Wednesday, December 31, 2008

Trends for 2009: The Web Dismantles Old Media (Print, Music, Broadcast and Hollywood)

December 31, 2008

The World Wide Web and peer-to-peer networking have effectively dismantled the business models of Old Media: newspapers, magazines, publishing, music, network TV and Hollywood. As all media becomes either free, shared or low-cost, there is no way high fixed-cost Old Media can survive.

I received an education in the Web's dismantling of Old Media "in conversation with Richard Metzger." Richard and his partner started and operated a very successful book publishing and music distribution business in the late 90s. As peer-to-peer networks and the Web took hold, Richard noted that music CDs which had sold in the 10,000-unit range were now selling less than a 1,000 units. Similar drop-offs were observed in books.

Here is one of Richard's fascinating books: Disinformation: The Interviews

These trends are accelerating. Newspaper circulations are plummeting; few citizens under the age of 40 subscribe to a "dead tree" newspaper. Why pay $250+ a year for a subscription when all the valuable content is on the paper's website for free? (Here is the S.F. Chronicle's standard offer for home delivery: 8 weeks for $46 or $299/year.)

Magazine circulations are falling, as are ad pages and the sums advertisers are willing to pay for an advert. The news is old and the pundits often less insightful than those found for free in the blogosphere. (Most magazine content can be found on their websites for free as well.)

Network television continues to lose market share to the cable channels and TV as a whole is losing "mindshare" to the Web. The much-anticipated "convergence" is indeed occuring: everything is converging for free on the Web.

In the music industry, CDs which would have sold hundreds of thousands of units are now selling in the tens of thousands. The reason is painfully obvious: why pay $16 for a CD with one decent song and 12 mediocre tunes when you can buy the one good song for 99 cents on iTunes or download all the songs for free?

The same mechanisms are at play in the film industry. Why pay $10 to watch multiple ads in a theater when you can buy the pirated DVD for a few bucks from a street vendor anywhere in the world, or rent it from Netflix (and make a copy for friends) for $2, or download the film for free off peer-to-peer networks based in non-U.S. locales?

Richard has related many other telltale signs of revolution in the media: book advances are dwindling to zero for unknown authors, film studios are making far fewer costly "Hollywood features," etc.

Richard recently recommended this entry from a music industry insider's blog: Bob Lefsetz:

"You know physical retail is on its last legs when Bruce Springsteen creates a special product for Wal-Mart. It's like there's a flood and everyone has retreated to high ground. In this case, the one location that seems able to sell physical product. But it's really more like a drought. The consumer is no longer raining money. And it's even worse, there's not enough food at Wal-Mart. Bryan Adams' album didn't sell there. Not everything moves in the big box store. Not everything is moving period.

As for Web-craziness, Soulja Boy's album debuted at number 43, selling less than half of his previous effort, a measly 46,000 in total. AND THIS IS CHRISTMAS WEEK!

This is the end my friend. This is the last hurrah. And the record business does not employ enough people to warrant a government bailout. Sure, GM has been mismanaged for even a longer period of time, but by digital standards, the record companies were exposed to the canary in the coal mine first. But they'd listened to too many hard rock records to realize the chirping was gone, they only heard the tinnitus in their ears.

But musicians think they're immune. Very few remember the pre-Beatle days. When stardom did not mean vast riches, diamond selling albums, private jet lifestyles. They just can't believe they're not entitled to wealth. So, when record sales tanked, they just raised ticket prices, as if the public didn't notice. But it's interesting, people only want to pay a lot to see the legendary, classic acts. Or maybe the new ones once. We're not building any infrastructure. We're just throwing crap against the wall. And now our cupboards are bare. The audience has moved on. They'd rather buy wiis. They deliver more entertainment value.

Sales last week were off THIRTY THREE PERCENT from the equivalent week last year.

It's a new day. The future paradigm is how does one get people to listen to your tracks from the vast assembled multitude of music they pay very little for. It's a heyday for listeners, everything's at their fingertips. The labels could have monetized this acquisition, if only they'd owned up to reality. But if you never used Napster, how could you realize how great it was?"

What's true of pop music idols is also true of movie stars. How can a studio pay an actor/actress $40 million when the film may not even net that much?

I take no joy in addressing the demise of industries, be it the auto industry or the newspaper industry. The jobs lost mean real pain and suffering. I have earned a bit of money off the print media (newspaper and magazine) from 1988 to the present as a free-lancer. The pay was almost always abysmal because there is always a fresh horde of newly minted English grads/writers/artists etc. who will work for near-free for the byline or credit to "build their career."

