In an earlier blog entry on content, readers provided a number of interesting comments. If you haven’t already read that article (and the comments), you may want to do so in order to understand this new article.
Many did not agree with my point of view. And that is great. I only wanted to stimulate some conversation.
Let me first address some of the comments (and I appreciate the time that everyone took in writing comments). The comment is in italics with my response following.
“I wonder if the Kindle model requires a subsidy to offset the upfront cost of technology development and/or design manufacturing.” Two thoughts come to mind. 1) No one has an issue paying $150 for an iPod even though the cost of the music is pretty much the same. 2) As new generations of eBook readers hit the market, prices will drop. Several are now on the market for under $200.
“The reason distribution appears to be the source of value isn’t distribution itself but the monopolistic nature of new distribution channels.” Indeed. And that’s my point. Those who aggregate are the ones who create positions of power. The content creators are not the power players. And the individual publishers certainly aren’t.
“If content was truly losing its ability to create value, Comcast would not try to purchase NBC–they might instead bid for Netflix or for a content delivery device company like Roku.” Great point. The reason why I mentioned Comcast’s acquisition of NBC was not to say that it was a good or bad move. I was only trying to point out that a few years ago, the networks were the ones doing the acquiring. Now the distributors are in a position to buy the content creators. It will be interesting to see what this Comcast deal does to Hulu.
“It’s the publisher that is not essential anymore – the content creators are also becoming content publishers due to technology.” Indeed, the publisher is now playing the role of middleman and is going away in many respects – or needs to play a very different role. As you suggest, content creators do have the option to go straight to the consumer now. And we are seeing a democratization of content. Having said that, content creators will still want to push their content to content aggregators – the source of the eyeballs. The reason why Google is so successful is that they are currently a significant player in how content is found.
Some interesting things have evolved in the past week since I wrote the first article. It appears that the big innovations are being developed by the content aggregators (not that that is surprising).
Google Digital Books: Google is offering eBooks on out of print books that are no longer subject to copyright restrictions. They scanned nearly 2 million books and will be offering them in digital form for about $8.
HP/Amazon paperback books: Soon after Google’s announcement, HP and Amazon.com indicated that they will offer print on demand paperback books for these out of print books. A 250 page book from their library of 500,000 can be purchased for about $15. A single copy can be printed in a few minutes.
Book Pricing War: Wal-mart, in an effort to crush Amazon.com, is offering 10 new release books for $10. Well, that was until Amazon said they would offer those same books for $10, at which point Wal-Mart dropped the price to $9. Target joined the price-war, dropping the price to $8.99. This caused Wal-Mart to drop the price to $8.98. According to the WSJ, “The publishing industry is also watching warily to see if the price war will have lasting impact on book pricing and the contracts that publishers sign with authors.”
BN Nook eBook Reader” Barnes and Noble, announced the release of their “Nook” eBook, intended to take on Amazon.com’s Kindle. One account says that the Nook is “closer to a printed book than its precursors in some respects, (in that it) allows users to lend their copies of electronic books to any friend who has installed Barnes & Noble’s e-reader application on a mobile device or personal computer.”
Comcast Premium Channel Streaming: Comcast announced that by end of the year, you will be able to watch popular cable television series such as HBO’s “Entourage” and AMC’s “Mad Men” on your computer without paying extra. They are reported to be the first cable TV operator to “unlock online access to a slate of valuable cable shows and movies, aiming to replicate what’s available on television through video on demand.”
Please don’t get me wrong. Content is necessary. As an author, I sure hope there is value in what I do. Amazon.com, iTunes, Wal-Mart, Barnes and Noble, and Comcast would not exist without content. So yes, content is important. I just wonder if it is still king.
P.S. As an aside, Andrew Odlyzko published an article entitled “Content is Not King” where he contends (according to Wikipedia) that “1) the entertainment industry is a small industry compared with other industries, notably the telecommunications industry; 2) people are more interested in communication than entertainment; and 3) therefore that entertainment content is not the killer app for the Internet.” I realize it is a different topic altogether, but it is interesting nonetheless.
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We often hear that content is king. But I wonder if this is still true.
Let’s take some very simple examples.
I am sure most of you know that the iPod was not a revolutionary invention. It was merely a new spin on the already existing MP3 player. The real innovation was the integration of the iPod with iTunes. This changed the game. Using this model, the distribution of content became as important as the creators (the musicians) and the publishers (the record labels). Apple is now one of the most powerful and profitable players in the music industry.
I now own an Amazon Kindle. I have to admit, I love it (I’ll blog about that another time). But what strikes me is that we are seeing the same “content distributor as king” dynamics unfold again. In the book business, the author’s royalty is a pretty small slice of the pie. I should know because I just signed a two book deal with Penguin’s Portfolio imprint.
Here are some illustrative figures for a printed book (kept very simple using made up, yet not far fetched numbers) …
- An author can expect about 10% +/- of the retail price of the book. So if the book retails for $25, the author gets $2.50.
- The retailer expects roughly a 50% discount and then they sell it for whatever they can get. If they sell it for a 20% discount, they gross approximately 30% of the price of the book (about $7.50). Their profit is quite a bit less due to overhead costs.
- Finally the publisher gets the remaining 40% or so – about $10 a book. By the time the publisher has covered all of their costs, books that sell poorly can lose them money because they need to pay the editorial staff, the various designers, the printers, and the shipping companies.
As you can see, the creator of the content (the author) gets a small slice. The publisher of the content gets a small slice. And the distributor gets a small slice. The rest of the money is eaten up in various costs.
Enter in the digital age.
Book on Kindle sell for $9.99 as a rule (we’ll make it $10 to keep it simple). Let’s look at an illustrative breakdown now.
- The author gets 5% of the retail (eBooks typically get a lower royalty) – $0.50. As you can see, an author can make 80% less with a Kindle book.
- The publisher and Amazon split the rest in a way I am not privy to.
- The publisher’s costs are lower because they don’t need to pay for shipping and printing. They still incur the upfront design and editorial costs.
- Amazon’s costs are close to zero. They only need to pay a small amount to Sprint to provide mobile services. No overhead (except maybe some computer servers). No distribution. No warehouses.
In this model, I want to be Amazon. Everything sold is nearly pure profit. The content creator (me) is definitely not the financial king in this model. The publisher does fine. But the distributor appears to be the one in charge.
This concept of distribution as king appears in all areas. I was speaking with a seasoned consultant from the retailing industry. He indicated that a few years ago, the power shifted from the manufacturers to the retailers. Wal-Mart has the lion’s share of power in the industry and they now call the shots.
You could argue that Google has a similar position, although their financial model is a bit different (AdWords accounts for most of their profit). But like other distributors, they don’t create content. Instead they aggregate content from a variety of sources into one distribution system.
I just read on Friday that Comcast may be buying a 51% stake in NBC from GE. This shows how the power is moving from the creators of the content (the writers) and the publishers of the content (NBC and their production staff) to the distributors of the content – Comcast.
Are you a content creator or you a content publisher? Does someone else control distribution? Or, are there new entrants who might control distribution? Beware. The current and future distributors/aggregators of your content could be one of the most serious threats to your business.
More to come…