The Road Ahead for Digital Content

I used to be one of the true believers of the “bits want to be free” school of thought. The fact that the marginal cost of creating another copy of a digital file, along with the cost of distributing that copy, were vanishingly small, meant that in the long run competition would make charging for content an unsustainable strategy.

The success of iTunes had long made me hesitate, but it is the current rise of companies like Netflix and Spotify that have convinced me that paying for content is not an activity that will be ending any time soon.

The Three Paths

Where we are heading, and where we already are to a certain extent, is to a world where there will be three methods of acquiring different content. First, there will be big bundles like Netflix and Spotify, where you pay a flat rate for all you can eat access to gigantic libraries of video, audio, and text. Everything within those bundles, as well as some additional content not available in those bundles, will be available for straight a la carte sales as well, as iTunes has provided for going on ten years now. Finally, the vast majority of content–that is, an amount uncountable orders of magnitude larger than what is available in the bundles or a la carte stores–will be available for free.

Bundling

Eli has an excellent post on the economics of bundling. In his example, there are a total of 10 songs in a hypothetical market. When sold individually, the rights-holder’s most profitable strategy is to sell them for 50 cents per song. However, when they are sold as one bundle, the per-song cost goes down to 40 cents. I defer the explanation of the logic behind this to his post and the excellent comments on it; if you want to know more about the direction that content industries are headed I highly recommend you take the time to read it in full.

Eli’s example only deals with 10 songs–imagine how low the per-unit cost has been driven for a service like Netflix, which charges 8 bucks a month to access tens of thousands of titles. The fact that users are paying for access, rather than downloading the whole bundle themselves, also allows Netflix to lower the price further.

The digital content industries have only scratched the surface of bundling tactics. We’re getting companies like Netflix and Amazon offering bundled streaming video, and Spotify and Rdio are doing it for music. But I believe it is only a matter of time before someone starts doing it for text. Rumor has it that Amazon is in talks with publishers to create a bundled option for ebooks. This does not surprise me in the least.

Eli suggested that news organizations should stop trying to set up paywalls and instead work on creating a Netflix-like bundle together. We then learned that the Slovakian media was already tinkering with something like this.

The future of bundling in digital content is going to involve both bundles that are much bigger than the current ones, and smaller ones.

The bigger ones will come not just because current bundles will continue to expand their offerings, but because bundle providers will start to mix the categories of content offered in a single bundle. Why should we pay for separate streaming video and streaming music bundles? Why not pay for one bundle that includes both? Or one bundle that includes streaming video, music, access to books and articles, comics, and smartphone and tablet apps? Apple and Amazon are two companies in a position to do just that.

The smaller bundles I have in mind occupy the space between a la carte and the Netflix-like bundles. One kind of smaller bundle that exists right now are albums–an artifact of an earlier era. Apple and Amazon will now let you pay for a whole album, and sometimes a whole season of a TV show, at a lower price than it would cost to buy all of the individual songs or episodes.

But why can’t we pay one price for a band’s entire discography? Or for all of the currently published Dresden Files books, or Walking Dead comics? Or for all of the seasons of a TV series at once?

A la carte

Apple was a true pioneer of a la carte digital offerings with their iTunes music store, which they later extended to include video as well as apps. Amazon has followed in their footsteps, and their Kindle store now dominates a la carte ebook sales.

What Apple did was to drastically reduce the transaction costs of acquiring and listening to music. Before iTunes, the big way to get music to your computer and MP3 player was either to rip it from CDs or to pirate it. Both approaches had transaction costs–you had to have a program to get your music off of your CD, and then have software that took the ripped song files and integrated them into your listening device.

Pirating, while it didn’t cost money, has disadvantages of its own–all the problems one would associate with any black market. First off, you can never be sure of the quality of the file you’re going to get. Secondly, the availability of songs depended entirely on what other people had to offer. There was also always the risk of getting a virus.

The iTunes store had a stable and growing library of titles, it tied the quality of the files to the reputation of a big brand, and it seamlessly integrated with Apple’s own listening device, the iPod. I could go on, but history has shown that consumers saw the advantages of what Apple had to offer and were willing to pay for them.

I think that a la carte libraries will always remain larger than bundles, if just for the simple reason that they will include everything in those bundles. After all, if you are not a Netflix subscriber, the fact that you want to watch one specific movie within Netflix’s library is probably not enough to sway you into signing up. So you can pay for the movie by itself, buying or renting it from Amazon or iTunes.

Then there will be things that content creators do not want to include in the bundles, at least not immediately. When a new season of Doctor Who comes out, the BBC may want to let Netflix subscribers see all the previous seasons to encourage them to watch the current one, but then leave the current episodes in the a la carte stores for the time being.

