But many other tasks remain as expensive, cumbersome, or labor-intensive as before, even in a fully digital world. It is unlikely that anyone else in the marketing channel would be able to—or would even want to—take over all the roles performed by the labels. Consider just one of these functions, that of giving advances to aspiring artists. If no retailers or other music-industry businesses advance money to a promising artist, having a record label shell out, say, a $100,000 advance against future earnings can make all the difference. That money can allow the artist to stop moonlighting as a Starbucks barista to earn a living while trying to find time to finesse her tunes, and instead devote all her time to her craft. How many aspiring musicians, when given the opportunity to sign a record deal that involves a significant advance, would pass up that opportunity? Most artists take the record deal—and that is unlikely to change anytime soon.
Or consider the marketing function: if a label no longer funds an artist’s promotional expenses, uses its industry relationships to secure prominent placements, and otherwise organizes effective marketing campaigns, the artist will be left to fend for herself in marketing her music—certainly not an option for the faint of heart. And few artists will look forward to learning the intricate accounting rules and royalty-payment procedures that a label will normally take out of their hands.
The long list of channel functions performed by record labels makes it quite clear that the large majority of artists will continue to want and need those functions to be performed by others. In fact, the lower the barriers of entry into the music industry, the stronger the need for labels. That’s because the more artists compete for attention, the more standing out in a cluttered media world becomes paramount, which in turn means that the development and marketing budgets as well as the expertise of major labels will become increasingly important. The International Federation of the Phonographic Industry (IFPI), an international music trade body, estimates that it typically costs $750,000 to $1.4 million to “break” a new act in a major market, including up to half a million dollars in marketing alone; even then, only one in five acts ends up with a successful career. Globally, the IFPI estimates, record companies invested $2.7 billion in A&R and another $1.8 billion in marketing in 2011. It is unclear which player besides the labels is willing and able to absorb the significant risks associated with launching new acts.
Wide-scale disintermediation of record labels and other entrenched entertainment businesses therefore seems an improbable scenario. Even for new creative talent that has gained prominence in online channels, the benefits of signing with a record label, publisher, or other kind of established content producer are often too tempting to ignore.
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Canadian pop sensation Justin Bieber’s successful career offers a vivid illustration of the continued relevance of record labels. Bieber first made his name among teenage fans through his YouTube videos and social-network presence. His manager, Scooter Braun, discovered him in 2008 through those same videos after (or so the legend goes) clicking on one of them by accident while searching for a different artist. But when it came time to conquer the mass market, Bieber and Braun smartly relied on a partnership with R&B star Usher and a recording contract with L.A. Reid’s Island Records, which belongs to Universal Music Group. “I chose a major label because I knew Justin had it in him to be a worldwide act, and I needed to have foot soldiers on the ground,” Braun explained to me. “To build a worldwide act, I needed offices in Australia, and in Japan, and in Malaysia.… I needed people who know the culture in each region. And Universal Records is the best company in worldwide music. They can get us on the radio, and they can get us good retailing opportunities around the world. They have the right relationships, and have nurtured those relationships. I did not want to struggle through the creation of a worldwide infrastructure by myself—that would have taken years and years and years.”
Braun sees no reason for Bieber to spurn a major label like Universal and venture out on his own, even though his main client has now become a global phenomenon. “I still don’t have an office in Japan, the second-largest music market in the world,” Braun said. “But do I have people working there every single day thanks to my business partnership with Universal? Absolutely.” He added: “It is possible to become a worldwide act without a major label. But why dedicate all that manpower to selling records when you can spend your time on other things instead? Universal Music Group has an amazing roster of talent that they can leverage to help put artists into better situations in the music industry worldwide.”
In the book-publishing industry, Amanda Hocking made a similar choice. Described as “the darling of the self-publishing industry,” the Minnesota native started writing when she was seventeen. Eight years later, in 2010, while working full-time in an $18,000-a-year job, she began selling her young-adult paranormal and dystopian novels online. She undertook this effort without the help of a traditional publisher; instead, she worked directly with retailers such as Amazon and Barnes & Noble’s BN.com. By 2011, she had seven books on USA Today’s bestsellers list and had sold over a million copies of her books, priced between $0.99 and $2.99. Held up as an example of an author who had shrewdly circumvented the established publishing industry and promoted her novels via social media and blogs, she became only the second self-published author to sell more than a million e-books through Amazon’s Kindle Store. And yet, that same year, she shopped a new four-book paranormal series, Watersong, to major publishers, eventually signing with St. Martin’s Press, an imprint of major publisher Macmillan.
