Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment
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But that’s not the only reason the effect of digitization is felt more in the entertainment industry. Another contributing factor is that people choose creative goods based on taste more than on a measure of objective quality. When subjective differences among products drive buying behavior, the kinds of tools we often associate with digital businesses—recommendation engines and other collaborative filtering mechanisms—can help people find the products they like. And because consumers of entertainment products are often avid fans who enjoy discovering new products, the lower transaction and search costs that are characteristic of digital channels both enable and encourage people to indulge their passion. Music fans discover new songs through YouTube, sports fans check statistics online, and readers browse stories on the Web—those who shop for more utilitarian products such as toothpaste and lightbulbs often find the buying process much less enjoyable.
Thanks to digital technology, entertainment industries are now rife with amateurs and other industry outsiders seeking to produce and disseminate their own creations—and not necessarily at a profit. Millions of people dream of making it “big” in music, publishing, film, and other creative industries. Since reduced production and distribution costs lower the barriers to entry to these markets, it is now possible for a teenager to self-publish a book and share it with millions of others, for a novice programmer to develop and sell a mobile game, or for a less-than-hip South Korean pop star to conquer the world with a catchy video in which he raps about a rich lifestyle while performing animal-inspired dance moves.
It is easy to see how the decreasing cost of doing business online has spurred the growth of YouTube in online video, just as it has fueled Amazon in books (and a host of other consumer products), and the iTunes Store, Spotify, and Rhapsody in music, to name a few examples. All of these online retailers introduce new possibilities for content creators. In part, that’s because unlike traditional bricks-and-mortar or analog aggregators, they have infinite shelf space and allow consumers to search through innumerable options. And in part, that’s because online retailers can relatively quickly and cheaply conquer global markets—in 2012, YouTube claimed it had eight hundred million users, of which 70 percent lived outside the United States—and allow content to be consumed across different platforms.
Carloss described YouTube as an example of a “next-generation platform” that “has no geographical borders and no specific devices of access—the screen can be in your pocket, on your office desk, or in your living room.” He described a “third wave” of video distribution that he believes will be facilitated by lower costs: “Broadcast was the first wave, with very general content being offered up to a general audience. By the late 1970s and early 1980s, cable came around and more channels were available to consumers. MTV was born for music, CNN was born for news, and ESPN for sports. But launching a cable channel still requires a sufficiently large audience to justify the infrastructure and other expenditures. At YouTube, we now see a third phase—an opportunity to give specific audiences content tailored to them in categories that are underserved by the current media landscape. When you have a global audience at your fingertips, you can develop narrow, niche channels that appeal to specific individuals.”
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In such a world without limits, betting on a select group of blockbusters and superstars may appear old-fashioned and ill-advised. That, at least, is the central tenet of a best-selling book, The Long Tail: Why the Future of Business Is Selling Less of More, published in 2006 and written by Chris Anderson, then editor of Wired magazine. When consumers can find and afford products more closely tailored to their individual tastes, Anderson argues, they will migrate away from hit products. The wise company will therefore stop relying on blockbusters and focus on the profits to be made from the “long tail”—niche offerings that cannot be offered profitably through bricks-and-mortar channels. “The companies that will prosper,” Anderson declares, “will be those that switch out of lowest-common-denominator mode and figure out how to address niches.” The idea caught on with many industry insiders. Google’s then chief executive officer, Eric Schmidt, for instance, claimed—on the cover of the book—that Anderson’s beliefs “influence Google’s strategic thinking in a profound way.” And in its communications with analysts and other industry observers, Netflix took pride in calling itself a long-tail company.
No one disputes that online businesses offer much more variety than their analog counterparts. When transaction costs decrease and physical constraints on selection disappear, merchandise assortments can grow exponentially. That’s why Apple’s iTunes Store lists millions of albums and songs, and why Amazon offers hundreds of thousands of albums, whereas even the largest offline music stores typically stock only ten thousand titles. Similarly, whereas Netflix’s DVD title count is in the six figures, bricks-and-mortar retailers usually stock no more than a couple thousand DVDs. And YouTube enables a long tail in online video, by making it possible for users to share videos for which there isn’t room on traditional television.
The Long-Tail Theory
For an illustration of the basic principle, consider the chart above, which ranks all possible offerings in a particular sector (say, all music albums and songs, all books, or all videos) by their sales volume. The shaded part represents the long tail—products that are consumed online but, because they sell only in small quantities, cannot be offered profitably through bricks-and-mortar or other analog channels.
