In the last post I attempted to describe the difference between “open” and “closed” distribution networks. I believe the differences that exist between these two approaches are a driving force behind the long tail phenomenon and, importantly, critical to understanding evolving economic models that will drive content production, distribution, and consumption within the next couple of decades. In this post I’m laying a little more foundation as to the reason why closed networks have dominated and why open networks are ascending. In the next post I’ll discuss how the economics of open networks will operate.
Part II: The Ascendance of “Open” Media Distribution Networks
Closed distribution has ruled the roost for a long time. Look around at all the major sources of content that inundate your life. Most of them have relied on closed distribution mechanisms until the last decade (I’ll get to video games in another post).
Book, magazine, and newspaper content has been produced by large publishers who distributed the publications through expensive physical outlets. If you wrote something interesting, you would need to be granted access to this closed network to be heard by a broad audience.
Terrestrial (and now satellite) radio and portable audio (tapes, CDs) content has been produced large corporate publishers who distributed this content via scarce airwaves and expensive physical outlets. As with books and magazines, if you had something interesting to say, you needed access to these closed networks to say it to a large audience.
Broadcast, cable, satellite, and portable video (VHS, DVDs) content has also been produced by corporate giants who have distributed this content via scarce airwaves, proprietary networks, and expensive physical outlets. As with both text and audio, interesting video required access to these networks to reach a broad audience.
Why This Has Been Logical
In each of these cases, available distribution mechanisms were inherently one way, they were analog hub-and-spoke architectures. Distribution infrastructure was expensive to create and manage; as a result, only organizations that could absorb the associated capital outlays grew up to around these networks. As time progressed, these companies had incentive to scale their networks to achieve superior economic returns. But as they reached more people, they had to deliver content that appealed to larger numbers of consumers or risk inefficient utilization of these enormously expensive networks.
These requirements forced similar consolidation and growth within content production. High production standards and sensory impact combined with simplistic themes and slick marketing campaigns to entertain the common denominator amongst millions of potential consumers. And all this stuff, it turns out, is also very expensive and very risky; to absorb the financial risk associated with such efforts required equally deep pockets. Symbiotic relationships between content owners and distributors were obvious and often resulted in outright combinations.
Welcome to the age of the media behemoth. In a closed network, everything points to bigger = better. The bigger you are and the more entrenched your position in the market, the greater your incentive to maintain status quo, to keep the networks closed and dominated by yourself and a few other competitors (to keep the regulators happy). And as evidenced by the actions of the current network operators and content owners, you’ll actually fight like hell to keep it.
The fact is, these massive closed networks have become very efficient at delivering content that appeals to lots of people. You can certainly argue that this content has steadily declined in quality, but people still watch 8 hours of TV on an average day and shows like American Idol draw tens of millions of consumers to Fox for two nights every week. Content producers and distributors have had a lot of time to perfect their craft and have become very good at taking advantage of the scale afforded by their massive closed distribution systems. But something ominous is happening.
Increasingly, closed networks are starting to lose their grip on the consumer. In the last decade (or so) an enormous open network (the Internet) has emerged and is quickly supplanting closed networks as a rival (and increasingly superior) source of content. The impact of this network is only just beginning to be felt, but the next decade will demonstrate the full implication of this new global transport mechanism on legacy providers (both in production and distribution).
Looking at these same three media categories today, we still witness the dominance of closed distribution, but we also see the seeds of a very different market emerging.
Books, magazines, and newspapers are still popular, but blogs have provided consumers with a simple method to publish and promote their own written works by taking advantage of the inherent bilateral communications of the Web. Within a few years, blogs have exploded in popularity and demonstrated a clear ability to draw consumer attention away from more traditional paper sources. But maybe most importantly, blogs have demonstrated the wide range of topics consumers will find interesting once given the choice.
Terrestrial and satellite radio
continue to draw listeners (although the overall market for radio is probably
not growing, but rather shifting) and labels still sell millions of CDs, but
open networks continue their relentless assault on legacy distribution. While companies such as Apple have taken a
half step (by layering a closed network atop an open infrastructure), millions
of consumers still turn to myriad networks such as Kazaa, eDonkey, and Morpheus
to share and download audio files. In
addition, Podcasting, a term that would have drawn nothing but blank stares in Silicon Valley even 18 months ago, has become a household
word (at least among radio and music execs) across the country. As with blogs, content selection is broad
based and growing quickly.
Broadcast, cable, satellite and
DVDs still rule with an iron fist. However, increased broadband penetration has begun to reveal the
potential of open video distribution to a much larger audience. BitTorrent, which now accounts for over 53%
of all Internet traffic, according to Big Champagne, (vs. 19% for FastTrack,
another P2P app) has only accelerated this trend. Within the last 6 months, no less than two
dozen different companies have announced their intent to pursue the
distribution of video online (Cozmo Media included). While video may not expand at the same rate
as open text and audio networks (due to continuing bandwidth constraints), it
is still as unavoidable as either. As
with both text and audio, the selection of content promises to be orders of
magnitude larger than what is available today.
Where Does This Lead Us?
Some closed networks will continue to operate for many years. Some will be dominated by hybrids that attempt to layer closed network architectures atop open networks. But such anachronisms are likely to survive due to lingering market distortions driven by the dwindling (but substantial) capital resources of closed network relics and plain old consumer resistance to change. But given the overwhelming advantage consumers experience within an open distribution network (largest selection of cheap portable content paired with the ability to inexpensively publish for a global audience), this transition is as inevitable as the transition from analog to digital.
What promises to be the biggest challenge of this transition, for both producers and distributors, will be the abrupt transition in economic models. I do not believe that “open” networks will operate in the same way as “closed” networks in that time and attention comprise the primary currency in such environments. Maximizing the utility of these consumer assets are the keys to success. In the next post I’ll discuss how these economies seem to be evolving and why (IMHO) advertising is going to be primary mechanism for monetizing time and attention.
Next Post | Part III: The Economics of “Open” Networks