But even more dramatic changes to the market for opera are afoot. In the early 2000s, there were close to 180 American opera companies with total gross receipts of $720 million. Attendance figures and revenues were quite concentrated: the top four companies accounted for nearly 50 percent of the industry’s revenues, and the Met had a budget nearly four times as large as the second-ranked player, the San Francisco Opera. The Met’s Live in HD revolution will, in all likelihood, increase the level of concentration even further and so amplify the winner-take-all structure of the market as a whole. To see why, we have to consider the competitive position of both larger and smaller opera houses.
The top echelon of the market stands to gain the most from the new distribution technology for several reasons. First, only a few world-class opera houses can afford the necessary investments in technology. The costs associated with simulcasting may come down dramatically over time—advances in digital technology tend to have that effect, after all—but for the time being, at over $1 million in expenses per simulcast (a sum that is largely made up of recording-equipment rental and labor costs), a Live in HD program is out of reach for the lion’s share of opera houses.
Second, only a few opera houses can acquire and retain A-list talent. The Met employs dozens of opera singers and musicians—their compensation accounts for over 30 percent of the Met’s total expenses. The market for opera talent is highly concentrated: although becoming a professional opera singer requires years of training in vocal technique as well as a mastery of languages and acting skills, few men and women actually enjoy a long-term career as a professional singer. According to Irene Dalis, a former Metropolitan Opera principal singer, only “one in 15,000 opera singers makes it.” But those reaching stardom, be it a Renée Fleming or Joyce DiDonato, can command $15,000 or more for a single operatic performance, and the biggest stars may appear in nearly fifty performances per year. The best-known and highest-paid opera singer in recent history, Luciano Pavarotti, reportedly earned $100,000 for a recital by the late 1980s; as a member of the Three Tenors, alongside Plácido Domingo and José Carreras, he earned a rumored $10 million. An elite group of musical directors and conductors also enjoy high-profile roles within opera companies. Many, like the Met’s James Levine, spend the majority of their professional careers associated with the same organization. The entertainers that come to dominate their professions and appeal to audiences and donors alike find themselves in a powerful position, forcing opera houses to compete for their services. Inevitably, the richest houses are in the best position to win the battle for A-list talent.
Third, because middling productions and mediocre talent are no substitute for superior production values and premium talent, only a few top opera houses can compete for global audiences. Imagine that several opera companies took a gamble on simulcast technology, and audiences in a movie theater somewhere on the planet had a choice between Carmen by the Met, La Bohème by London’s Royal Opera House, and La Traviata by the Lyric Opera of Kansas City. The Lyric Opera’s production would undoubtedly be excellent, but who would bet on that show to sell the highest number of tickets? Audiences expect to find the best operas and opera singers at the major opera houses, and these houses are global brands. Since the market for simulcast opera can only bear so much variety, Kansas City and other second-tier opera companies would find it difficult to compete. Consequently, it’s likely that only a few internationally renowned opera houses will be able to participate in the technological arms race. They will reap most of the rewards associated with any new distribution channels.
That’s not to say that smaller, local opera houses will not see any benefits from the new technology. The simulcasts may well stimulate a broader interest in opera, which could in turn be a boon to smaller opera companies. A Boston Lyric Opera representative who acknowledged that her opera house does not have the best talent but rather “the next level down,” believes that the simulcasts in the Boston area stimulated an interest in opera and brought new audiences to their opera house. But managers of other smaller operas are more concerned. Reed Smith, the general manager of Tri-Cities Opera in Binghamton, New York, said about the Met, “they are invading our space, to put it bluntly.” It may take years to properly assess the impact of simulcasts on smaller operas, but unless these houses find ways to differentiate themselves, it is likely that at least some of them will struggle to compete with the richer, bigger opera companies, which will further fuel a winner-take-all market.
In opera as in other entertainment businesses, content producers that have scale are best equipped to win the race for new technology and for the best talent, and therefore ultimately for audiences. David Gockley, general manager of the San Francisco Opera, has called the Met’s innovations “a bombshell.” He has sought to emulate the strategy, albeit with limited success. Other top-tier opera companies across the world have also stepped up their efforts to distribute operas through new channels. The Washington National Opera simulcast its productions to schools and universities, the Royal Opera House in London tried staging opera and ballet performances inside and outside Europe, and the Teatro Alla Scala in Milan distributed a live worldwide simulcast of its gala opening night. Meanwhile, the Metropolitan Opera has gone from strength to strength: in the 2010–2011 season, the Met collected a record-high $182 million in private donations and—evidence of its battle for the best content and biggest stars—ran on a whopping $325 million operating budget. The Met spent more putting on operas during that season than any other company in the world, and its budget was bigger than the next eight largest companies in the United States combined.
