jargon this is called Disintermediation, although that sounds far more cruel than simply being eliminated!

The intermediary almost always starts with a useful and well defined role. Once upon a time, access to the airline and hotel booking system was complex, requiring a lot of training. Who needs to go through all that just to book one vacation a year (in a good year)? So we had an intermediary – the travel agent. A skilled professional who’s primary role was to interpret the Byzantine workings of Sabre for mere mortals booking travel! Technology moves forward and a good portion of the travel market is now booked directly by the customer, through those same back-end systems, but with sufficiently customer-friendly interfaces that it’s worth the effort to master it.

I’m not sure if travel agents have completely gone by the wayside – in fact we’re far from that – yet. But it’s inevitable that a travel agent will become a luxury for those who don’t have time to get online. Right now I book 100% of my travel online, but my mother still values the skill of the agent to find a good deal for her. That’s probably a generational thing, so if the trend toward self-booked travel will continue as each successive set of nephews or nieces will trend even further toward self-booking. Simultaneously the reluctance of the mature end of the age spectrum will slowly drop as sites and systems become more and more user-friendly. They’re already heading there.

So, an industry displaced by new technology has to reinvent itself or face extinction. The important thing is that, for many, many years the travel agent provided a valuable service, for which they were deservedly compensated. But when a channel, a middle man or intermediary, faces new technology that disrupts and inevitably destroys their business the choice is to adapt and find a niche to survive in, or die. Such is the nature of life on earth.

Heading the way of the dinosaur are our content aggregators and distribution channels: the Record Labels, the Motion Picture Studios, the TV Networks or even the cable channels.

If the assumption is that every channel or service is in place because it serves a function (or once served a function) that was considered valuable then Record Studios, Motion Picture Studios, Television Networks and Cable Channels (thank you Ted Turner) all all in place because of a valuable service, or services, that they provided. Unfortunately for them, the technology is rapidly making the service much less valuable, if it has any remaining value.

Let’s consider Record Labels as a clear paradigm to follow, mostly because music is much further through this cycle than is filmmaking (including production of entertainment to fill 500 channels with nothing on).

The Record Label performed several valuable services for the artist:

1) The cost of recording was high, so they pre-paid it, on the gamble that it would pay off, and all charged back to the artist’s future earnings, but we won’t go into the politics of it all, right now.
2) The cost of producing a record, physically, was relatively high, because of the up-front costs of producing the first disk, beyond recording the album.
3) Distribution was expensive, paying all the wholesalers and providing for margin at retail, plus those trucks and trains full of vinyl disks.
4) Promotion was expensive, simply getting the word out was expensive, particularly when there were only mass-market channels.

But technology has taken the value out of each of these in turn. First, the cost of recording dropped to the point that every star-struck teen and their friends can produce professional quality audio (even better if they know how to apply knowledge to the accessible toys of production). A purpose-built studio is always going to be better, but even there the cost, at least in this part of Los Angeles, of a recording studio has dropped to be very affordable. But even if the final sound is not at recording-studio-silence-and-perfection, the difference is small. Remember Pareto’s Principle also known as The 80-20 Rule? Even the worst bedroom with a bit of modern recording gear gets a kid 80% of the way to the sound. Like DV, the quality is “good enough” to be accepted in the professional sphere. Strike 1.

So, not long after the cost of recording dropped from the hundreds of thousands of dollars, to thousands of dollars, the cost of producing a CD dropped dramatically – burn individual units with Stomper-labels lovingly applied, or do a run of 1000 for less than $1 each, printed, with bar code and ready for retail. Strike 2.

Strike 3 was the Internet, and digital distribution. The Labels could live with Strikes 1 and 2 because it left them as the gatekeepers to the distribution and promotional channels. Even if you record and press yourself, you would still need the Label for distribution and promotion. But with the Internet with its file sharing and its bittorrents, the Labels really started to get worried. A band could, if anyone had heard of them, distribute their material free, or even sell it direct.

Phew, fortunately, if you never hear about the band or artist, free and direct distribution isn’t going help! The Labels might be down 3 for 3 but they still had a chance of keeping control of promotion.

Promotion. Once you’ve got the cash to spend on a marketing blitz, you can pretty much get your return on the artist back, even if success is moderate. There’ll still be a value-ad for the Labels. There’s nothing to replace that, surely.

Logged on to MySpace anytime? If not, go do it now.

I’m sure it’s not the only site like it. Social Networking online – the hot new growth area of the Internet – is the biggest word-of-mouth market, with viral capability, ever invented. And there’s no publicity like word-of-mouth publicity. It’s going to be a lot more credible because it’s from one of your Friendsters. You get a couple of million MySpaceCadets telling each other how great those free tracks were, and the profit from the next tour and sales of your CD at the venues are likely to be better than they were going to be before! Concerts have been the long term profit center for the artist.

