Entertainment-as-a-Service

Jonathan

I just got back from a really fun (and delicious) lunch with Peter of Pantless Knights, who is in LA working on a hilarious new video, and one of the main things we discussed was the idea of Entertainment-as-a-Service. The term is a reference to the concept of Software-as-a-Service (SaaS), which is a business model generally contrasted with the conventional packaged or ‘shrinkwrap’ software model. Essentially, SaaS is a subscription business and packaged software is a retail business.

The entertainment industry is a retail business. Books, movies, tv shows, music are almost universally sold as one-off purchases. But, those things are just the packaging and the people selling them to you are just middle-men. The business of entertainment (not to be confused with the entertainment *industry*) is fundamentally a marketplace of attention between fans and content creators — fans have a finite supply of attention for which content creators are competing. So, then what is the entertainment industry? To use a very relevant analogy, it is the collection of intermediary businesses (i.e. publishers, studios, networks, labels) that have been acting like investment bankers, taking the raw materials of talent and creativity and packaging them up in a form they know how to sell (i.e. retail) and commanding a big slice of profit along the way. Entertainment doesn’t want to be a retail business, and that is the fundamental essence of the disruption the Internet has unleashed on the entertainment industry.

[Clarification: For the sake of this discussion, I’m using the term ‘content creator’ to represent those who add unique creative talent to the production process. As my dad pointed out, content creation is rarely a solo effort (most notably in film production, which can involve hundreds of individual contributors) to which studios, networks, labels, and publishers often contribute substantial value. But as those contributions are opaque and thus interchangeable as far as the consumer is concerned, I am excluding those who make them from the class I refer to as ‘content creators’ in this post. Otherwise said, even though the sound engineer plays a crucial role in creating the album, no one buys it based on *who* the sound engineer was.]

When you think about what elements of the entertainment business technology has really undermined, it’s nothing more than the packaging — the time slots and release dates and viewing windows and region codes that are artificial constructs of these middle-men trying to slice-and-dice the content into as many tranches as possible to squeeze out every last cent of profit. Just like the investment bankers and their CDOs fragmented and obscured the connections between investors and their investments, so have the studios, networks, publishers, and labels introduced complexity into the connections between content creators and their audiences. While that complexity, and the companies who created it, may have been a necessity in an era of technologically inferior marketing and distribution systems, they are simply market inefficiencies in the Internet age.

So, what is the difference between retail and subscription when it comes to entertainment? In a recent post on my personal blog about SaaS vs shrinkwrap software, I wrote:

The business model of packaged software invites feature bloat, because it’s upgrade driven and you need to continually find ways to justify why Thingamajig 2009 Pro Edition™ is so much better than Thingamajig 2008 Pro Edition™. Software as a Service businesses have a much different (and arguably greater) challenge, they need to continue to create value for their customers month after month….So, you end up with a much more customer-centric product…and a vendor who is truly interested in addressing your customer needs.

The first priority of a retail business is to maximize sales, building brand loyalty and repeat business may be means to that end but they always take a back-seat to whatever else will drive more sales. Whereas in a subscription business, customer retention (and thus customer satisfaction) is always top priority, even above new customer acquisition. So if a studio believes they can get a lot of people to see a crappy movie by spending more on marketing and less on quality, they will (and do, again, and again, and again…). Because all you’re buying from them is the packaging, they know you aren’t really paying attention to whether it’s a Fox or Warner Brothers or Paramount film (do you buy your cereal based on who made the box it comes in?). But, a director would rather disown a bad film than endorse the studio releasing something that doesn’t meet his standards and his fans’ expectations. This is because the director knows that his relationship with his fans is a subscription business, and if he disappoints them he will be unable to continue exchanging his content for their attention in the future. The studios understand this too — they don’t give Tom Cruise $25M (plus a cut of the gross) per movie because his acting skills bring $25M of quality to the screen, they do it because he has more than $25M in ticket, DVD, and merchandise sales worth of fans.

