Monopolies, seven years later

Seven years ago, I wrote an article about media, copyright, monopolies and the future. You can find the unedited version right here. I'm fascinated by the stuff I got right, and amused that while the concepts are there, many of the examples would be different today.

Here's a (slightly) shorter version, because most people don't read long stuff so much:

You're a monopolist.

Not that there's anything wrong with that, of course.

If you're reading this magazine, it's likely that you're a successful member of the profit-seeking entertainment industry. And if you're making money in movies, books, music or TV, it's because you can take advantage of a legacy of monopolistic (or maybe oligopolistic) practices.

Having a monopoly is fun and exciting and fraught with power. It's also intoxicating.

How else to explain the hubris of three of Hollywood's best and brightest launching a well-funded website that managed to go out of business before it even launched? If you're used to being able to corner the market, it's easy to think that another medium is just another medium.

How else to explain the exploits of the RIAA as they valiantly duel with Napster, trying to put the genie of widespread music distribution back into the bottle. They're used to having a monopoly on the distribution of music, and they want it back.

How else to explain the antics of the book industry as they stumble their way through the minefields of Microsoft, Stephen King and free e-books? "Publishers control the distribution, not these weenies, dammit!"

It was great to be a monopolist. Steady profits and no hassles. It would be great if we could stay monopolists forever, wouldn't it?

Before you call the Justice Department, let me explain. The limited supply of content, the few choices of distribution--these practices are all legal... most of them are actually enforced by the government. But understanding where these monopolies came from (and why they're going away-fast(!)) will give you a new way of looking at your business, and it turns out that this sort of analysis can open amazing new markets and new ways of generating profits.

We know that if you offer a smart consumer two products that are absolutely identical (same quality, similar brand attributes, just as convenient), she'll choose the cheaper one. Gasoline stations have price wars-but movie theatres don't. Supermarkets lose money when they sell milk, but TV networks are dedicated to turning a profit on just about everything. The heart of the media business is the prospect of being a monopolist-of getting paid a lot more than our products cost to make. But when the monopoly goes away, there's not a lot of room for obscene profits. In markets where people have a choice between equals, the cheapest and most convenient often win.

Over time, the media business has done everything it can to be sure that consumers don't have a choice. After all, a CD increases in price about 25 times from the time it's made to the time it's purchased by the listener. And a TV ad that costs a network zero to broadcast might end up selling for a million dollars.

There are three things that led to the monopolies we now enjoy:

1. The FCC limited the number of TV and radio stations in every market, allowing three networks to dominate TV and the record companies to dominate radio.
2. Copyright ensures that we can charge a lot for a book or a record... way more than it costs to make it.
3. The limited number of physical distribution outlets (record stores, movie theatres) guarantees that distributors with clout get more shelf space.

This triad is responsible for the profits you're enjoying right now. Imagine a nightmare of a world in which all three legs on this stool disappear. At the same time.

Time to wake up. It just happened.

THE MONOPOLIES ARE DYING...AND THEY'RE GETTING DEADER

The past, the glorious, profit-making, fun past of the media business was based on:
• scarce creators, under long term contracts
• scarce retail outlets, able to be controlled with marketing muscle
• scarce spectrum (few radio stations, few TV stations)
• copyright laws (and a lack of technology) that limited theft of services
• limited power of the creators to compete without a large media company as partner

It's hard to outline a point of view that shows the power of any form of media getting stronger over the next decade. There are going to be more TV channels, not less. More ways for authors to distribute their works, not less. More ways for musicians to connect with listeners, not less. More ways for consumers to sample or take content, not less.

You were a monopolist. You're not anymore.

To succeed in the old days, here's what you needed to do (choose any two!):
1. Grab a piece of the electromagnetic spectrum, hopefully one limited by the government
2. Buy up the supply of actors or writers
3. Establish long term profitable relationships with distributors and retail outlets

Welcome to a new century. In the new century, we all have the same goal:
1. Establish a direct and positive relationship with the end user.

It sounds easy. It's not. It's scary. It's likely to wreck your business before it saves it. Doesn't matter. The truth is: businesses that don't aggressively pursue this tactic will disappear.

...

