But the reason I’m writing about it here is to highlight how many of the lessons Shirky has drawn from the plight of the newspaper industry in the Internet age can be equally applied to the entertainment industry (i.e. studios, labels, networks, and publishers). Here is my Readers’ Digest version of Shirky’s post with notes added to emphasize the analogies to the entertainment industry:

The problem newspapers face isn’t that they didn’t see the internet coming. They not only saw it miles off, they figured out early on that they needed a plan to deal with it, and during the early 90s they came up with not just one plan but several…As these ideas were articulated, there was intense debate about the merits of various scenarios…In all this conversation, there was one scenario that was widely regarded as unthinkable, a scenario that didn’t get much discussion in the nation’s newsrooms, for the obvious reason.

The unthinkable scenario unfolded something like this: The ability to share content wouldn’t shrink, it would grow…People would resist being educated to act against their own desires. Old habits of advertisers and readers would not transfer online. Even ferocious litigation would be inadequate to constrain massive, sustained law-breaking. (Prohibition redux.)…DRM’s requirement that the attacker be allowed to decode the content would be an insuperable flaw. And, per Thompson, suing people who love something so much they want to share it would piss them off.

Revolutions create a curious inversion of perception. In ordinary times, people who do no more than describe the world around them are seen as pragmatists, while those who imagine fabulous alternative futures are viewed as radicals. The last couple of decades haven’t been ordinary, however. Inside the papers, the pragmatists were the ones simply looking out the window and noticing that the real world was increasingly resembling the unthinkable scenario. These people were treated as if they were barking mad. Meanwhile the people spinning visions of popular walled gardens and enthusiastic micropayment adoption, visions unsupported by reality, were regarded not as charlatans but saviors.

When reality is labeled unthinkable, it creates a kind of sickness in an industry. Leadership becomes faith-based, while employees who have the temerity to suggest that what seems to be happening is in fact happening are herded into Innovation Departments, where they can be ignored en masse. This shunting aside of the realists in favor of the fabulists has different effects on different industries at different times. One of the effects on the newspapers is that many of their most passionate defenders are unable, even now, to plan for a world in which the industry they knew is visibly going away.

This is a classic example of Clayton Christensen‘s Innovator’s Dilemma theory in which entrenched incumbents (the newspapers in this case, but equally the labels and studios) see disruptive or even revolutionary innovations coming often before anyone else but still fail to adapt. Christensen’s explanation is consistent with if a bit drier than Shirky’s above. Entrenched incumbents are organizationally predisposed to choose sustaining innovations over disruptive innovations because of the phenomenon of middle-management. Middle-management is meant to act as a filter for senior management, and their incentive structures are generally set-up to reward passing up ideas that win the approval of their superiors. And of course the ideas most likely to win approval from senior management are those most similar to ideas that have been approved in the past. So, the system is inherently set-up to promote sustaining innovations and filter out disruptive ones — or as Shirky puts it, create “Innovation Departments, where they can be ignored en masse.”

Round and round this goes, with the people committed to saving newspapers demanding to know “If the old model is broken, what will work in its place?” To which the answer is: Nothing. Nothing will work. There is no general model for newspapers to replace the one the internet just broke.

With the old economics destroyed, organizational forms perfected for industrial production have to be replaced with structures optimized for digital data. It makes increasingly less sense even to talk about a publishing industry, because the core problem publishing solves — the incredible difficulty, complexity, and expense of making something available to the public — has stopped being a problem.

In his original Long Tail article for Wired (4.5 years ago!!!), Chris Anderson declared an end to the “tyranny of physical space.” What that meant was the Internet fundamentally undermines any business model based on technologically inferior distribution. As content has no inherent physical requirements for consumption (and thus distribution), any model reliant on that is technologically inferior and thus ripe for disruption. The effect of this disruption is to eliminate the market inefficiencies and redistribute any value that was artificially aggregated by exploiting them. In other words, the margins that the content distribution gatekeepers were able to extract from the old system do not exist in the new system without gatekeepers.

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can’t predict what will happen…And so it is today. When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution. They are demanding to be told that old systems won’t break before new systems are in place. They are demanding to be told that ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.

People invested in the old model don’t want to switch to the new model because, while it may be better overall, it’s less appealing to *them*. Would you ask the buggy-whip industry to pioneer automotive technology?!

Experiments are only revealed in retrospect to be turning points [my emphasis]…[T]here is one possible answer to the question “If the old model is broken, what will work in its place?” The answer is: Nothing will work, but everything might. Now is the time for experiments, lots and lots of experiments, each of which will seem as minor at launch as craigslist did, as Wikipedia did, as octavo volumes did.

Society doesn’t need newspapers. What we need is journalism. For a century, the imperatives to strengthen journalism and to strengthen newspapers have been so tightly wound as to be indistinguishable. That’s been a fine accident to have, but when that accident stops, as it is stopping before our eyes, we’re going to need lots of other ways to strengthen journalism instead.