Entertainment is naturally a subscription business, and the Internet returns it to its natural state. The content creators who thrive online are those who understand this and focus on the ongoing satisfaction of their customers (see Ze Frank, Michael Buckley, Chris Leavins). The level of customer satisfaction these creators deliver is really only possible on the Internet because they can go direct-to-consumer without need of the middle-men and their packaging. These creators publish in all forms — video, photos, blogging, micro-blogging, music. They do not see themselves constrained by the legacy dividing lines of the entertainment industry, their goal is to entertain their audience by any and all means available. There is no distinction for them between primary and ancillary content, they are 360° entertainment brands. The other thing that has made these creators so successful online is their direct interaction with their customers. The best your most engaged fans can do offline is give you their personal attention (and the money that comes with it) and try to recruit others to do so as well. But online, they can interact with you and become part of the show. Empowering your customers is the surest way to make them even more engaged. As I wrote in another recent post on my personal blog:

Bringing your customers into the product development process has the dual benefits of helping you build better and more customer-centric products and making your customers your most passionate sales people (because after all, it’s their product too).

So, the Internet enables these creators to spend more time listening to their fans and creating new content they’ll enjoy while outsourcing the marketing to the community for free. This is the exact opposite of the offline retail model in which the studio takes money out of production budgets to put it into marketing campaigns. The ability to establish deeper relationships with their fans also allows online content creators to attain higher average attention per customer (ARPU) than is possible in the retail world, thereby making it easier to build more value by going deeper with a smaller audience.

To be clear, I’m not trying to say the only business model for content on the Internet is a recurring subscription fee. The ‘subscription business’ to which I’m referring is more the theoretical exchange of value between content creators and their fans, which can and will take many forms — including selling packaged goods. I’m also not saying that the online entertainment market is solely the domain of Internet-only content creators. In fact, I believe the Internet is most powerful as an entertainment marketplace when the quality and reputation of a historically offline content creator is freed of the constraints of the legacy packaged goods business model. Take for example Josh Freese, who gets extra points for using this freedom precisely to illustrate the absurdity of the conventional retail approach.

And now, I leave you with the profound product of the coming entertainment revolution:

P.S. Hat tips to Ian Rogers for the marketplace of attention thinking and Umair Haque for the marketing vs quality dichotomy.

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17 Responses to Entertainment-as-a-Service

  1. kareem says:

    brilliant post, strauss, and you’re standing on the shoulders of giants. can’t wait to see what you’re cooking up in the SF’s kitchen.

    • Steve, you’re right that ‘subscription’ is a potential red herring here because the term is loaded with too many pre-conceptions. I like patronage, though to me it still implies discrete (if chronic) exchanges of value (and it’s a little arcane ;-) ). In my mind, the concept of an ‘attention subscription’ is most clearly exemplified by what it means to be a *fan* of a creator. When you become a fan, it is a default state until you make the proactive decision to opt-out or ‘cancel’ your fandom.

      To me, that opt-out default state is what is so important about the subscription metaphor. Just like the default state for a Netflix subscriber is to pay their subscription fee every month, the default state for an Okkervil River fan is to buy their new album every time they release one or buy tickets to their show whenever they come to town. If at any point Netflix or Okkervil River disappoint me, I can decide to change my default state — but, there’s little chance I’ll ever come back. And just like Netflix offers different subscription options, there are different tiers of fandom (it’s more like a spectrum than tiers) — as evidenced by the self-segmentation and variable pricing being explored by Trent Reznor, Josh Freese, and others.

      However, I don’t think fandom is really a word let alone the right one :-). So, the search continues. As for the $100M movie, I entirely agree with you that the world of entertainment-as-a-service is not optimized for conventional ‘blockbusters’ and will be able to support a much smaller number of them than the legacy system. But in my mind, that is because the success of today’s blockbusters is artificially inflated by the scarcity of content in conventional distribution channels — i.e. “I guess I’ll go see the new Michael Bay movie because it’s the best thing playing at the theater by my house, not because it is the film I most want to most over all.” That’s why I don’t believe the conventional studio system can or should survive this transition.

  2. Robi Ganguly says:

    While you’re right that entertainment is fundamentally a service business, I think it does the thinking around this a bit of a disservice to limit this to just the entertainment industry. Because ultimately, you’re trying to think about how to move the entertainment business forward and it doesn’t appear that the industry is going to do it by only looking within.