How dare he! He has no big studio money. He has no relationships with CAA and he doesn't exhibit at Cannes or NATWest. Yet he has an audience around the world. Yet he's building characters with real value-characters that will become toys or movies or t-shirts. He has violated every single rule of the old order, and he's still succeeding.

Could you imagine this happening ten or twenty years ago?

Now do this: Visit Publishers Lunch You'll get a free subscription to Publishers Lunch, a daily newsletter chronicling what's going on in the book business. It's free, of course, and it's always interesting and occasionally juicy. It's written and distributed by one guy, who every day increases his power by talking to thousands of people in the book business.

Could you imagine this happening five years ago?

Sorry to remind you, but consider the Drudge Report. Four years ago, nobody had ever heard of Matt Drudge. Today, for many Americans, he's one of their most important sources of news. He paid no dues, didn't work his way through a corporate hierarchy, owes nothing to the head of the network.

Hardly seems fair, does it?

...

...

Are all three of these examples perfect businesses, bound to bankrupt you and your peers? No way. They're nits. Chinks in the armor. Little businesses that might get bigger. Sure, there are tons of example of well-financed new media companies that went under. That's not the point. The point is that individuals with little or no money are building real media properties that are attracting the consumers that you want to attract. There will be plenty of carnage and disappointments in this new arena. Who cares? What matters is that there is a new arena. It's mere presence means that the monopolies are dying.

I had coffee with the executive producer of a network news show last week. He told me that every year, in addition to getting smaller in size, his audience, on average, ages almost a year. The people he needs in order to maintain his monopoly are finding something else to do with their time.

Need more proof? Take a look at Tivo and Replay. These digital VCRs have tiny audiences (but expect a bunch to sell this Christmas). It's easy to dismiss them as toys for the digerati. Easy, except for one fact: 80% of the people who use one of these devices skip all of the commercials during the shows they watch. ALL of them! Imagine. So much for the business model of the most powerful medium of all time.

...

Face it. The barriers are falling and they're falling fast. If there are limits to how many competitors you were facing, those limits are going away. There used to be room for just a few movies to open over Labor Day. But when movies are shown on DVD players in my house and yours, there's room for hundreds of millions of movies to open on the same day!

Think it's easy to sell banners on the Internet? There are 40 million different sites, with more every day. How much of a premium are you, the advertiser, willing to pay for one thousand impressions on this site instead of that site? That's why the CPM went from $100 a thousand to a buck in less than two years. What happens to the ad sales of your TV network when there are 40 million different TV networks? What happens to the budget for your new arthouse movie when there are millions of people cranking out their own arthouse movies?

You're not going out of business tomorrow. The structures you've built and perfected are going to stick around for a long time. We still want blockbuster movies and the Top 40 and Tom Clancy's next book. But it's not going to get better, more profitable or more fun. It's going to get worse.

As I write this, NBC has flown hundreds of its best people to Sydney. Is it possible to overpay for the Olympics? When the mass market is long gone, and network viewership is at an all time low, probably not. It's a fun way to revisit the glory days of Ed Sullivan and Mary Tyler Moore. Alas, in the long run, the folks who run the Olympics will end up with all the money and NBC (or whatever network is dumb enough to take its place) ends up with two weeks of memories and a black hole where their wallet used to be. People are wringing their hands over NBC's Olympic ratings. They say they're lousy because of the time zone issue. Nonsense. They're lousy because Americans are no longer willing to sit down for two weeks and all watch the same stuff, especially when it's jammed with irrelevant commercials.

The alert reader now interrupts and shouts, "Wait a minute!" After all, Pop.com just went bust. Viacom spent a ton on MTVi, and look where it got them. And Warner Bros. spent years and years with an entertainment portal (lately called Entertaindom) and it tanked as well.

"We're not against new media. We just think it's a bit of a fraud."

And my response is to cry foul. I spent years dealing with many of these organizations, and I was astonished and overwhelmed by the combination of old-media thinking, arrogance and lack of vision they managed to squeeze into just a few very well furnished audiences.

...

...Don't bring the old monopoly-driven mindsets to the non-monopoly marketplaces! Just because you can get away with being a bully ("Do you know who you're talking to!") in your current job doesn't mean that the mindset is going to fly in a world where the rules are different.

