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Summary and Analysis of Streaming, Stealing, Sharing: Big Data and the Future of Entertainment
Based on the Book by Michael D. Smith and Rahul Telang
By Worth Books OPEN ROAD INTEGRATED MEDIA
Copyright © 2017 Open Road Integrated Media, Inc.
All rights reserved.
ISBN: 978-1-5040-4428-8
CHAPTER 1
Summary
Part I: Good Times, Bad Times
1. House of Cards
Technology is changing the entertainment industry and data is driving the decision-making. This is in stark contrast to previous decision-making that was based on "gut feel" and consolidated industry control.
Take the television series House of Cards, for example. Netflix had data showing a substantial audience for the original series, the main actor, and the director. Given this data they elected to forego a pilot and to release an entire season at once.
This, in turn, provided the writers and producer far more flexibility in the development of the series. It also generated considerable excitement for the audience and allowed that audience to watch the series as they chose: one episode at a time or by binge watching every episode.
Need to Know: The authors identify Netflix's advantages over traditional film studios and television networks:
• Detailed information about audience behavior.
• Personalized channels for distribution.
• Personalized promotion.
• New ways of developing content (no commercials, as one example).
• Creative freedom without the restrictions of broadcast requirements.
• Delivering one-stop shopping convenience to address the potential of piracy.
• Monetizing the content through a bundled service rather than single sales.
They also point out that digital technologies are helping smaller organizations overcome the major producers' economies of scale and market dominance. They see these key factors at play:
• Distribution channels with nearly unlimited capacity.
• Competition from digital piracy networks.
• Low-cost production technology.
• New distributors from Amazon to YouTube to Apple's iTunes.
• Advanced computing techniques to gather and analyze consumer behavior data.
2. Back in Time
This chapter explores the historical development of the music industry. It begins with the publishing of sheet music, moves to the creation of the phonograph and gramophone, and ends with the development of recording artists.
The Depression saw record sales drop from 150 million to 10 million units. This started a wave of consolidation and, by the late 1940s and early '50s, just six companies produced 158 of the 163 gold records over that time. There was a surge of growth in small independent producers in the '50s when the large firms ignored rock and roll. But by the '70s the larger firms had seen their error and had acquired most of the smaller firms.
Need to Know: The large music producers use their size and scale of operations to manage the cost and risk of finding new artists and bringing them to market. They also use their size to maintain control over those artists and over the downstream distribution of their music. This same pattern is found in the film industry with six major movie studios and in publishing with six major publishing houses. They exert the exact same control.
3. For a Few Dollars More
Publishers face three key challenges: extracting the maximum profit for each publication, generating consumer awareness of their publications, and competing with other publications in the market.
Traditionally, maximum profit was extracted by first publishing a hardcover book at a high price, extracting maximum profit from consumers who must read the book at any price. This was followed by publication of a paperback edition, lowering the price point to attract those who did not see the benefit of purchasing the hardcover book. Then ebooks arrived on the scene.
Smith and Telang conducted an experiment where 83 titles were released simultaneously with the ebook version and another 99 titles where the ebook was released up to eight weeks after the hardcover book. They found first that there was no impact on hardcover book sales regardless of when the ebook was released. Second, they discovered that ebook sales were 40% lower for those that were released after the hardcover book.
The authors touch on a similar approach in the music industry with the release of deluxe and regular editions of albums. They also address the much more complex motion picture industry, which involves theatrical releases, hotel and airline releases, pay-per-view cable, DVDs, and television broadcast.
Need to Know: Technology threatens market control in the entertainment industry through rapid and broad information availability, nearly costless distribution, and customer preference data. This threatens existing business models that are built on consumer segmentation (hardcover book buyers versus paperback book buyers) and pricing discrimination between those segments through controlled distribution.
4. The Perfect Storm
The "perfect storm" refers to the changes that arrived in the entertainment industry in the 1990s: a move from analog to digital media, increasing use of personal computers along with the advent of mobile technology, and the rise of the Internet. The authors refer to the term "a2b" or the shift from atoms to bits.
Take Encyclopedia Britannica, for example. In 1990, entire sets sold for $1,500 to $2,000. Sales commissions were $500 to $600 on each set. The organization's most important asset was its sales force. They refused to consider lower cost digital editions because they would lose their highly compensated sales force.
As digital alternatives were introduced — such as Microsoft's Encarta, priced at $99 — the entire definition of an encyclopedia was expanded to include search, video, hyperlinks, and continuous updates. From 1991 to 1996, Encyclopedia Britannica's sales dropped by 50%. In 2012, with Wikipedia in full use, Encyclopedia Britannica announced it would no longer produce a print version, ending 200 years of publication.