Why? Hocking’s explanation boils down to a desire to have St. Martin’s carry out the kinds of channel functions that publishers traditionally perform, thus allowing her to focus on what she enjoys doing. “I want to be a writer,” she wrote in her blog not long after the deal was announced. “I do not want to spend 40 hours a week handling e-mails, formatting covers, finding editors, etc. Right now, being me is a full-time corporation.” She added: “I don’t think people really grasp how much work I do. I think there is this very big misconception that I was like, ‘Hey, paranormal is pretty hot right now,’ and then I spent a weekend smashing out some words, threw it up online, and woke up the next day with a million dollars in my bank account.… This is literally years of work you’re seeing. And hours and hours of work each day. The amount of time and energy I put into marketing is exhausting. I am continuously overwhelmed by the amount of work I have to do that isn’t writing a book. I hardly have time to write anymore, which sucks and terrifies me.” Self-publishing is “easier to get into but harder to maintain,” she wrote. “It may be easier to self-publish than it is to traditionally publish, but in all honesty, it’s harder to be a best seller self-publishing than it is with a house.”
Even though digital technology makes it possible for authors, musicians, and other entertainers to “go direct,” it is unlikely that many artists who find themselves in Justin Bieber’s and Amanda Hocking’s shoes will take a different path than they did. In the recorded-music business, major record labels still reign supreme: of the top one hundred albums on the Billboard chart in 2012, eighty-seven were released by one of the “big four,” Universal, Sony, Warner Music, and EMI. And if wide-scale disintermediation of content producers is unlikely to occur in the recorded-music and book-publishing businesses, it is even less probable to disrupt the movie and television industries, where complex entertainment goods such as films and television programs bring together large teams of creative workers and require huge up-front costs. For most creative talent, no matter what kind of entertainment business they work in, established producers provide valuable services that they would prefer not to perform, or simply cannot perform as effectively, by themselves.
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Even so, it would be a mistake to dismiss disintermediation as a myth and simply get on with business as usual. The fact that entertainers can use online channels to interact directly with consumers has real consequences for media produc
ers and the profitability of their businesses.
First, digital channels give a small group of successful entertainers the opportunity to build up sizable fan bases by themselves.This gives them power in negotiations with media producers, which, in turn, enables those stars to secure higher compensation. St. Martin’s had to overcome several other major publishers’ bids in a hotly contested auction for Amanda Hocking’s new series of novels, eventually paying a staggering $2 million for the global English-language rights. Because she keeps 70 percent of all revenues generated with her self-published e-books, Hocking could afford to push hard for a top-dollar deal when making the move to a traditional publisher—if the advance had been less than spectacular, she certainly could have walked away. After all, self-publishing had provided her with a viable and lucrative alternative, and at the rate she was selling e-books, she could have afforded to hire her own editor, publicist, marketing manager, and assistant to ease the non-writing workload. Likewise, if Justin Bieber had not been a YouTube phenomenon when he signed with Island Records, he surely would have received a lower advance. For media producers, the upside is that Hocking and Bieber are safer investments because of their track records, but those better odds of success come at a price.
Second, even if only a few superstar acts disintermediate producers and sell directly to consumers, as Radiohead did, that could have severe implications for the portfolios of major publishers, record labels, and other content providers. Losing the superstars that major content producers have so carefully developed and marketed can wreak havoc with their finely tuned blockbuster strategies, not least because top artists tend to bring in the highest revenues and profits. Adding fuel to this fire is a problem of timing: it is the superstar entertainers that may feel most motivated to leave, as they often are at a stage in their life cycle when they would prefer to take on more risk in return for a larger share of the revenues generated with their brands.
The release of In Rainbows came at just this career stage for Radiohead. After deciding to release the album themselves, the band got to keep nearly all the revenues, whereas it would have had to settle for around 15 percent of album and song sales under a conventional record deal. Provided they can drum up sufficient demand, stars who choose to sell their products directly to consumers can reap huge rewards. Yorke acknowledged as much: “In terms of digital income, we’ve made more money out of this record than out of all the other Radiohead albums put together, forever—in terms of anything on the Net. And that’s nuts.” We should not read too much into Radiohead’s motivations in this single instance (as Yorke once said: “It was simply a response to a situation. We’re out of contract. We have our own studio. We have this new server. What else would we do?”), but the financial result of the experiment was striking.
Another instructive example of talent selling direct to consumers comes from the world of television. In 2011, the entertainer Louis C.K., known for his stand-up comedy shows that aired on HBO and Showtime, among other networks, sold his self-produced and self-directed comedy special, Live at the Beacon Theater, through his own web site. Addressing his fans (or, rather, the “People of Earth,” as he put it) four days after the launch, C.K. wrote: “The experiment was: if I put out a brand new standup special at a drastically low price ($5) and make it as easy as possible to buy, download and enjoy, free of any restrictions, will everyone just go and steal it? Will they pay for it? And how much money can be made by an individual in this manner?” Quite a bit, it seems: C.K. sold 50,000 copies within twelve hours, and 110,000 copies in those first four days, yielding a profit of $200,000 (“after taxes $75.58,” he quipped). “We can safely say that the experiment really worked,” C.K. concluded. Total sales of the special are now reportedly well above $1 million. Fellow comedians Aziz Ansari (helped by C.K.) and Jim Gaffigan promptly followed suit, also self-releasing their specials. C.K. took his adventure one step further in 2012 when he decided to forgo Ticketmaster and instead sell tickets to his stand-up tour directly from his site.
