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.

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.