Need to Know: There were four main factors that combined in the perfect storm:
• Consumer-perceived product value changed from printed volumes to digital access.
• High-margin direct sales were replaced by low-margin retail sales.
• Established business processes for direct sales could not be changed due to management structures and culture built on the old model.
• Market power rapidly shifted to digital and online products.
Part II: Changes
5. Blockbusters and the Long Tail
This chapter focuses on the online sales benefits to consumers when purchasing blockbuster publications versus purchasing more obscure or niche publications. From the authors' detailed study in 1998–1999, considering sales of books and CDs across 8,500 price observations from 41 different retailers, they found that online prices were 9–16% lower than prices in physical stores.
In 2000, Smith and Telang compared Amazon book sales data with a publisher's total sales data. They found that one-third to one-half of Amazon's sales came from titles that would not be available in physical stores. They estimate that the value to consumers in gaining access to obscure titles was nearly $1 billion a year. This is 10 times the value gained from lower online pricing.
Online book sales increased from 6% of total book sales in 2000 to 30% in 2008. New titles increased from 122,000 in 2000 to 560,000 in 2008.
Need to Know: Managing blockbuster titles requires selecting a few products to bring to market and controlling the promotion and distribution resources to ensure their success. Managing long-tail titles requires an online platform that maximizes access to a broad range of products and that uses data to recommend products through peer reviews and individual consumer preferences.
6. Raised on Robbery
Steve Jobs said, "You'll never stop [piracy]. So what you have to do is compete with it." This chapter focuses on whether piracy actually harms producers as well as consumers, and what works to combat piracy based on empirical data.
In 1999, the online music-sharing service Napster rose to prominence. Over the next four years, total revenue in the music industry dropped by 25%. There were many factors at play, including unbundled digital single tune sales and perhaps shifting consumer use of free time. But all evidence points to harm done to producers.
Had it hurt the consumers, the evidence would reveal itself in the lack of investment in music because of reduced quality and fewer available titles. The authors found that the quality and number of titles remained stable, due, in part, to new technology that greatly reduced the costs of creation, promotion, and distribution.
Need to Know: The authors found two primary ways of combatting piracy: providing a high level of service and working with government agencies to shut down piracy sites. With the first, Smith and Telang found consumers were willing to pay more for services such as iTunes, which provided convenience, reliability, and quality as opposed to the music illegally downloaded. Paired with the government's help in piracy site shutdowns and notices, stealing music saw it's first decline, and legitimate sales, in one cited example, started to climb by 20 to 25%.
7. Power to the People
The power to control access to entertainment markets has shifted from major publishers, music labels, and film studios to the authors, artists, and producers as they are increasingly sought out directly by consumers. The critical aspects that have made this shift possible are:
• Cost of creating content: Low-cost cameras and editing software allow anyone to produce high quality content.
• Cost of production facilities: The YouTube partner program allows ready access to editing equipment in major cities around the world.
• Freelance hiring: Online services open up hiring freelancers in every required skillset anywhere, and at low cost.
• Sales platform access: Amazon Kindle Direct, Apple iBookstore, and many other platforms allow direct sales access by creators, eliminating traditional publishers in the process.
One example the authors cite is Lindsey Stirling, a hip-hop violinist. Shunned by major music labels, she posted a video on YouTube, and now has nearly 7 million subscribers, published two albums that hit #2 and #23 on the Billboard 200 chart, and completed a 55-city world tour in 2015.
Need to Know: With the advent of new technologies, along with direct market access, the amount of content available to us has exploded. The number of new books being released jumped from 122,000 in 2000 to 3.1 million in 2010. New albums increased fourfold during the same 10-year period, and YouTube adds 300 hours of video every single minute.
8. Revenge of the Nerds
The nerds, in this case, are the online retail sales platforms Amazon, iTunes, and Netflix. Now, not only do they have dominance of their markets, but traditional publishers, music labels, and film studios need to respond to their demands in order to stay afloat.
A case in point was NBC's attempt to renew its Apple iTunes contract in 2007. NBC wanted increased price flexibility, anti-piracy measures on Apple's iPod, and a share of revenue on iPod sales. NBC executives felt they were in a highly advantageous negotiating position with sales of their shows accounting for 40% of iTunes sales. Apple said, "No, thanks."
After that, piracy of NBC content increased by 11.4%, and spread to other networks' shows as consumers discovered the relative ease of accessing these shows illegally. By the fall of 2008, NBC was back with Apple with no benefit and continuing piracy.