So far, so good. But in his book, Anderson also offers some bold predictions about how demand is evolving. Online channels, he argues, actually change the shape of the demand curve. In his view, consumers value niche products geared to their particular interests more than they value products designed for mass appeal, and as Internet retailing enables consumers to find more of the former, their purchasing will change accordingly. In other words, consumption will shift from the head to the tail of the curve—and the tail will steadily grow not only longer, as more obscure products are made available, but also fatter, as consumers discover products better suited to their tastes. Put differently, with cataloging, search, and recommendation tools keeping a selection’s immensity from overwhelming customers, we will experience a democratization of markets. Ultimately, obscure products will erode the huge market share traditionally enjoyed by a relatively small number of hits.
Anderson goes on to predict that “fickle customers” will “scatter to the winds as markets fragment into countless niches.” Thanks to the long tail, we will leave “the water cooler era, when most of us listened, watched, and read from the same, relatively small pool of mostly hit content.” Now, he says, “we’re entering the micro-culture era, when we’re all into different things.” Anderson expects the multitude of niches to collectively add up to something big: he forecasts that the many small markets in goods that don’t individually sell well enough to justify traditional retail and broadcast distribution will together exceed the size of the existing market in goods that do cross that economic bar. Over time, in other words, the shaded area under the curve in the previous chart will become bigger than the blank area.
While these predictions might be music to any YouTube executive’s ears, the changes Anderson describes would spell trouble for a content producer relying on a blockbuster strategy. Fortunately for those betting on hits rather than niches, actual data on how markets are evolving tell a much different story than what Anderson predicted. As demand shifts from offline retailers with limited shelf space to online channels with much larger assortments, the sales distribution is not getting fatter in the tail. On the contrary, as time goes on and consumers buy more goods online, the tail is getting longer but decidedly thinner. And the importance of individual bestsellers is not diminishing over time. Instead, it is growing.
Take the music industry. According to Nielsen, which collects recorded-music sales information, of the eight million unique digital tracks sold in 2011 (the large majority for $0.99 or $1.29 through the iT
unes Store), 94 percent—7.5 million tracks—sold fewer than one hundred units, and an astonishing 32 percent sold only one copy. Yes, that’s right: of all the tracks that sold at least one copy, about a third sold exactly one copy. (One has to wonder how many of those songs were purchased by the artists themselves, just to test the technology, or perhaps by their moms out of a sense of loyalty.) And the trend is the opposite of what Anderson predicted: the recorded-music tail is getting thinner and thinner over time. Two years earlier, in 2009, 6.4 million unique tracks were sold; of those, 93 percent sold fewer than one hundred copies and 27 percent sold only one copy. Two years earlier still, of the 3.9 million tracks that were sold, 91 percent sold fewer than one hundred units and 24 percent sold only one copy. The picture is clear: as the market for digital tracks grows, the share of titles that sell far too few copies to be lucrative investments is growing as well. More and more tracks sell next to nothing.
Equally remarkable is what is happening in the head of the industry’s demand curve. In 2011, 102 tracks sold more than a million units each, accounting for 15 percent of total sales. That is not a typo: 0.001 percent of the eight million tracks sold that year generated almost a sixth of all sales. It is hard to overstate the importance of those few blockbusters in the head of the curve. And the trend suggests that hits are gaining in relevance. In 2007, 36 tracks each sold more than a million copies; together, these tracks accounted for 7 percent of total market volume. In 2009, 79 tracks reached that milestone; together, they made up 12 percent of the sales volume.
The level of concentration in these markets is so astounding, in fact, that it is nearly impossible to depict the demand curve: it disappears entirely into the axes. Taking a different approach to mapping the sales distribution, the chart that follows shows how much tracks of different levels of popularity contribute to the overall sales in the market. It is staggering to see how few titles at the top contribute to a significant portion of sales, and how many titles at the bottom fail to do the same. Those are the realities of digital markets. Assortments may become more and more expansive, but the importance of the few titles at the very top keeps growing, while average sales for the lowest sellers are going down.
Recorded Music Sales in 2011: Digital Tracks
In the recorded-music industry in 2011, more than 8 million unique digital-track titles together sold 1.271 billion copies. The figure shows how sales were distributed across groups of titles with different levels of popularity. For instance, nearly 6 million titles—74 percent of all unique titles—each sold fewer than 10 copies, accounting for only 1 percent of sales.
The same patterns are visible in album sales. As the next chart shows, out of a total of 880,000 albums that sold at least one copy in 2011, 13 album titles sold more than a million copies each, together accounting for 23 million copies sold. That’s 0.001 percent of all titles accounting for 7 percent of sales. The top 1,000 albums generated about half of all the sales, and the top 10,000 albums around 80 percent of sales. Deep in the tail, 513,000 titles, or nearly 60 percent of the assortment, sold fewer than 10 copies each, together making up half a percent of total sales.
The numbers certainly do not come close to the trusted “80/20 rule” that many managers live by, which supposes that 80 percent of the sales tend to come from 20 percent of the products on offer. For music albums, it is closer to an 80/1 rule—if we can speak about a rule at all. Even if we take a conservative estimate of what would be on offer in a bricks-and-mortar store at any given point in time, Anderson’s predictions that long-tail sales will rival those in the head are far off.