...

So now, the good news:

Oprah Winfrey launched a magazine in the Spring. It has millions of readers, starting from zero. Probably profitable from day 1.

Stephen King wrote a book and more than 150,000 gladly paid him for a chance to read the first chapter.

Jimmy Buffet is one of the most successfully recording artists working today, and he rarely makes a record.

The answer to your monopoly problem is to create a new monopoly. I call it the Permission Monopoly.

Here's how it works:

Everyone has a limited attention span. We can't read all the books we want, listen to all the music we want, go to all the movies. So we filter. We ignore. We procrastinate. And we hide.

Have you heard the new album from Bill Frisell? Read Descarte's Error? Seen Croupier? Didn't think so. No time. Of course, if someone you trusted insisted that you spend the time to try them out, you might. Of course, if they were created by people you'd liked in the past, you'd be more likely to try them out. If you could try them out for free, you'd be more likely to try them out as well.

In the past, Tower Records or The Tattered Cover or WNEW or General Cinema was appointed (by default) as the arbiter of what we'd pay attention to. If it got played on the radio, we heard it. If it was by the cash register, we saw it. If Brandon Tartikoff liked it, we watched it.

In today's million channel universe, though, those arbiters are a lot less powerful. Now, maybe I want Slate to recommend it. Now, maybe the programmer of my internet radio station has to cue it up.

So, without powerful arbiters, it's way harder for powerful media companies to modify the marketing conversation. Way harder for ten well-funded salespeople to get shelf space everywhere that matters. Way harder for a crack PR person to get you a review in just the right publication.

What's a megalomaniac media mogul to do?

The wrong strategy, it seems to me, is to go court and try to stop the leaky bucket. It also seems like a mistake to call the authors and filmmakers and others who abandon you, "crazy" or "short-term focused" or to say, "well, they can get away with that but the others can't."

The defectors know something you don't. The defectors know that if they hurry, they can build a new monopoly, a monopoly you don't control. They know that they can build a direct and long-term relationship with the end user, one that will survive competitive incursions and will last a long time. if they hurry.

And so, learn from these folks. you should hurry. You must hurry. If you understand that the game is radically and permanently being changed, you can go out today and start building mutually beneficial relationships with your listeners/readers/watchers. You can offer these folks something of value in exchange for their attention. You can then build a new monopoly.

Imagine trying to get Bill Clinton to allow you to publish his new autobiography. What happens when you can say, "We have a permission-based relationship with 32 million Americans, all of whom look forward to hearing from us every two weeks with our hot new book offerings. And by the way, our competition doesn't even have 10 names."

What happens when you're trying to break a great new trance band, and you have permission to send the first single, by e-mail, to 600,000 kids who loved the last trance band you broke? Think that helps your career?

PLEASE NOTE: I'm not talking about treating consumers the way you and other marketers have been treating them for a century. No churn and burn. No contemptuous, "we'll talk to you when we want to, otherwise keep quiet!" And no renting, buying or selling lists. No, I'm talking about treating this new client the same way you treat your most important retail account or radio station or theater owner. You don't show up at his house in the middle of the night (or if you do, you bring a big box of cubans). You don't send them e-mail spam, or call them on the phone over and over again.

You have a relationship. You understand that every interaction has to benefit BOTH of you or the relationship is over. If you're going to build a monopoly on consumer attention, you'll need to do the same thing.

Here's how I boil it down to as few words as possible:
1. Make it easy for your happy users to tell as many of their friends as possible.
2. Give away free samples early and often.
3. Get permission from anyone who likes what you do to follow up with anticipated, personal and relevant messages that benefit both of you.
4. If this requires changing what you make and what you charge for, fine.
5. If steps 1,2, 3 and 4 mess up your current business model, fine.

...

The new monopoly of the future is permission. Permission to talk to your customers directly about new stuff. Permission to teach, permission to ask, permission to learn. If you have that monopoly, you profit over and over and over again.

...
 

The power is certainly moving. It's moving from five oligopolistic status quo gatekeepers that controlled money and promotion and retail to a much messier, faster-moving, more interesting amalgamation of database keepers, musicians and fans. Today, there's a chance to co-op parts of that system. Tomorrow, that chance will be gone.