All in all, although advances in digital technologies may at first blush seem to have a “democratizing” influence, in reality they tend to have the opposite effect: they foster concentration and a winner-take-all dynamic. By making reproducing, distributing, and consuming media content easier and cheaper, new technologies increasingly give people around the world access to the most sought-after television programs, movies, books, and opera performances. In this rapidly evolving marketplace, blockbusters and superstars gain in relevance—and blockbuster strategies thrive.
Chapter Six
WILL DIGITAL TECHNOLOGY THREATEN POWERFUL PRODUCERS?
“I like the people at our record company, but the time is at hand when you have to ask why anyone needs one,” said Thom Yorke, singer and guitarist of British band Radiohead. It was 2007, shortly before the band would take the media world by storm by announcing a highly unconventional release plan for its new album In Rainbows. Radiohead would release its music as a digital download on the band’s web site only—and would allow each fan to decide how much to pay for it.
Formed in 1985 by five friends attending an elite private boarding school in England, Radiohead was one of the most popular and artistically significant bands of the late twentieth and early twenty-first centuries. Known for its brooding style, Radiohead made a splash in the US market with its single Creep in April 1993, which introduced music buyers to the band’s debut album Pablo Honey. The band released five more albums between 1995 and 2003, with OK Computer garnering the highest sales and most acclaim. It won the band its first Grammy Award, for Best Alternative Music Album. By 2007, Radiohead’s six albums collectively had sold over eight million copies in the United States alone, and the band had accumulated a huge following—“large enough to make albums zoom to number one and devoted enough to plaster the Internet with Radiohead fan sites, blogs, song discussions, and bootleg recordings,” as one reporter from the New York Times described it.
In 2003, with the release of its sixth album, Hail to the Thief, the band fulfilled its contractual obligations to its longtime record label, EMI, and chose not to renew its contract. By early 2005 Radiohead had begun to record In Rainbows, with no plans to sign a new contract with any record label. A two-year recording effort, the self-produced album’s music was shaped by feedback from fans who attended a tour in 2006. Many of the songs played on tha
t tour ultimately found their way onto the album, and live versions were posted on the Internet by fans who had recorded them at concerts. “The first time we did All I Need, boom! it was up on YouTube,” Yorke said about one of the songs. “I think it’s fantastic.”
By the time Radiohead was ready to release its new album, the music industry was nothing like what it had been when the band started its ascent to the top. Bricks-and-mortar record stores accounted for just over 30 percent of all album sales—an all-time low—compared with over half of all album sales a decade earlier, having consistently lost share to mass retailers such as Walmart and Best Buy, digital retailers such as Apple’s iTunes Store, and online subscription services such as Rhapsody. Music piracy, meanwhile, had proliferated, too: files were traded at an estimated ratio of twenty illegal downloads for every track sold.
Amid those difficult market conditions, Radiohead now planned to release its album in a fashion unprecedented for a musical group of its magnitude: not only would the full album be available exclusively through Radiohead’s web site for digital download, but consumers would have the option of setting their own price for it. When visitors to the site clicked on a question mark next to a blank price box, a message saying “It’s up to you” would display, and a subsequent screen would confirm, “No really, it’s up to you.” Only a service charge of £0.45 (or about $0.90) would be assessed for any download. Radiohead retained all rights to the album, and worked out an arrangement with its longtime music publisher, Warner/Chappell, to allow for proper payment of publishing royalties.
Some industry insiders dismissed the plan—conceived by the band and its managers Chris Hufford and Bryce Edge at UK-based Courtyard Management, and a significant break from the industry standard of fixed prices for music—as another nail in the coffin of the dying music industry. But Yorke was undaunted. Describing traditional strategies as a “decaying business model,” he declared: “You can say we’ve earned the privilege to do things our way.”
* * *
Radiohead’s front man may be right about the band having earned the privilege to do what it wants, but it is debatable whether self-releasing an album in this manner is a smart move. And even now, more than five years after In Rainbows was released, industry insiders wonder whether Radiohead’s actions foreshadow the future of the music industry, or whether the unusual album launch will remain a one-off experiment among superstar acts. What is clear is that there is a lot to be learned from how In Rainbows was received.
From the moment Radiohead announced its plans, the name-your-own-price gimmick was all that journalists covering the music business could write about. It suited Radiohead’s eccentric style, and the band had already established a reputation for experimenting with unconventional album release tactics. For instance, OK Computer was introduced with a single, Paranoid Android, which had no chorus, several tempo changes, and lasted six and a half minutes—much longer than the average radio-friendly pop song. The label also sent one thousand media-industry insiders a Walkman with the album permabonded inside. For Kid A, the band’s fourth album, Radiohead eschewed a traditional promotional approach, forgoing a single, a music video, and an accompanying US tour. Instead, the band released a collection of 10- to 40-second music “blips,” combining images of nature, animations, and photographs of the band’s members with audio clips, on music television channel MTV and on the band’s web site. Tony Wadsworth, president and chief executive officer of EMI, remarked that Radiohead “want[ed] to find other ways of doing what has to be done to get their records into as many hands as possible.”
