The Consumer is King – Not Content After All!

By Eleanor Haas

A decade ago, the cry was
“Content is King” as we tried to make sense of digital  technologies that were changing everything
about how we received and used information, did business and related to one

Now technology has not
only enabled new kinds of media unimaginable even ten years ago but has
empowered consumers in ways that enable them to control the information they
receive, once the exclusive province of publishers. Most serious of all, technology has transformed
so much so fast that today’s adults are no longer competent to forecast what
happens next. As Strauss Zelnick,
founder, ZelnickMedia, pointed out at yesterday’s digital breakfast, our media
habits today are those we formed by the time we were 16.  Look to the 16-year-olds for what’s cool and
try to understand how they use and experience media.

Listening to media
business leaders discuss the future of digital entertainment – and digital “entertainment”
now encompasses all digital “content,” another startling convergence – right
after reading Chris Anderson’s piece on “Free!” as the future of business models
throws light across the full spectrum of the media universe and related
business models. The business leaders
spoke at a GothamMediaVentures event sponsored by Frankfurt Kurnit Klein &
Selz. They were Ellie Hirschhorn, Chief
Digital Officer, Simon & Schuster; Andrew Lack, Chairman, Sony BMG Music
Entertainment, and Strauss Zelnick. Richard Hofstetter, a Frankfurt Kurnit partner, drive the discussion
with probing questions.

Digital Business Models

Hofstetter described the
digital platform as a source of new opportunities for monetizing consumer
relationships and for bringing customers to media brands – i.e., supporting the
traditional entertainment business model of advertising, subscription and
pay-per-view or pay-to-use. This is
certainly true. In many ways we are, in Zelnick’s words, moving increasingly
away from a paying economy to an advertising economy. But that is only part of the story.

Anderson takes the story to another level, talking about radical new business models
enabled by low-cost digital distribution, such as free video content online
while theaters make money from concessions and sales of a premium movie-going
experience. Google is free to consumers,
he says – and generates revenue from advertisers who want to reach those

“Technology is giving
companies greater flexibility in how broadly they can define their markets,
allowing them more freedom to give away products or services to one set of
customers while selling to another set,” he writes, adding that “anything that
touches digital networks quickly feels the effect of falling costs.” Web technology is all about scale, he
explains, and transistors, which he calls “the atomic units of computation,”
are now close enough to costless that storage, bandwidth and processing power
are being offered free by companies like YouTube and Google, and IT developers
can afford to focus on delighting computer users, not just on running
algorithms efficiently. As a result, we
have increasingly sophisticated user interfaces, new forms of digital
entertainment and a flood of new ways to make “free” part of business models.

The New Economics of “Free”

Attention and reputation
are the new scarcities, not money, writes Anderson,
and it’s to acquire these that “free” exists for the sake of a business
model. It’s a seismic shift in our values
as society.

Anderson clusters variations on the theme in six categories:

  • “Freemium” – the subscription model – a free basic version,
         supported by premium versions with more features.
  • Ad-supported – free content, services, software, etc., paid for online by ad banners, text ads, affiliate ads, site sponsorships, search results inclusions, paid listings, lead generation, product placements and paid personal connections on social networks.
  • Cross-subsidies – giving away one product (razor) in order to sell another (blades).
  • Zero marginal cost – a de facto business model: the product becomes free because distribution costs nothing. Example: online music.
  • Labor exchange – the user creates value for the publisher by supplying information and gets free access to Web sites and services.
  • Gift economy – beyond money to altruism and sharing now that zero-cost distribution makes this economically viable – Wikipedia, open source software and UGC, for example.

New Business Models for Digital Music

Looking back, Zelnick
says “we (the record industry) drove people to piracy.” How? By not having the technology to support peer-to-peer sharing except for
free and by so fearing what had happened to the film industry with VCR rentals
– retailers made money but not film studios – that the music industry would not
allow retailers to make money with digital music.

point about cost-free distribution supports this. Consumers saw what was possible and acted on
it. The record industry lacked the
access software and the strategy to take action.

new business models have emerged that make online music economically viable
with multiple revenue streams, including two of


categories: ad-supported and paid
premium subscriptions.

· Entertainment content download sales are booming at both
iTunes and Napster.