    The reason the U.S. economy has steadily migrated to service industries is that creating “things” and selling them is just the first step in economic development. Creating services and perhaps more accurately, “experiences” (great and appropriately titled book: “The Experience Economy: Work Is Theater & Every Business a Stage” http://bit.ly/info/15nPSz) is where we currently find the highest value adds, economically. This is because of the issues that you’ve been touching on: customers who develop relationships with companies are often the most valuable and desirable customers.

    For this reason, I would say that your post is really insightful, but you kind of punted on the real question: what are the subscription business models that will enable the entertainment industry to transition appropriately?

    In software, a portion of the service companies are supporting themselves through subscription revenue streams. Plenty of others are right now trying the freemium model or free/”we assume advertising will work later” and we’ll see how that pans out for them.

    But we’re not seeing the entertainment industry experimenting beyond the free/advertising model. So, should they be? If so, how? Can they look at the Wall Street Journal and the Economist and learn from them? And what of the subscription revenues that are paid to cable companies and shared with the networks? How can these consumer subscriptions evolve to online models?

    • Ethan, you’re exactly right. When I worked on political campaigns, we distinguished between ‘earned media’ and ‘paid media’. This isn’t a new idea by any means, it’s what businesses have historically called PR or word-of-mouth. And because news coverage and voter discussion are relatively large awareness drivers in the political realm, they have always been seen as a first-class ‘marcom’ channels right up there with paid ads.

      But before the rise of the social web, these channels were never really big brand awareness drivers for business and were thus ignored or treated as much less important than paid media. However, much like an election cycle makes newspaper editors and coffee shop patrons more receptive and effective transceivers for political messaging, the social web has acted as an accelerant for online PR and word-of-mouth in the commercial realm. The combination of this amplification of reach and effectiveness coupled with the relatively low cost of ‘earned media’ channels compared to conventional advertising is what has now raised them to first-class channel status for businesses as well.

  3. debs says:

    just popping in to say – yummy – lots to chew on – will be back with more thoughts…

  4. Ethan Bauley says:

    This is also “demand-stimulating marcom” advice for businesses at all scales.

    That is: Why buy media when you can make it?

    (And I’m trying to imply a LOT of different things with that statement ;-)

  5. SteveR says:

    Great post, right on the money.

    Subscription business might be a sort of loaded word. Having beat my head against that wall in the music world for a long time, my most salient takeaway is that with a $/month classic subscription model, you are either overcharging or undercharging every customer. I know you didn’t mean it that way strictly speaking but as you take your show on the road you might save time inventing/using a term that has less baggage.

    I like the old skool term patronage where the artist has a large number of consumers who pay basically nothing but a small number with special access that pick up most of the bills. Not sure you’ll ever be able to make $100M movies that way though…

  6. fred wilson says:

    yes, yes, yes

    i hate file based entertainment because it lends itself to a sales model not a service model

    i also believe the economics of an annuity service business are far superior to a sales driven business

    great post

  7. rahmin says:

    A+ Strauss.

    I’ve used this and your ‘Crystal Ball for Studio Execs‘ posts as a litmus test for the folks I know in the entertainment industry. It’s shocking how few of them get it, arguing that today’s middlemen (studios, networks, etc) are the ones in control…

    The entire film industry today exists for DVD sales (over 50% of revenue). The studios are right, “content is king” – it just won’t be owned by the distributors/marketing machines moving forward – in a way, it will be owned by the fans.

  8. Ethan Bauley says:

    @jhstrauss

    Right, but what I’m really getting at is that one of the fundamentals about the “social now web” (that is being taken for granted a lot these days) is that it lets companies (or artists) *publish* their own information very cheaply (a distinct process from distribution). It’s cheap to both create and publish a video of an interview with your execs or product demo (or of your band horsing around in the studio).

    As you probably know from being around the entertainment industry, the source of disruption is *equally* distributed between cheap a) *production* and b) distribution. Cheap distro gets you high velocity WOM…but you have to give them something to talk about. Maybe that’s “a phenomenal cust svc experience” or “great product”, but it also might be an information complement.