Recorded Music Sales in 2011: (Physical and Digital) Albums
In the recorded-music industry in 2011, more than 880,000 unique album titles together sold more than 330 million copies (including both physical and digital copies). The figure shows how sales were distributed across groups of titles with different levels of popularity. For instance, 513,000 titles—58 percent of all unique titles—each sold fewer than 10 copies, accounting for only 0.5 percent of sales.
Of course the goods in the long tail include not just true niche content but former hits as well. Sales of a blockbuster—even one on the scale of Lady Gaga’s The Fame or Maroon 5’s Songs About Jane—will eventually dwindle. Such products can now live forever online, even if they have long been cleared from physical shelves. For old hits, then, digital channels may present a real opportunity. But the large majority of products in the tail were not very successful to begin with. Most of them, in fact, never met the bar for a release through traditional distribution channels. Or, in the case of individual music tracks, they are orphans of unbundling activity: now that online consumers can cherry-pick the most popular tracks on an album, the rest shoot quickly into the long tail.
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These statistics for the recorded music industry are no fluke: my research on other sectors, such as video rentals and sales, yields the same patterns. Rather than a shift of demand to the long tail, we are witnessing an increased level of concentration in the market for digital entertainment goods. As illustrated by the chart below, the entertainment industry is moving more and more toward a winner-take-all market.
These trends take on greater meaning when we look at the behavior of individual customers. More than ever, it is vital for managers in the entertainment industry to understand who is responsible for the volume of business in the head and in the tail. Is a small group of fanatics driving the demand for obscure products? Or are large numbers of consumers regularly venturing into the long tail? Entertainment executives who pay close attention to the massive amount of data generated by online businesses can rediscover two old laws of consumer behavior first articulated by the sociologist William McPhee in the early 1960s, in his book Formal Theories of Mass Behavior. McPhee explored his theories in settings that typically provided fewer than a dozen alternatives. But my research reveals that his findings—which in many respects are directly at odds with Anderson’s thinking about the long tail—also hold true for the enormous assortments we now find online.
The Long-Tail versus Winner-Take-All Theory
After reviewing a trove of data, McPhee identified two important principles. First, he found that a disproportionately large share of the audience for popular products consists of relatively light consumers (those who buy a particular type of product infrequently), while a disproportionately large share of the audience for obscure products consists of relatively heavy consumers (those who buy that type of product often). In other words, obscure products are chosen by people who are familiar with many alternatives, whereas popular products are chosen by those who know of few others. Because it seems that hit products “monopolize” light consumers, McPhee called this phenomenon a “natural monopoly.” No wonder, then, that when Apple proudly announced it had amassed a hundred thousand iPhone apps in its App Store, over 98 percent of iPhone users had at the time shown no interest in any of the ninety-nine thousand least popular apps. In general, most people are perfectly content with the most popular products. (The wide appeal of these top titles is, of course, what makes them popular in the first place.)
Second, McPhee showed that consumers of obscure products generally appreciate those products less than they appreciate popular products. McPhee described this concept as “double jeopardy,” because niche products have a double disadvantage: first, they are not well known; second, when they become known, it is by people who “know better” and actually prefer the popular products. Netflix, for instance, should recognize this principle all too well: its niche titles receive significantly lower ratings than its hit titles. It perhaps sounds obvious, but many people intuitively believe the exact opposite—they think that the out-of-the-way movie or book is at least a delight to those who find it. In reality, however, the more obscure a title, the less likely it is to be appreciated.
This is not to deny the joy that a long-tail assortment can bring to consumers. Many YouTube users have felt the thrill that comes fr
om discovering a rare gem of a video, perfectly tailored to their sense of humor or style and theirs to share with like-minded friends. That is also what gives Anderson’s and Kyncl’s thoughts on catering to the niches such resonance. For Anderson, the strategic implications of the digital environment are clear: companies should learn how to tailor their offerings to niche audiences. But the problem is that for every Charlie Bit My Finger—Again!, an immensely popular video of a baby biting its older brother’s finger that has amassed over half a billion views, there are millions of other amateur recordings of babies that never appeal to anyone beyond the star’s immediate family. And that, in turn, creates significant headaches for content producers and retailers hoping to build lucrative, sustainable businesses online.
With more and more hours of videos uploaded every minute, YouTube’s challenge of profitably managing its vast assortment only increases. Even if each title costs a fraction of a cent to store and stream, those small amounts add up quickly given the assortment sizes that online businesses are accustomed to—especially if advertisers are unwilling to help support those long-tail titles. But not offering a long-tail assortment isn’t a solution: after all, as McPhee’s laws underscore, the heaviest consumers have a disproportionately strong interest in the tail, and cutting back on variety may lead them to switch to rivals.