Free

The vast majority of content will remain available to consumers for a sticker price of zero. The difference in magnitude between what is available a la carte and what is available as bundled content will not be very large. By comparison, the difference in magnitude between what is available a la carte and what is available for free will be more on the scale of difference between a planet and a galaxy, or a universe.

Content industries have always been blockbuster industries, following a power law distribution. Digital technology, the Internet, and the web will only serve to skew that distribution even further–1 percent of the content will account for 99 percent of the revenue, if that isn’t already the case.

Content industries have always had a tiny fraction who were able to make enormous wealth off of their creations, a much larger fraction that could make a decent living, a much, much larger fraction that just used their creations to supplement a primary source of income, and the vast majority who were unable to make a penny off of their creations.

Because of the web and transaction-cost reducing services like app stores, content creators who are unable to make any money off of their creations are for the first time in history able to nevertheless make it publicly available. So that gigantic body of work that will be available for free will come from this category of content creator–and it will comprise what Chris Anderson has called the long tail. Contra Anderson, however, this segment of the market will bring in next to nothing in revenue.

People have and will continue to provide their content for free for a variety of reasons. The most obvious one is that they aspire to make it big–they’re trying to get out of the long tail and into the head of the tail. They can only do so by gaining visibility and building an audience.

Many people who do not desire to make a living off of their creations also make contributions, however. Personally, I do not intend to try and make a living by writing about technology and society. But I write about it both because it is a subject that interests me, and because writing in public helps me connect to others with similar interests. It also provides me with a portfolio I can point potential employers to in order to help them evaluate me. For a more thorough overview of the benefits of making things in public, see Jeff Jarvis’ new book Public Parts.

The availability of free content will continue to put price pressure on a la carte and bundled content at the margin, pushing paid content into even bigger and cheaper bundles. Moreover, more and more new tools will be developed to drive down the biggest cost of free content–its transaction costs. iTunes has driven down the transaction costs not only of a la carte content but of free podcasts. Link sharing on services like Twitter and Facebook drive down the cost of content discovery.

The Content Creator Draft

From the long tail of free content there will emerge a tiny minority of successful individuals who begin to make a living off of what they do. In the world of webcomics, a group of artists are making a living by giving their comics away online for free and making money indirectly, though merchandise, donations, and other similar strategies. Radio host Leo Laporte has managed to successfully make a living by building up a podcast network financed through ads and donations.

From this group, a few will be vaulted up to blockbuster status. Witness Scott Sigler, who began building up a following by podcasting his novels, and then got a book deal with Random House. Or Amanda Hocking, who became so successful selling her books independently in the Kindle Store that she was picked up by a publishing house.

There will remain big intermediaries–like the publishing houses, record labels, and movie studios of today–who will finance the creation of high end content. They used to have an expensive discovery process for finding talent, which for publishers included things like paying “mid-listers” who were not bestsellers but not total flops either. Now, the discovery process will be left entirely to the open web–people will succeed or fail at demonstrating their ability to attract an audience on their own, and the big intermediaries will pick them up only after they have. This reduces the risk to the intermediaries, which in turn reduces the cost of producing high-end content.

So free, a la carte, and bundled content will all be part of the new interconnected digital ecosystem that is growing and maturing around us at this very moment.

  • http://naturalaw.failuretorefrain.com jurisnaturalist

    I think you rightly identify one of the services which pay-to-use sources for digital media provides: security. I don’t look for free downloads because I’m wary of viruses.
    One could imagine a web napster-style content sharers being slightly more efficient at storing and sharing content, so long as there are low increasing returns to scale. I’m guessing there are massive IRTS for data storage.
    Finally, the Netflix – Pandora – Amazon service we all like most is the recommendations list.
    This services does not merely tell me information which I did not previously know. It gives me information about options I did not know that I did not know.
    I have found many movies I never would have heard of through Netflix which I have enjoyed.

    I think free content will become more and more common, but it won’t be through piracy. Kickstarter, Noisetrade, and other services of this sort will find ways for fans to patronize content producers up front. Producers will decide on some amount, their marginal costs of production for a new album, say, and only finally produce only that threshold has been reached. Residuals are pure profit. If they don’t make the threshold, patronage can be refunded.

    Finer arts, those which contain a higher level of asset specificity, such as paintings or sculptures, have long operated on a model like this, where producers build a portfolio and then seek patronage for future pieces.

    • http://adamgurri.com AdamGurri

      All great points–how could I forget Kickstarter? Kickstarter and services like it are such a huge development in funding.

      On the recommendations front–if enough people use Amazon’s Kindle Fire to browse the web, which Amazon would run through their servers first, I wonder if Amazon won’t start building recommendation algorithms for free web content, too?

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