Um, what career? When everything is free, how do you make money? Well, the standard answer is you sell ads, and a few sites and blogs actually make a decent living off adverts--those with 1,000,000 visits a month or more. (Alas, not this site, which receives 120,000-150,000 visits a month.)

Newspapers and magazines also derive ad revenues from their sites, but it's on the order of 20% of their print ad revenues--not anywhere enough to fund their high fixed-cost business model. The same can be said of broadcast TV, the music industry and Hollywood.

Now comes the really bad news: standard advertising/marketing no longer works very well. I address this at some depth in my 73-page book Weblogs & New Media: Marketing in Crisis :

The two basic reasons are:

1. people with little disposable income can no longer respond to print/broadcast adverts
2. the entire reductionist edifice of Standard Model of Marketing (SMOM) has run its course.

My longtime friend G.F.B. and I were discussing these new realities recently (he makes his livelihood in broadcast/video/advertising) and he suggested that the new model is to sell 10,000 copies (of anything) at 99 cents rather than 400 copies at $25.

He proposed that if the cost is below the threshold of "impulse buy" then consumers will purchase the digital item without making a complex internal assessment as to the value. In other words, "Hey, for $1.29, I'll give this a look/listen/read, and if it's no good, oh well, no big deal." G.F.B. reckoned the "impulse buy" threshold is somewhere in the neighborhood of $ .99 to $1.29.
With this concept in mind, I recently made my novels available on Amazon's Kindle reader for the price of two iTunes, i.e. $1.98. The Amazon Kindle store helpfully discounted this modest sum down to a grand total of $1.58:

Of Two Minds and Kama Sutra Cadillac

Is this insane? I don't think so. There will always be a place for print books and media, but the assessment of value when digital resources are free has shifted. Is there value in a beautifully illustrated 400-page cookbook? If you actually cook and enjoy gazing at the photos and studying the recipes, then $30 is a fair price for the value you receive from the book.

A good softbound plumbing guide is still worth $15 to me, as the online resources are cumbersome to assemble. For someone lazy like myself, the book is actually more portable onsite than digital resources,even though they are free. Plumbing doesn't change much and the book will last decades, so $15 is a good value to people like me.

I also like autographed books, and prefer to pay money for a pocketbook when traveling over staring at a laptop. So yes, there will continue to be markets for books, films, music and even newspapers. But the days of people paying $300/year for a newspaper subscription, $25 for a hardbound novel that offers two hours of distraction, $15 for mostly mediocre music on a CD or $16 for a film DVD are passing.

Is it fair that I charge $14 for a print book when I'm willing to sell the digital version for $1.98? It seems to me G.F.B. is correct, and there are two markets for all media in the digital world: a "value assessment market" (VAM) in which consumers carefully weigh the relative value of $14 or $28 in terms of lasting utility or enjoyment, and the "impulse buy" of around a dollar or two for the more modest utility of paying the creator/distributor a small "rental fee" for the use of their creation on a computer or digital device.

To bemoan the emergence of this "impulse buy/small rental fee" market as a replacement of existing costly media is to miss three paradigmatic realities:

1. everything is free on the Web (other than the cost of the electricity and Web access)

2. the Web is a giant copying machine Is the Web a Giant Copy Machine? (March 4, 2006)

3. the market for books, CDs, DVDs, newspapers, TV networks, etc. will still exist, but only as a "value assessment market" (VAM) in which consumers will carefully weigh the value of the purchase against its free competitors and other sources of the same information/entertainment.

So it's not an either/or proposition: you can still try to sell 400 copies at $25, and also try to sell 10,000 copies for 99 cents. The markets are priced according to the costs of manufacture, distribution and size of the markets. Downloading an entire 100,000 word novel takes only a few moments and a few pennies of electricity and disk storage; it is as close to "free" as is possible.

Printing and shipping a book (or DVD, CD, Sunday newspaper, ad-larded magazine, etc.) costs much more and hence it must cost more.

No one knows exactly how the digital/web revolution will play out, but who's holding the buggy whips and who's producing the Model T's is already painfully visible.

NOTE: I will be visiting family until 1/4/09. Have a safe and Happy New Year!

Thank you, Lynelle F. ($20) for your much-appreciated donation to this site. I am greatly honored by your support and readership.

Thank you, Cort K. ($100) for your stunningly generous donation to this site. I am greatly honored by your support and readership.

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