Another factor at play is the volume of data that online retail platforms' have of their customers' buying habits and preferences. They leverage this data to develop interest and generate increased sales revenue. Moreover, the traditional players don't have access to the data on their own viewers.
Need to Know: Each of the leading online retailers now has a larger market share than the combined market share of the two largest physical store retailers. Plus, digital sales exceeded physical sales of movies in 2008, books in 2012, and music in 2014.
9. Moneyball
Playing off the book Moneyball, which is about using data to drive a baseball team to success on the cheap, the Smith and Telang show how data is being used to drive investment in the entertainment industry. Bill Carr, Amazon's vice president, is quoted as saying, "We let the data drive what to put in front of customers." He added, "We don't have tastemakers deciding what our customers should read, listen to, and watch."
The major drivers in the entertainment business are now Amazon, Apple iTunes, and Netflix. Amazon spent more than $100 million on developing new series in just the third quarter of 2014. Netflix planned to produce 600 hours of content in 2016. Both began as distributors of other people's products, now they are major producers of hits that are driven by data derived from their customers.
Need to Know: These new platforms have the following advantages:
• Tons of data on consumer viewing preferences and activities along with data-driven decision-making.
• On-demand availability of content coupled with direct promotion to consumers.
• One-stop shopping creates convenience and builds connections with consumers around their brand and content.
Traditional studios, music labels, and publishers have two challenges to overcome. The first is their "we've always done it this way" bias toward modern business models and "gut feel" decision-making. The second is limited direct customer data that can be used to drive production and promotion activities.
Part III: A New Hope
10. Pride and Prejudice
The authors present a case study review of Harrah's casinos to show the company's success story through transformating from an old-line gambling destination to a data-driven, customer-focused entertainment business. One of the biggest transformations was moving from a casino manager-focused business, driving revenue at each casino as led by their managers, to a data-driven operation across all their properties.
Their early data-driven analysis recognized that 26% of customers generated 82% of their revenue. The key finding was that these customers were not high rollers, but older adults and seniors who played the slot machines.
The keys to their data-driven operations are:
• Centralized data across the company, rather than individual casinos housing separate information.
• Data analytics has C-level importance and authority.
• All decisions must be informed by data.
• Marketing based on individual customer behavior.
A significant amount of the chapter focuses on a broader review of the four Ps of marketing to reveal new insights based on comprehensive data analysis:
• Product: Analysis of the music industry refuted the claim that selling albums resulted in higher revenue than selling singles. Instead, it increased revenue by attracting new consumers.
• Place: Data revealed that consumers are watching less live television because they are spending more time on the Internet.
• Price: While trends showed that consumers were extremely sensitive to online pricing of movies, they found that lowering the prices by half actually increased total demand by three or four times, resulting in total higher sales and profit. In the music industry, they found that prices for singles were 30% too high and albums were 30% too low. Making these adjustments resulted in substantially higher revenue and profits.
• Promotion: Analysis of online ads targeted at specific consumers resulted in four to five times the profit generated by broader advertisements.
Need to Know: Important insights into data analytics to the entertainment industry:
• Customer and market data must be linked across the organization to develop a true competitive advantage.
• Analytics staff must be centralized across the company to leverage the full value of collaboration across skill sets and achieve full integration of information.
• Data analysis must be at a high level in the organization to attract and retain staff, and to demonstrate its critical importance in the organization.
• Centralizing information will remove the function from business unit biases and influence, helping the team focus on finding answers to difficult corporate level questions.
11. The Show Must Go On
The turnaround of Apple began in 1997 with the return of Steve Jobs. Apple focused on the consumer experience, and realized that it would need to bypass existing retail channels and build its own stores to reach their customers directly. At that time, many computer stores were closing.
Apple focused on designing stores around the customer experience, testing what worked and what didn't, including offering the Genius Bar for service experience. Today, Apple has 453 retail stores, 50,000 retail employees, and serves, on average, a million customers a day.
The authors relate this approach to the entertainment industry, urging the industry to reach out directly to customers through vertical integration. This will allow the entertainment industry to gain control over interactions and will provide data on customer needs, actions, and preferences. This is the forte of digital delivery.
(Continues...)
Excerpted from Summary and Analysis of Streaming, Stealing, Sharing: Big Data and the Future of Entertainment by Worth Books. Copyright © 2017 Open Road Integrated Media, Inc.. Excerpted by permission of OPEN ROAD INTEGRATED MEDIA.
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