    Put another way, what are the differences between a blog post about Product X written on AcmeCo.com (the vendor of Product X), whose “earned” audience is 500k people, versus a similar post on 3rdPartyMediaChannel.com, whose “earned” audience (i.e. not a paid placement) is the exact same 500k people?

    It’s tough to get to an apples/apples comparison, but I hope you see my point.

    Going back to my original thought, any information complement a company/artist makes doesn’t have to be a video commercial whose total cost of production is millions and millions of dollars (plus paid placement).

    In many ways, I see the media/advertising business as a middleman the same way I view the film/record industries. Company-customer and artist-fan are the same insofar as “vendor-buyer” relationships are concerned, imo.

    (This point also dovetails with Jeff Jarvis’s recent piece on the “inside out” agency, which I think is directionally correct, insofar as it points to the incongruous interests between some agencies and their clients)

  9. Strauss – really nice to see the SaaS/EaaS comparison and great discussion here.

    One of the biggest mindset shifts is understanding that the entertainer as proprietor of the business. Gary V, iJustine, Felicia Day, etc. have a direct stake in building their audiences. They manage their following directly, with minimal ‘middlemen’ interference. If they deliver crap, they lose those direct subscribers. It gets harder to pass the blame to a nameless Hwood bureaucracy.

    As far as the subscription models go, I actually don’t think the term is that loaded. It just comes in different forms.

    In the web series world, where I spend most of my time, I think we’ve actually got that already — from Tiki Bar TV drink mugs to Pure Pwnage t-shirts — it’s essentially opt-in sub fees via margins on the merchandise that keep those shows running.

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    • That’s a lot to chew on buddy :-)

      First of all, I think your definition of cheap ‘distribution’ is actually combining two things that I break out separately: a) distribution (i.e. availability) and b) promotion (i.e. awareness). I agree that production and distribution (my version of it) have been effectively commoditized at this point. But the nut that has yet to be cracked online IMHO (and thus where the conventional media establishment still has a huge advantage) is promotion. While the monetary costs of online promotion may be theoretically low thanks to the ‘viral’ power of social media, this is rendered moot by the fact that no one has really figured out a sustainable and reproducable way to realize its full potential. [Hint: that's a key part of the Snowball Factory's mission ;-) ]

      In terms of the differences between the types of distribution channels, I’ll point you to a recent comment I made on my buddy Hooman’s blog: http://www.widgify.com/?p=231#comment-118066.

      And finally, check out this post on the ‘memefication’ of bands, which I think supports your point that the type of content doesn’t really matter: http://www.hipsterrunoff.com/2009/03/the-memefication-of-your-band.html

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  13. I know I took a round-about way there, but the point of this post was to advise content creators on the best ways to approach building an online entertainment business. The reason I don’t make recommendations for how to save the entertainment industry is because I don’t think it can (or should) be saved. I believe entertainment on the Internet will be dominated by online-first content creators, and I don’t see the conventional studios, networks, labels, or publishers wanting or being able to make that transition. If this post was the introduction and the recommendations for the online content creators, the post I just wrote today is the continuation for the offline entertainment industry. Here’s the bottom-line to save you the read ;-) :

    If I were the head of a studio, I would stop trying to figure out how to grow the buggy whip business by keeping down the automobile. I would also recognize that transforming my profitable if shrinking buggy whip business into a money-losing automobile business making it up in volume is probably not in the best economic interest of my shareholders.

  14. Mark, you’re totally right on with the ‘entertainment as proprietor of the business.’ In fact I may have subconsciously paraphrased you the other day in a comment on the Topspin blog when I wrote:

    If [the conventional] model placed the artist in the role of an employee, doing their part of the job and handing it off to the next team on the assembly line, then this new model requires them to step up to being an entrepreneur and taking ownership of the end-to-end business of delivering, not just creating, their content.

    Re: subscription models, you are right on as well. My only point about it being a loaded term was in the context of people who aren’t as creative in their thinking as you and tend to leap to monthly payments anytime you use any variant of the word ‘subscribe.’ :-)