Content is No Longer King….Long Live the King (Part 1)

October 4, 2009  

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…

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5 Responses to “Content is No Longer King….Long Live the King (Part 1)”

  1. Greg Y (@piplzchoice) on October 4th, 2009 2:08 pm

    Steve,

    Very interesting post. I wonder if the Kindle model requires a subsidy to offset the upfront cost of technology development and/or design manufacturing. Personally I do not find cost of electronic books, which is not much lower than a cost of a paperback, to reflect economic cost advantage of electronic publishing. Presumably higher availability at a lower cost would result in higher total revenue, but the reality IMHO is the high cost of the device, we currently experience, would make this relationship between content and distribution, non-sustainable.
    It seem the only scarcity we will continue to experience is the attention time people will be willing to spend. And that depends mostly on a quality of content. So to me content still is the king.

  2. Rishi on October 4th, 2009 9:39 pm

    Steve:

    An interesting observation, but I have to disagree with the hypothesis.

    The reason distribution appears to be the source of value isn’t distribution itself but the monopolistic nature of new distribution channels. Each of the examples you have cited describes a near monopoly over the distribution system. iTunes/iPhone don’t have a similarly sized competitor and neither does Amazon’s Kindle. The network effects of these distribution methods actually make them further entrenched and stronger–but, the underlying source of value is still the monopoly.

    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.

    Cable companies are worried that with the advent of content delivered over the internet (e.g. TV shows on the web, which have a much lower ad yield) they might be left out of the content value chain. They are responding first by preventing the spread of online TV and movies (notice the 250GB/month cap on home internet users) and they will now try to place bets on other sources of value: content being the biggest.

    See more on the subject: http://www.economist.com/businessfinance/displayStory.cfm?story_id=13611259

    Rishi

  3. Monica O'Brien on October 5th, 2009 9:26 pm

    I think the publisher/Amazon split is currently 35%/65%.

    Of course, we all know who holds the power still, so who knows if that will change.

  4. Monica O'Brien on October 5th, 2009 9:33 pm

    Sorry for the double comment.

    I meant to add that’s the split for the Kindle version of books, and it’s actually that the publisher gets 35% of the retail price. Amazon still pays 5%ish for affiliate sales from whatever is left.

    Also, the “content is king” motto came from a completely different context that what you are talking about here.

    While distribution is essential (and it’s one of the first things you learn in strategy – that the entities with more leverage pretty much squeeze all the profits from the system), content is also essential. It’s the publisher that is not essential anymore – the content creators are also becoming content publishers due to technology.

    Amazon is powerful, but still doesn’t hold all the cards – if they squeeze too much profit from the relationship, content creators will also start distributing their work themselves – right now it’s still very profitable for content creators/publishers to also list on Amazon.

    Thoughts?

  5. Content is No Longer King…Long Live the King (Part 2) | Business Innovation Speaker and Consultant Stephen Shapiro on October 21st, 2009 3:07 pm

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