To say that the Internet has changed the media business is so obvious it barely bears writing; the media business, though, is massive in scope, ranging from this site to The Walt Disney Company, with a multitude of formats, categories, and business models in between. And, it turns out that the impact of the Internet — and the outlook for the future — differs considerably depending on what part of the media industry you look at.
THE OLD MEDIA MODEL
Nearly all media in the pre-Internet era functioned under the same general model:
Note that there are two parts in this model when it comes to making money — distribution and then integration — and the order matters. Distribution required massive up-front investment, whether that be printing presses, radio airplay and physical media, or broadcast licenses and cable wires; the payoff was that those that owned distribution could create money-making integrations:
Print: Newspapers and magazines primarily made money by integrating editorial and advertisements into a single publication:
Music: Record labels primarily made money by integrating back catalogs with new acts (which over time became part of the back catalog in their own right):
TV: Broadcast TV functioned similarly to print; control of distribution (via broadcast licenses) made it possible to integrate programming and advertising:
Cable TV combined the broadcast TV model with bundling, a particular form of integration:
THE ECONOMICS OF BUNDLING
It is important to understand the economics of bundling; Chris Dixon has written the definitive piece on the topic:
Under assumptions that apply to most information-based businesses, bundling benefits buyers and sellers. Consider the following simple model for the willingness-to-pay of two cable buyers, the “sports lover” and the “history lover”:
What price should the cable companies charge to maximize revenues? Note that optimal prices are always somewhere below the buyers’ willingness-to-pay. Otherwise the buyer wouldn’t benefit from the purchase. For simplicity, assume prices are set 10% lower than willingness-to-pay. If ESPN and the History Channel were sold individually, the revenue maximizing price would be $9 ($10 with a 10% discount). Sports lovers would buy ESPN and history lovers would buy the History Channel. The cable company would get $18 in revenue.
By bundling channels, the cable company can charge each customer $11.70 ($13 discounted 10%) for the bundle, yielding combined revenue of $23.40. The consumer surplus would be $2 in the non-bundle and $2.60 in the bundle. Thus both buyers and sellers benefit from bundling.
Dixon’s article is worth reading in full; what is critical to understand, though, is that while control of distribution created the conditions for the creation of the cable bundle, there is an underlying economic logic that is independent of distribution: if customers like more than one thing, then both distributors and customers gain from a bundle.
WHEN DISTRIBUTION GOES TO ZERO
A consistent theme on Stratechery is that perhaps the most important consequence of the Internet, at least from a business perspective, was the reduction of the cost of distribution to effectively zero.
The most obvious casualty has been text-based publications, and the reason should be clear: once newspapers and magazines lost their distribution-based monopoly on customer attention the integration of editorial and advertising fell apart. Advertisers could go directly to end users, first via ad networks and increasingly via Google and Facebook exclusively, while end users could avail themselves of any publication on the planet.
For Google and Facebook, the new integration is users and advertisers, and the new lock-in is attention; it is editorial that has nowhere else to go.
The music industry, meanwhile, has, at least relative to newspapers, come out of the shift to the Internet in relatively good shape; while piracy drove the music labels into the arms of Apple, which unbundled the album into the song, streaming has rewarded the integration of back catalogs and new music with bundle economics: more and more users are willing to pay $10/month for access to everything, significantly increasing the average revenue per customer. The result is an industry that looks remarkably similar to the pre-Internet era:
Notice how little power Spotify and Apple Music have; neither has a sufficient user base to attract suppliers (artists) based on pure economics, in part because they don’t have access to back catalogs. Unlike newspapers, music labels built an integration that transcends distribution.
That leaves the ever-fascinating TV industry, which has resisted the effects of the Internet for a few different reasons:
- First, and most obviously, until the past few years the Internet did not mean zero cost distribution: streaming video takes considerable bandwidth that most people lacked. And, on the flipside, producing compelling content is difficult and expensive, in stark contrast to text in particular but also music. This meant less competition.
- Second, advertisers — and brand advertisers, in particular — choose TV not because it is the only option (like newspapers were), but because it delivers a superior return-on-investment. A television commercial is not only more compelling than a print advertisement, but it can reach a massive number of potential customers for a relatively low price and relatively low investment of resources (more on this in a moment).
- Third, as noted above, the cable bundle, like streaming, has its own economic rationale for not just programmers and cable providers but also customers.
This first factor, particularly the lack of sufficient bandwidth, has certainly decreased in importance the last few years; what is interesting about TV, though, is that it is no more a unitary industry than is media: figuring out what will happen next requires unpacking TV into its different components.