In fact, in this deal, the artist is going to end up with a much bigger cut of the dollar take. Even if they don’t make a cent off the music they give away, artists signed to Labels don’t often see a lot back for their CD sales after the Label charges them, against any advance or royalty, for all that Production, Pressing and Promotion – every dollar of it.

Now the music industry is way further down this path than any other sector, but all parts of their story are in place. It is inevitable that there is no future role for Record Labels as they have been known. (I hear they’re thinking of retraining as travel advisors to the super-rich.)

This isn’t going to play out to the end game in 2006, but the trend is well underway and the conclusion is inevitable.

The movie industry is heading down the same sequence. The cost of producing a “film” (be it on chemical film or digitally ) has also dropped. The cost of producing entertainment Television to an acceptable quality standard is now entirely based on the cost of the content. Rocketboom demonstrates that it’s possible aggregate an audience without spending traditional amounts of money on production. And have you seen their ad rates? $40,000 for 8 ads tacked on the end of an episode thanks to an eBay auction. Starving artists live another year. Even more relevant – this is “consumer generated media” right outside established genres.

Given the relative ease of aggregating a mass (enough) market at relatively low cost, what role is left? The word-of-mouth through the social networking sites will be what’s important. I’m taking a poll on which studio or label will be caught red-faced manipulating or attempting to manipulate a social network. (I’m also expecting that someone will comment and demonstrate where that’s already happened.)

In the television realm, do people want to watch channels or do they want to watch programs? I would contend that the value of TV Networks, and subsequently the explosion of channels is that viewers got choice of programs. With the exception of, maybe, the Shopping Channel and Soap Channel, few people sit and watch “a channel’ all the time. They jump from channel to channel to choose the programs they want to watch. People want to watch programs, not channels and both advertisers and program producers will be better off without the intermediation (middle man) of the channel or network, just like musicians will be better off without the Record Labels.

Let’s consider a case study. The Daily Show with Jon Stewart has, according to wikipedia one million viewers a night, although other sources have it as high as 1.3 million. Let’s stick with the one million mark for the moment, it makes the numbers easy. Unfortunately I couldn’t find anything definitive on either the cost-per-episode nor ad rates for the Daily Show but let’s run some numbers.

If the show sold for 10c per episode and kept the same audience (What, this entertainment isn’t worth a dime?) then each episode brings in $100,000. Cost to the viewer per month (assuming all new episodes), something like $2. And we know that’s more than Comedy Central are getting as a basic cable channel, per subscriber to a cable or satellite system. For “disposable television” – view it once but it has little or no repeat value – like The Daily Show or Daily News – about 10c a program is what I’d like to pay, and 25c is the maximum I’d pay for that type of programming. Prime Time type programming would likely lever 50c out of my pocket per episode, and maybe for Monk I’d go to $1 an episode. Applying that directly to the production company… In this case we have 5.4 million viewers, most of whom would go to 50c an episode, the producer would get $2.6 million an episode. I think those numbers stack up.

The other model is to consider it from an advertisers point of view. Who is it worth being the exclusive sponsor of The Daily Show, or Las Vegas? It’s probably a more cost-effective buy for a car company to directly finance the production and be the only advertiser in the show, probably with a little product placement action going on. In parallel with the low-cost-to-buy-but-no-ads version at 50c (say). This concept is carried forward in an article by Mark Pesce called Piracy is Good? How Battlestar Galactica Killed Broadcast Television

Whichever way you cut it, the middle men – the channel aggregators – look like being disintermediated progressively in the coming years. And there’s not much they can do about it. There are better, new models, like Mark Pesce’s. There are new micropayments systems coming that will charge through an RSS feed, only for what’s downloaded – pay for what’s interesting – in parallel with advertising supported content. Everything old is new again: back to the days when “Soap Operas” were indeed sponsored by a soap company.

2 thoughts on “What’s left for the Labels and Studios, Networks or Channels?”

  1. Once again the “Sage From Down Under” is way up on the power curve, time to catch up fellas. Personally I would so much like to be alive the day RIAA goes silent, because they have cheated artists and kids for so long. But we have to be ever watchful, as Philip’s article on “My Space” clearly indicates. We have a “Roman Senate” out of touch with mainstream America, and they get a lot of money from the entertainment industry, so we geeks or friends thereof, need to be vigilent lest RIAA rear its ugly greedy head again with the help of uninformed Senators, and many of them are really uninformed.

  2. Great piece, Phil. Middlemen are surely going the way of Willy Loman. We still need agents, of course, in the talent biz– to deal with other agents.

    [burn individual units with Stomper-labels lovingly applied]

    Even that’s gone. Never mind the added weight of paper labels gumming up some machines. Get yourself an Epson R220 and inkjet printable disks, you have full color high quality labelling. It’s a new world..

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