We don’t really want movies or tv shows or CDs either, what we want is entertainment. By moving us beyond the “tyranny of physical space” the Internet is also freeing entertainment from the packaged goods business model that is required for physical distribution and opening up the possibility of real models for entertainment-as-a-service. And just because there isn’t an immediately clear answer to what the successful new models will look like doesn’t mean they won’t come in time or that they haven’t already.

The entertainment industry is a retail business. Books, movies, tv shows, music are almost universally sold as one-off purchases. But, those things are just the packaging and the people selling them to you are just middle-men. The business of entertainment (not to be confused with the entertainment *industry*) is fundamentally a marketplace of attention between fans and content creators — fans have a finite supply of attention for which content creators are competing. So, then what is the entertainment industry? To use a very relevant analogy, it is the collection of intermediary businesses (i.e. publishers, studios, networks, labels) that have been acting like investment bankers, taking the raw materials of talent and creativity and packaging them up in a form they know how to sell (i.e. retail) and commanding a big slice of profit along the way. Entertainment doesn’t want to be a retail business, and that is the fundamental essence of the disruption the Internet has unleashed on the entertainment industry.

[Clarification: For the sake of this discussion, I'm using the term 'content creator' to represent those who add unique creative talent to the production process. As my dad pointed out, content creation is rarely a solo effort (most notably in film production, which can involve hundreds of individual contributors) to which studios, networks, labels, and publishers often contribute substantial value. But as those contributions are opaque and thus interchangeable as far as the consumer is concerned, I am excluding those who make them from the class I refer to as 'content creators' in this post. Otherwise said, even though the sound engineer plays a crucial role in creating the album, no one buys it based on *who* the sound engineer was.]

When you think about what elements of the entertainment business technology has really undermined, it’s nothing more than the packaging — the time slots and release dates and viewing windows and region codes that are artificial constructs of these middle-men trying to slice-and-dice the content into as many tranches as possible to squeeze out every last cent of profit. Just like the investment bankers and their CDOs fragmented and obscured the connections between investors and their investments, so have the studios, networks, publishers, and labels introduced complexity into the connections between content creators and their audiences. While that complexity, and the companies who created it, may have been a necessity in an era of technologically inferior marketing and distribution systems, they are simply market inefficiencies in the Internet age.

So, what is the difference between retail and subscription when it comes to entertainment? In a recent post on my personal blog about SaaS vs shrinkwrap software, I wrote:

The business model of packaged software invites feature bloat, because it’s upgrade driven and you need to continually find ways to justify why Thingamajig 2009 Pro Edition™ is so much better than Thingamajig 2008 Pro Edition™. Software as a Service businesses have a much different (and arguably greater) challenge, they need to continue to create value for their customers month after month….So, you end up with a much more customer-centric product…and a vendor who is truly interested in addressing your customer needs.

The first priority of a retail business is to maximize sales, building brand loyalty and repeat business may be means to that end but they always take a back-seat to whatever else will drive more sales. Whereas in a subscription business, customer retention (and thus customer satisfaction) is always top priority, even above new customer acquisition. So if a studio believes they can get a lot of people to see a crappy movie by spending more on marketing and less on quality, they will (and do, again, and again, and again…). Because all you’re buying from them is the packaging, they know you aren’t really paying attention to whether it’s a Fox or Warner Brothers or Paramount film (do you buy your cereal based on who made the box it comes in?). But, a director would rather disown a bad film than endorse the studio releasing something that doesn’t meet his standards and his fans’ expectations. This is because the director knows that his relationship with his fans is a subscription business, and if he disappoints them he will be unable to continue exchanging his content for their attention in the future. The studios understand this too — they don’t give Tom Cruise $25M (plus a cut of the gross) per movie because his acting skills bring $25M of quality to the screen, they do it because he has more than $25M in ticket, DVD, and merchandise sales worth of fans. 

Entertainment is naturally a subscription business, and the Internet returns it to its natural state. The content creators who thrive online are those who understand this and focus on the ongoing satisfaction of their customers (see Ze Frank, Michael Buckley, Chris Leavins). The level of customer satisfaction these creators deliver is really only possible on the Internet because they can go direct-to-consumer without need of the middle-men and their packaging. These creators publish in all forms — video, photos, blogging, micro-blogging, music. They do not see themselves constrained by the legacy dividing lines of the entertainment industry, their goal is to entertain their audience by any and all means available. There is no distinction for them between primary and ancillary content, they are 360° entertainment brands. The other thing that has made these creators so successful online is their direct interaction with their customers. The best your most engaged fans can do offline is give you their personal attention (and the money that comes with it) and try to recruit others to do so as well. But online, they can interact with you and become part of the show. Empowering your customers is the surest way to make them even more engaged. As I wrote in another recent post on my personal blog:

Bringing your customers into the product development process has the dual benefits of helping you build better and more customer-centric products and making your customers your most passionate sales people (because after all, it’s their product too).