Not every established superstar with a large following will take this route—for one thing, it requires an entrepreneurial spirit that not every artist possesses—but those who do can use online channels to command a bigger cut of the income streams involving their brands. The odds are decidedly stacked against niche acts, however. As Thom Yorke said about Radiohead’s success with In Rainbows: “It only works for us because of where we are.” Less established artists without a strong fan base and without any marketing clout generally have little monetary value to gain from going direct.
Digitization, then, has given rise to two intriguing phenomena. First, a number of creative workers have used the new technologies to sell their products directly to consumers, risen to the top in online channels, and subsequently landed big contracts with established media producers. Second, a few superstars who have come up in the traditional way have used online channels to venture out on their own under more lucrative revenue models. Rather than undermine the role of blockbusters and superstars, digitization therefore only further fuels a winner-take-all trend. Over time, an even higher share of the total income is likely to go to the top talent, and we will probably see more—not less—concentration in markets for entertainment goods.
Anxious about the possibility that advances in technology may prompt their best talent to leave, content producers are fighting back. In the music industry, labels are turning to longer-term contracts with newly signed talent. Locking acts in when they do not yet have any bargaining power ensures that the labels can benefit longer from their investments in talent development. Record labels are also diversifying their activities to give artists more reasons to stay. This trend is reflected in the “360” deals that virtually all labels now ask new artists to sign; such deals allow labels to benefit in multiple ways from their efforts to build an artist’s brand.
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The same factors that make it difficult for talent to take over a content producer’s functions also prevent wide-scale disintermediation of retailers. That is not to say that online retailers won’t replace bricks-and-mortar retailers—in fact, such a trend is very much under way, as the closings of Tower Records in music, Borders in books, and Blockbuster in movie rentals illustrate. Online retailers offer a compelling set of benefits to consumers. For instance, they usually offer a wider assortment and therefore more choice, enable easy browsing using recommendation engines (as opposed to requiring consumers to sort through shelves of physical products), and provide the convenience of placing orders from home. But even as retailing moves online, creative talent will find it difficult to take over the core functions these retailers perform. It is one thing for Radiohead to generate publicity and attract audiences to their web site; it is another thing entirely for a little-known artist to do so.
Retailers also help consumers by effectively acting as a filter and aiding them in making choices. In a market without retailers, consumers would somehow have to make themselves aware of all the product offerings in a favorite category—albums by hip-hop artists, for instance, or books by up-and-coming fiction writers—and then find a way to choose among them. While some consumers may enjoy the endless searches that doing so would entail, most people are perfectly happy to pay a little extra for the luxury of having someone else do this work for them.
In fact, rather than weakening the position of retailers in the marketing channel, the shift to online selling is actually creating ever more powerful retailers and other aggregators. The iTunes Store has a larger share of the online music market than any single retailer ever had of the bricks-and-mortar market for recorded music. iTunes has already overtaken Walmart in market share in music retailing in general. Similarly, in advertising-supported online video there are really only two players that matter, YouTube and Hulu, while Amazon dominates online book sales. Here, too, the rise of digital technology has fueled concentration—and not fragmentation—in the marketplace. And because these retailers are responsible for such a
large percentage of the sales generated in certain entertainment sectors, creative workers in those sectors bypass them at their peril. Aside from a few superstars with massive followings, most artists will find it very difficult to generate significant levels of demand for their products without the help of these retailers.
Just as creative workers have been experimenting with selling their products directly to consumers, many established content producers have begun rethinking their role in the marketing channel, and specifically their position vis-à-vis established aggregators. Indeed, one of the keys to the future of entertainment markets lies in the evolving relationship between producers and retailers. The world of sports—which seems ahead of many other entertainment sectors in the search for ways to use digital channels to generate revenues—offers important clues.
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When a special request comes in from Apple’s highest echelons to send two of your best people to the technology giant on a three-week assignment during the most hectic months of the year, without any other information to go on, is it wise to agree without blinking an eye? Bob Bowman, chief executive officer of Major League Baseball Advanced Media (commonly referred to as BAM), was about to find out. It was late January 2010, and Bowman made his way to a fifth-floor conference room in BAM’s offices, where a team of executives, product managers, and engineers had gathered for their weekly mobile meeting. Among those present were the two team members who had just returned from their stay at Apple’s headquarters in Cupertino, California—a visit that culminated in their appearance onstage with Steve Jobs, then Apple’s chief executive officer, as part of the much anticipated unveiling of Apple’s new mobile device, the iPad. Now, Bowman would learn how much BAM still needed to do to turn the demo shown to the audience in Cupertino—which had garnered rave reviews from tech industry insiders—into a fully workable app, and devise a marketing strategy for it.
Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment Page 22