Hollywood 2.0 – Who Pays?

Thanks to the indispensable Instapundit, I ran across this very interesting post by Marc Andreesen.  In it, he theorizes about the coming destruction of, and rebuilding of, the entertainment industry:

I believe the entertainment industry is in the early stages of being rebuilt in the image of Silicon Valley.

What would a new entertainment media company, producing original content, look like in the age of the Internet?

• Starting from the end of the process: you know distribution is now nearly free. Put it up on the Internet and let people stream or download it.
• Marketing is also free, due to virality. Let people email your content to their friends; let people embed your content in their blogs and on their social networking pages; let your content be searchable via Google; let your content be easily surfaced using social crawlers like Digg. All free.
• Production is very cheap. Handheld high-definition video cameras cost nearly nothing. You can do almost every aspect of production and post-production on any Mac. Hell, you can even score an entire movie for free — there are hundreds of thousands of bands on the Internet who would love to have their music embedded in a new entertainment property as promotion for the bands’ concerts and merchandise.
• The creators of the content are the owners of the company. The writers, actors, directors — they are the owners. They have a direct, equity-based economic stake in the company’s success. They get paid like owners, and they act like owners.
• Financing is straightforward: venture capital, just like a high-tech startup. We live in a world in which financing a high-quality startup is simply not difficult — not for a high-quality technology startup, and increasingly not for a high-quality media startup. Modern financiers love being co-owners of a new company with the talent that will make the company successful — and that’s how it will happen here.

This is not a difficult thing to envision. And in fact, it’s already happening. Will Ferrell’s Funny Or Die, in which I am a minority investor, is one early existence proof of this model. And there are a ton of other such new companies either already underway, or currently being incubated, or currently being negotiated.

And in fact, there are a lot of historical precedents even in the media industry for the model of talent as owners, going all the way back to the original United Artists in 1919. Some of those precedents worked great — George Lucas, for example. Some flamed out. Of course, they were all up against the bottlenecks.

But here we are, living in a world in which the bottlenecks have suddenly become irrelevant.

I don’t think there’s any question that this is the logical model to pursue in the age of the Internet — the age of free distribution and marketing.

Read the whole thing.  It’s worth it if you care about business, business models, etc.

And Marc Andreesen is probably a lot smarter than I am — he certainly has more money.  But having thought all of the appropriate paeans (say them to yourself as well), I can’t help notice something.

Who pays?

I mean, Andreesen goes on at some length in the above quote about four things:

1. Distribution is free.
2. Marketing is free.
3. Production is very cheap.
4. Venture capital is widely available.

Okay.  That’s dandy.  And I’m sure he’s right.  But the missing piece here is revenues.  Andreesen goes on at some length about how creators in Hollywood would become owners, and be compensated as owners, and so on and so forth.  Agreed to all of that.

But who pays for the product so created by these creator-owners at the end of the day?

Let’s run through the possibilities.

One, the consumer pays.  This is the model for a variety of existing entertainment sites with low cost production, free marketing, and free distribution: porn.  Consumers pay directly for this content, and the creators are often owners and compensated as such.

Trouble is, partly because of the low cost of creation, low cost of marketing and distribution, the revenues are pretty darn low for the individual owner-creator.  Porn is a multibillion dollar industry, but any one porn-site operator isn’t likely to be Hugh Hefner.  The vast majority of people in the porn industry is compensated far, far, far less than counterparts in the “legit” industry.  No pornstar, no matter how popular, has made $20m per movie that Tom Hanks routinely gets.

Two, the distributor pays.  Here, the creators get paid by some distribution portal, who then marks up the products or does a bunch of other monetization strategies to the products, and sells them to the public.  This is obviously not that much different from today’s entertainment industry paradigm.  Replace studios with Web Portals, NBC-Universal with Facebook, and you’ve got this model going.

Trouble is, the value in this operation is clearly with the distributor who is responsible for getting all of the audience and marketing to that audience.  I mean, if I own Facebook and its billions of users, the product I promote on the front page of the site will get far more views/hits than a product I bury way down in the list.  Sure, you can have some community-generated ranking system and such as YouTube and Digg have, and quality stuff will get out at some point, but if the Distributor is the one paying, then the Distributor takes all of the risk and reaps all of the rewards.

Plus, the Distributor still has to answer the Who Pays question.  Is it the consumer directly?  (Pay per view of YouTube vids?) Is it a Distributor?  (Maybe NBC-Universal becomes an uber-mega-portal that pays Facebook for content that it in turn buys from these artist-creators?)  Is it an Advertiser?  In other words, all that happens here is a shift up the value chain of the critical “Who Pays” question.  It still needs to be answered.

Could you do a revenue-share type of model?  Certainly.  But all that does, in my view, is shift the burdens slightly without changing the underlying economics.  As long as the Distributor bears the risk, the Distributor reaps the rewards.  And the Distributor becomes the new bottleneck that the studio is today.  Instead of having to pitch some development executive at Paramount, you have to pitch the VP of Content Development at Facebook.  Not that different.

Three, the advertiser pays.  The third model, it seems to me, is that the advertiser pays.  So the consumers get all their entertainment “for free” in exchange for agreeing to view a bunch of ads and marketing messages.  This is, in fact, the most popular model for the media business in the world.

Trouble here is that the creator-owners don’t have massive sales teams to rep them to advertisers or their advertising agencies.  You can bet your bottom dollar that the head of Sales for NBC-Universal has numerous relationships carefully cultivated over years in expensive restaurants and on golf courses with the decisionmakers at various corporations and their media buyers.

So if the advertiser is going to pay, who is going to sell to them?

Or is the idea here that once you have a hit — thanks to cheap production, free marketing, and free distribution — that the advertisers will simply flock to pay the content creator-owner?  Even if that’s true, how does the rest of the industry apart from the Chosen Few at the top pay their mortgage?

Look at bloggers for an example.  A number of bloggers say they make money from their blogs thanks to advertiser support.  But only a very few have gotten enough popularity (aka, audience) to be of interest to advertisers.  A large number have relied on outsiders (e.g., Pajamas Media) to handle the ad sales.  Same with a large number of niche content websites who rely on ad networks and such to pay for the server costs.

Make a long story short, you can’t make money in the Long Tail.

So Hollywood might get remade in the mode of Silicon Valley.  Financing is easy and plentiful.  Production costs are low.  Marketing is free.  Distribution is free.  All good.

But who pays the bills?

-TS