So, the Internet enables these creators to spend more time listening to their fans and creating new content they’ll enjoy while outsourcing the marketing to the community for free. This is the exact opposite of the offline retail model in which the studio takes money out of production budgets to put it into marketing campaigns. The ability to establish deeper relationships with their fans also allows online content creators to attain higher average attention per customer (ARPU) than is possible in the retail world, thereby making it easier to build more value by going deeper with a smaller audience. 

To be clear, I’m not trying to say the only business model for content on the Internet is a recurring subscription fee. The ‘subscription business’ to which I’m referring is more the theoretical exchange of value between content creators and their fans, which can and will take many forms — including selling packaged goods. I’m also not saying that the online entertainment market is solely the domain of Internet-only content creators. In fact, I believe the Internet is most powerful as an entertainment marketplace when the quality and reputation of a historically offline content creator is freed of the constraints of the legacy packaged goods business model. Take for example Josh Freese, who gets extra points for using this freedom precisely to illustrate the absurdity of the conventional retail approach.

And now, I leave you with the profound product of the coming entertainment revolution:

P.S. Hat tips to Ian Rogers for the marketplace of attention thinking and Umair Haque for the marketing vs quality dichotomy.

Watch CBS Videos Online

For us though, the real story isn’t the wackiness of Joel’s success but rather how he has achieved it. Of course, having the ability to come up with witty lyrics about how awesome watermelons are and the time and energy to scour the interwebs for brands looking to crowd-source their marketing are necessary, but they’re not sufficient. Michael Buckley, the other online video personality covered in the CBS News segment, told the NY Times “I was spending 40 hours a week on YouTube for over a year before I made a dime.” Like Michael, Joel does a lot more than just what you see on screen. Arguably, making the videos is the easy part (at least for someone like Joel) — the real challenge has been building and cultivating the loyal fan-base (or as Joel calls it, his “contest voting army”) that has made him such a newsworthy phenomenon.

As of this writing, Joel has:

• 257 fans on Facebook 
• 1,128 members of his “Yes, Joel, I’ll vote for your newest stupid contest” Facebook Group 
• 339 subscribers on YouTube 
• 138 followers on Twitter 
• 153 members of his Google Group/mailing list 
• 344 friends on MySpace 
• 35 contacts on Flickr
• and thousands of views per month on his blog

Each of these relationship channels has different strengths and weaknesses, and we have achieved a good measure of success using them in concert through best practices and a substantial time commitment. But, the system is far from perfect. In addition to the redundant work required to build and maintain relationships through all these various channels, it is very difficult to identify and de-duplicate the individuals across them, and it is basically impossible to have a cohesive view of what is going on in your fan universe.

While 800 lbs brands like Britney Spears or 50 Cent have enough clout to ask their fans to sign up for new services, the rest of us need to find effective ways to reach our potential fans where they already live online. YouTube, Facebook, Flickr, MySpace, and other popular social media services provide access to their huge existing audiences, but the relationships you build through them have to be on their terms. We’ve learned from experience in the trenches with clients like Joel and Handsome Donkey, and we’re hard at work on a solution that gives independent online media brands the best of both worlds: access to existing social media audiences with greater control over the fan relationships it generates. So, stay tuned!

The name is a nod to Umair Haque, who now writes for HBS and popularized the concept of the Snowball Effect applied to content on his blog a couple of years ago. The basic idea is that in a world in which you can watch anything you want (like, say on the interwebs), you’re going to want to watch the content that’s most interesting to *you* — and that the most effective way to find out about this interesting content is from like-minded people as opposed to from an impersonal marketing campaign. Thus, Umair argues the abundance of content enabled by the Internet creates the conditions in which the ‘Snowball’ can be more powerful than the ‘Blockbuster.’

There are enough examples of online videos “going viral” and making their creators rich and famous (or at least Internet famous) that we now know Umair’s theory can work in practice. But although these examples of viral success exist, no one really knows how to systematically reproduce them (ya know, like a “Factory” might ). 

These successful proofs of concept, if you will, have spawned a phenomenal increase in quality online entertainment content, which in turn has drawn an even larger audience to the medium. But, it has also made standing out from the crowd and reaching the *right* audience more important than ever, which is where word-of-mouth Snowball-style marketing comes in. While the sheer amount of content out there makes it harder than ever to stumble onto a “hit” in the conventional media sense, the number of people discussing and sharing that content makes it easier more possible than ever for engaged content creators to build real relationships with passionate fans and empower those fans to become evangelists to their friends. 

Social media services like YouTube, Facebook, MySpace, and Flickr have become a promotional platform of sorts (the Social Web) that provides infrastructure for content creators to establish meaningful connections with the largest number of their potential fans at no cost (other than time and effort).

But, the truth is not many people have the time or inclination to be trolling the interwebs to learn about the latest social media g33kery. That’s where we come in — this blog will try to educate content producers on the promotional tools that exist across the Social Web, answer common questions on how they work, and teach best practices for using them most effectively. We’ll also take questions from the audience. So, feel free to send your vexations to asktheyeti[at]thesnowballfactory[dot]com.