House of Cards (IV)

Perhaps this all means that Netflix will be the “winner” in digital motion-picture delivery. But perhaps not. Netflix, after all, faces challenges from Google, Amazon, and Apple, which, by virtue of their existing businesses, have competitive advantages of their own: the ability to subsidize content to obtain data on customers, enhance customers’ loyalty, or sell hardware. Netflix also faces challenges from the studios themselves, which are using platforms such as Hulu.com to vertically integrate into the digital distribution market.

The researchers don’t want to prognosticate in this series. We don’t know which firms are going to come out on top in the next phase of competition in the entertainment industries. But we do know how technology is changing the entertainment industries. That’s because for the past ten years, as faculty members at Carnegie Mellon University’s Heinz College, the researchers have led  an in-depth research program to analyze the impact of technology on entertainment. They have worked with many talented people at leading motion-picture studios, music labels, and publishing houses to use data and advanced statistical analysis to understand how technology is changing specific aspects of their business.

Their research with these firms has addressed every major consumption channel – legal or illegal, digital or physical – and has touched on nearly every major marketing and strategic choice facing these industries. They have learned an extraordinary amount. Their research has yielded new insights into the business and public-policy questions facing the copyright industries, unique access to industry leaders and datasets that have helped us address those questions, and an understanding of the challenges that companies in the entertainment industries face and the business strategies they can use to overcome them.

But while they were studying these specific questions, we began to ask a more general question: Is technology changing overall market power in the entertainment industries?

From a historical perspective, the answer to this question appears to be No. For 100 years, market power in the entertainment industries has remained concentrated in the hands of three to six publishing houses, music labels, and motion-picture studios. And these “majors” have been able to maintain their market power despite extensive shifts in how content is created, distributed, and consumed. In the twentieth century, low—cost paperback printing, word-processing and desktop publishing software, recording to magnetic tape (and later to videocassettes, CDs and DVDs), radio, television, cinema multiplexes, the Walkman, cable television, and a host of other innovations were introduced. Through it all, three to six firms – often the same three to six firms – maintained control over their industries.

The key to the majors’ dominance has been their ability to use economies of scale to give themselves a natural competitive advantage over smaller firms in the fight for scarce resources. Through these economies of scale, the “majors” successfully controlled access to promotion and distribution channels, managed the technical and financial resources necessary to create content, and developed business models that allowed them to determine how, when, and in what format consumers were able to access content.

Because these market characteristics persisted throughout the twentieth century, it is natural to conclude that no single change in computing or communications technologies would affect market power in the entertainment industries. But what if the entertainment industries are facing multiple changes? What if advances in computing and communications technologies have introduced a set of concurrent changes that together are fundamentally altering the nature of scarcity – and therefore the nature of market power and economic profit – in the entertainment industries? Consider the following changes that have been introduced by digital technologies:

1. The development of digital distribution channels with nearly unlimited capacity, which shifted the entertainment industries away from a world in which content was distributed through scarce broadcast slots and scarce physical shelf-space

2. The introduction of global digital piracy networks, which make it harder for content producers to generate profit by creating artificial scarcity in how, when, and in what format consumers are able to access entertainment content

3. The availability of low-cost production technologies, which shifted the entertainment industries away from a world in which only a privileged few were able to access the scarce financial and technological resources necessary to create content for mass consumption – a shift that has resulted in an explosion of new content and new creative voices

4. The introduction of new powerful distributors (Amazon, Apple, Netflix, YouTube) that can use their unlimited “shelf space” to distribute this newly available content, and which are using a new set of economies of scale to achieve global dominance in markets for content distribution

5. The development of advanced computing and storage facilities, which enables these powerful distributors to use their platforms to collect, store and analyze highly detailed information about the behavior and preferences of individual customers, and to use this data to manage a newly important scarce resource: customers’ attention.

Although a variety of experts have discussed various individual changes in the creative industries, no one has looked at them as a whole or used data to evaluate their combined effects rigorously. That’s what we hope to do with this and subsequent series of articles. And what we think you’ll see when you look at these changes as a whole, in light of the empirical evidence, is a converging set of technological and economic changes that together are altering the nature of scarcity in these markets, and therefore threatening to shift the foundations of power and profit in these important industries. That shift, in fact, has already begun.