March, 2005
When it comes to chronicling the fragmentation of media, there has been no shortage of ink spilled.
But one recent article on this subject, entitled The Long Tail by Chris Anderson, editor in chief of Wired, has stood out in capturing the imagination of the digital media world.
(if you already know about The Long Tail, feel free to skip to the next section)
The main idea of The Long Tail is that the constraints of traditional distribution systems (e.g. geographic proximity, radio spectrum, retail overheads, etc.) all have conspired to drive media marketers to concentrate their promotional efforts on a limited number of large-scale, big-name projects. As a result of this hits-driven mindset, the vast majority of creative projects are grossly under-promoted, generating small revenues.
The article asserts that the power of digital distribution is that it mitigates or even erases many of the physical world's limitations. Inventory costs are negligible, geographic boundaries are broken, manufacturing costs are gone. A world of abundant product selection is created. With marketing tools such as sophisticated segmentation, accurate recommendations and cost-based pricing, consumers are guided to products heretofore unseen and unknown, generating newfound revenues for them.
When this concept is plotted on an XY chart, the revenues from these smaller products extend out along the X axis, forming a line which looks approximately like a "long tail" on the head of the cluster of sales driven from the big-name, heavily- promoted products. Hence the name "Long Tail".
Anderson goes on to explain the power of Long Tail economics by citing sales and trend data in three media: books (Amazon), music (Rhapsody) and movies (NetFlix). It is no surprise that there is a lot more stuff out there than can possibly be fit on store shelves. What is surprising is that these three companies are finding that their aggregate sales activity for products they carry, but which are typically NOT available in traditional retail channels, is actually greater than their sales for those products that typically ARE found in those retail channels.
In other words, the combined revenues of all the niche products are larger than the corresponding sum for the hit products. Small-time products equal big- time profits. That, in a nutshell is the power of Long Tail economics.
There are dozens of "cable" (i.e. non-broadcast) channels. In the aggregate, they form the Long Tail of television programming, as compared with the small cluster of seven broadcasters. Cable programming started modestly as a tactic to elevate cable TV's value proposition from a simple "antenna" service and was long derided as a motley stew of has-beens and never-should-have-beens. Bruce Springsteen was even moved to write a song about it.
But as the quality of their programs has steadily improved, cable programmers (and operators) have begun realizing Long Tail economics. On the viewership side, for the last year the aggregate audience for the dozens of ad- supported cable networks during the crucial "sweeps" periods has been larger than the combined audience for the group of seven broadcast networks. In last month's sweeps, cable again nudged past broadcast by about 202K households.
And on the ad sales side, cable now gets approximately 41% of the dollars in the upfront ad market, compared to just under 20% ten years ago. Cable ad sales have just about tripled during this period to a projected $6B+ in 2005, driven by deploying increasingly powerful tracking and market segmentation tools that allow both national advertisers and small local advertisers to tap cable's potential. (data from Kagan Research LLC) The holy grail of cable ad sales is to obtain the same ratio of ad dollars to eyeballs, as compared with the broadcasters. That objective seems to be within reach.
In short, while it's taken approximately twenty years, Long Tail economics in cable programming are now being realized.
While these disruptive influences are well-known, their effects are not yet fully understood. Broadband and IP have opened up a new path to deliver quality video directly to the end-consumer; wireless connectivity and new devices are redefining how and where video is consumed; production costs to create high-quality digital programming are low and getting lower; video search engines from Google, Yahoo and Blinkx, which extend existing internet usage behaviors, are becoming more sophisticated and widely adopted; and most importantly, traditional television advertisers are increasingly shifting their mindsets (and their bucks) from big brand-building campaigns to surgical, ROI-based online tactics prompted by consumers' heightened disdain for commercial interruptions.
Examples of non-traditional publishers who are enticed by the potential of direct-to-consumer video opportunities abound. Recently I've seen video product demos on CNET and print reporters doing video news and features on USAToday.com and NYTimes.com. TheKnot.com is planning bridal related programming on its site. Last holiday season, I watched Amazon's short films. Meanwhile, a resurgent AOL.com is preparing a fall relaunch of its site with a video-centric strategy. Plenty of more announcements are on the way.
On the surface, operators should love the idea of new content that adds more value to their high speed internet value proposition. But, operators want to maintain their traditional role as the packager/retailer of video programming using their proprietary set top boxes. Maintaining a climate of shelf space scarcity increases their leverage over programmers in fee negotiations.
A longer tail of video available through other distribution channels (i.e. the internet) undermines this scarcity. In addition, to date, most operators have thought of their high speed internet services as primarily access businesses, not programming platforms. As one smart operator once told me "Do we really want to be in the role of driving our customers AWAY from their TV sets?"
Meanwhile programmers should love the idea of having direct access to their viewers after years of dependency on operators. In fact, recently everyone from Showtime to SciFi seems to be experimenting with streaming a show on the net. But part of these channels' value rests on the same scarcity principle. As an example, today there is only one "Travel Channel" on the dial. If they moved a big chunk of their video to the internet, does this hurt them by shifting eyeballs away from their TV-based programming (thereby hurting their ad revenues) or help them by opening up a new online revenue stream and further enhancing interaction with their brand? Are they even able to do this given current distribution contracts and rights clearances?
Finally, programmers already feel the pinch of operators trying to reel in the fees they pay programmers. If cable's retail video model was harmed in any way due to programmers going direct, that could only further strain existing economic relationships. So while a direct-to-consumer model is enticing on its face, complexities lie just below the surface.