Radiohead may not have been motivated by profits but, helped by the free publicity, the In Rainbows release was quite successful. To the surprise of many music-industry insiders, a significant number of consumers showed they were willing to pay even when it was not required—or, in true “stick-it-to-the-man” fashion, perhaps because it was not required. According to market research company comScore (which tracks hundreds of thousands of computer users), nearly two out of every five downloaders (38 percent, to be precise) paid for the album. Those who paid gave an average of $6, leading to an average amount spent per paid or free download of $2.26. A small group of fans pushed the average price up: one-sixth of all downloaders accounted for nearly 80 percent of total revenues, and close to one in every twenty downloaders accounted for nearly 30 percent of total revenues. Although Radiohead itself has not given out any sales figures, insiders estimate that the band sold between $6 million and $10 million’s worth of albums. At the same time, illustrating the pull of illegal downloading even in the face of such an appealing pricing scheme, the album was a big hit on peer-to-peer networks, too. Forbes and BigChampagne found that on the day of In Rainbows’ release, 240,000 people downloaded the album for free over BitTorrent, with another 100,000 people per day doing the same over the following days.
Another aspect of Radiohead’s innovative release should have attracted more attention than the pricing plan, however, since it is possibly of far greater strategic importance. Radiohead released its album through its own web site, without the support of a label or retailer. That tactic spoke to a second high-stakes debate about the effect of digital technologies on the future of the entertainment business. If one key question is whether these new technologies will create a profitable long tail of millions of niches at the expense of blockbusters, another is whether technological advances undercut the traditional role of content producers and distributors. Will digitization “disintermediate” them? That is, will established producers and distributors become superfluous when it is easy for artists and other talent to market their creations directly to consumers, as Radiohead did? If this were to happen, the end would be near for content producers and retailers—and thus their blockbuster strategies.
Fortunately for those established players, a close look at Radiohead and other examples suggests that wide-scale disintermediation is very unlikely. But that is not to say that this debate does not raise critical issues. Indeed, the possibility of disintermediation is a much greater threat to the business models of existing entertainment companies than the supposed rise of the long tail, and it is paramount for media producers to respond swiftly and adequately.
Exactly what is happening, and why? When questioning whether a type of business may be disappearing, we have to consider what marketers call the “marketing channel”—essentially all parties that are involved in producing, selling, and consuming a good. In its simplest form, the conventional channel for entertainment products consists of four “channel partners”: one or more creative workers, a producer, a retailer, and a consumer. In the recorded-music industry, the marketing channel can consist of a band such as Radiohead, a record label, an offline retailer such as Walmart or an online retailer such as iTunes, and a music fan.
People most often associate the growing importance of digital technology, and the lower transaction and search costs that it causes, with the distribution of products via digital stores—iTunes and Spotify in music, Hulu and YouTube in video, and Amazon in books. But digital technology can alter channels much more fundamentally and in many more ways, as illustrated by the chart that follows. Some of these effects—the threat of piracy, for instance, or the desire of amateurs to become producers—lie at the core of YouTube, Hulu, and many other new businesses. Most central to the question of disintermediation are two observations: first, that online media enable talent to skip its traditional channel partners and “go direct” to the consumer, as Radiohead did; and second, that producers can pass over retailers and market entertainment goods directly to consumers, as happened when EMI co-launched the web site MusicNet on which it sold its music.
Being able to go direct is one thing, but will creative talent make use of that ability, to the detriment of producers and retailers, their existing channel partners? Answering this question involves thinking through the functions that producers and retailers currently perform, which marketers call (rather unimaginatively) “ch
annel functions.” The central idea is that it is possible to eliminate a channel partner only if someone else steps up and takes over the essential functions performed by this partner. This is the “iron law of distribution,” which dictates that while you may be able to work around a channel partner, you cannot simply eliminate the channel functions that the partner performs.
How Digital Technology Impacts Channels for Entertainment Goods
Take the example of record labels in the music industry. Labels traditionally perform a wide range of channel functions: among other activities, they discover artists and help them develop their sound; advance artists money to cover their living and other expenses; provide career guidance; enlist the help of collaborators such as producers or music-video directors; fund recording sessions; enable the physical production of albums and songs; distribute the music to retail accounts; market the music (by getting music played on radio stations, for instance, or by connecting with retail partners to arrange in-store promotions); and handle royalty payments and other accounting issues. Granted, digital technology makes some of these tasks a lot easier or cheaper. Recording studio-quality music has become less expensive, and so has manufacturing albums—when all music is consumed digitally, there is no longer a need to produce physical copies. And distributing digital music is much simpler and cheaper than having to send out physical copies. For instance, Radiohead’s manager told me that the band shipped the digital version of In Rainbows around the world for a few pennies per album, taking all costs into account.
Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment Page 21