· MySpace Music, announced less than a week ago, is a joint
venture of MySpace with the big labels: Sony
BMG Music Entertainment, Universal Music Group and Warner Music Group. For the first time, the most popular digital
music community, My Space, is in partnership with leading music companies for
purposes of marketing music content in a way that legitimizes downloads and
generates multiple revenue streams. This
represents a sea change from iTunes because it helps music titles bubble up in
peer-to-peer interactions as opposed to being pushed down by large companies’
choice of materials. (The success of the
joint venture will depend to some degree on the autonomy granted to partners
who are otherwise competitors.)

· Device manufacturers are taking an “all you can eat”
approach, loading devices with music so that consumers buy the music with the


and other alternative bands left their record labels, released new albums on
their own Web sites and invited downloads for free or whatever consumers wanted
to pay. But by then they were already
established and could use tours and other vehicles to generate revenue. (
Anderson’s cross-subsidy model.)

value record companies and movie studios deliver is discovering and
establishing new artists, who need nurturing and a company behind them even if
they no longer need the old distribution of traditional media.

Film Business Continues as Before

films continue to be distributed and marketed in the traditional manner, and
the studios continue to provide the financing. The business has not yet been disrupted because the Internet pipe isn’t
fat enough for downloading movies.

Book Publishing has Yet to Adapt

video and social media have been the first three waves of the digital content
revolution, which the book publishing industry has sat out, according to
Hirschhorn. Storytelling is still in
demand, and people still read books. Opportunities
are evolving for e-delivery and integrated e-commerce that can provide a rich
media reading experience, but it’s early days.

are assets as well as books. Like
musicians, they have fan bases. Opportunities exist for them to connect with consumers, build personal
brands and franchise and have a voice beyond their books.

different from some digital entertainment businesses is that the book business
is not in the ad sales business, looking to build audiences. Publishers want their authors out there
broadly, leveraging syndication.

How Do Story-Tellers Get Paid?

way storytellers get paid is apparently by developing online games.  Zelnick mentioned a new interactive game that
contains eight hours of narrative!

this, however, how they get paid seems to be the $64,000 question. Technology business plans are clear. But content companies are under pressure. The middleman/distributor is in competition
with the creative force. TV viewers zap
commercials, and networks now give away content for free at sites like Hulu –
online streaming video on demand, free snippets of programs. Creators are getting into their own
businesses but have to rely on agents and lawyers to fight for the right to do
their own exploitation. Will advertisers
buy this? Yes, says Lack, advertisers
will follow if consumers buy in.

all about what consumers want. And that,
in turn, is determined by our habits at 16!

New Directions for News.

news has begun cutting news-gathering costs, looking to outside sources. Yesterday, CBS was reported to be in talks
with CNN about outsourcing some of its reporting operations. (Whoever thought the heart of the news
business would ever be outsourced?)

addition, citizen journalism has become a reality. CNN introduced ‘iReport” a year ago,
soliciting UGC for consideration by CNN editors. Now offers
unvetted online content from users and bloggers. What happens to credibility with citizen

characterized blogging aptly: “Blogging
is part of grassroots bubble up content – some news, a lot of opinion and junk
– a platform trying to find its place.” But, he added, it should not dominate serious news gathering. a lot of
established companies have too much baggage for the digital age, he
continued. The high cost of their
infrastructure is challenged by digital media and will be replaced by some of
these, including blogs.

there’s no need to get news from an existing company. Social networks are rapidly becoming an
alternative. Are they being
overvalued? Zelnick’s answer to this is
a good one: “News Corp. paid $580
million for MySpace and got a good buy – even though the valuation is too
high.” Why? Because of the enormous growth potential of
interactive entertainment, based in part on the same model as the traditional
movie business: give consumers what they
want and grow with the demographics.

And the reason for this is what might be termed the new economics of consumer control.  Social networks add a measure of consumer control that has never before existed.  Content bubbles up in peer-to0peer interactions instead of being pushed down by large companies.  Being incontrol transforms the value proposition for consumers.

What’s Next?


The next business to be
disrupted will be television, and it will be an ugly transition, predicts Lack,
but this will take longer than we think – as did the battle between videotape
and 35-mm. film, which took decades.

8 Responses to “The Consumer is King – Not Content After All!”

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