Chris Anderson wrote a post on The Long Tail Blog a little while back about The Miraculous Power of Scale, in which he explained why the ‘freemium’ business model is increasingly effective online. The point he makes is that technology enables businesses to give away products and services to 95+% of customers, because they can generate more than enough income on the remaining 5%. Reading the post, I couldn’t help but think a very similar thing is happening in the entertainment world.
Jeff Zucker of NBC was famously quoted some time back saying that entertainment companies are “trading analog dollars for digital cents.” His point is that the entertainment industry used to sell a TV show DVD for 32 dollars, now they stream the show on Hulu for 50 cents in advertising revenue.
Jeff makes a very salient point, one that a number of people seem to be concerned about. How can the existing entertainment industry sustain itself on mere cents when they are used to making dollars? The short answer is they can’t. There are significant inefficiencies in the industry from the past that will need to go away.
However, for the entertainment industry as a whole, the “miraculous power of scale” offers enormous potential. Far from heading to its demise, we are quickly moving toward an entertainment renaissance. In a world where most entertainment is consumed for free, billions of people will have access to vast catalogs of media. And amazing new music and film projects will arise, as brilliant new artists find inspiration and audiences in this unfettered marketplace.
Of course all of this is only possible if the economics support it, and this is where Chris Anderson’s analysis plays an integral role. In the new entertainment industry, producers will increasingly derive small incremental revenue (advertising, modest subscription fee, tiny rental fee) from vastly larger numbers of people. Hulu is a brilliant example of this, where less than 6 months after launch, it was serving over 100 millions streams to more than 3 million people.
More interestingly, the same dynamics actually apply to compensating artists as well. For the creators of entertainment and media, a big component of compensation will likely come as a byproduct of their exposure to large volumes of consumers.
We already see this today in the blogosphere where an emerging class of Internet Celebrities (Fred Wilson, Robert Scoble, etc…) create information and entertainment product for free, yet increasingly make money off the value of their names, and ability to market to their audiences.
For emerging artists and writers, this will increasingly mean putting music or books out for less pay, in order to generate significant income from live concerts or speaking engagements. Of course, fame and notoriety, even within specific circles, will also create significant opportunities for endorsement and marketing deals.
The overarching point is that freemium as a business model works not only for the entertainment/media industry, but for the artists and producers within it. While musicians may have to spend 95% of their time on non-revenue generating activities, and a tv show may be streamed 95% of of the time to users that dont click on ads, the miraculous power of scale will make the revenue generating 5%, very profitable.
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