Chapter 4
Missed Opportunities: How Incumbents Failed to See the Digital Future
Traditional media companies consistently missed opportunities to shape digital distribution because they evaluated innovations based on metrics that served their existing businesses. Two revealing case studies illustrate this pattern of industry disruption.
In 1997, Howie Singer and Larry Miller at AT&T launched a2b Music, a pioneering service for secure digital music distribution over the Internet. Their innovation predated iTunes, iPods, and even Napster, offering downloadable digital songs and a portable music device with flash storage. Despite addressing industry concerns with digital rights management and micro-billing capabilities, they met fierce resistance from music executives who couldn't grasp the fundamental shift. One called the reference to music as "bits" insulting, while another complained they spoke "a different fucking language." By rejecting a2b Music, the industry missed its chance to control digital distribution before Apple and others stepped in.
Similarly, Encyclopaedia Britannica was at its peak in 1990, earning $650 million selling premium reference sets for up to $2,000 each. When Microsoft approached Britannica in 1985 about licensing their content for a CD-ROM encyclopedia, Britannica refused, fearing it would "hurt our traditional way of selling." The company worried about losing its sales force, diluting its brand authority, and risking its reputation on unproven technology. Meanwhile, Microsoft created Encarta using content from Funk & Wagnalls, offering it for just $99 with features like video, search, and hyperlinks.
By 1996, Britannica's sales had plummeted to $325 million. After failed attempts at creating their own digital products, Britannica was sold for just $135 million. In 2012, after Wikipedia's rise, Britannica discontinued its print edition after more than 200 years.
These failures stemmed from multiple simultaneous challenges: digital delivery changing how value was delivered, shifts from high-margin direct sales to low-margin retail models, organizational cultures that revered traditional models, and rapidly shifting market power that made the wait-and-see approach ineffective.
The entertainment industry's "perfect storm" resulted from the convergence of digital media, micro-computing, mobile technologies, and the Internet. Just as the fishermen in Sebastian Junger's book perished by applying familiar strategies to unprecedented conditions, traditional media companies found themselves overwhelmed by technological changes they weren't prepared to navigate.
Chapter 5
Beyond Blockbusters: How the Long Tail Changed Consumer Choice
Chris Anderson's "long tail" theory and Anita Elberse's "blockbuster" model represent competing views of how technology changes entertainment businesses. While Anderson argues online sales channels shift consumption toward niche products, Elberse contends blockbusters remain dominant. Both miss the key point-though individual long-tail products don't threaten blockbusters, long-tail processes do.
Early internet value came primarily from access to millions of previously unavailable niche products, not just lower prices. In 2000, this "long tail" access generated $700 million to $1 billion in consumer value annually-ten times more than price savings. By 2008, this value had quintupled to $4-5 billion yearly as internet book sales grew from 6% to 30% and available titles increased dramatically.
Even truly obscure products create significant value when matched with the right consumers. When consumers shift from physical to online channels, they consistently consume more niche products and fewer blockbusters. Research shows that even when product assortment remains identical between online and catalog channels, consumers still gravitate toward niche products online due to technological characteristics of digital markets.
Peer recommendations, rather than creating winner-take-all effects, actually increase diversity-doubling peer influence increases revenue for the least popular 20% of products by 50% while decreasing top products' revenue by 15%. The anonymity of online shopping also reduces social inhibitions, allowing consumers to purchase products they might avoid in person-from difficult-to-pronounce alcohol to high-calorie pizzas to erotic content like "50 Shades of Grey," which began as a self-published e-book before becoming a blockbuster through passionate online promotion.
The debate about what percentage of sales come from niche products misses the point-what matters is that consumers gain value from these products through fundamentally different processes. While traditional entertainment industries rely on curation (expert selection) and control (over scarce promotion and distribution), long-tail businesses like Amazon and Netflix rely on selection (wide variety) and satisfaction (using data and recommendations to help consumers discover content).
These processes aren't just for niche products-they're increasingly being used to create blockbusters too, as with Netflix's original hits. The real threat to traditional entertainment companies isn't niche products themselves, but that companies specializing in long-tail processes can adapt their platforms, data, and customer connections to compete in the blockbuster market.
Chapter 6
The Piracy Problem: Digital Theft or Market Failure?
Digital piracy transformed from a limited annoyance to an existential threat when technology made perfect reproduction nearly free and effortless. While entertainment industries fought through legal means like shutting down Napster and proposing legislation like SOPA, debate emerged about whether piracy actually harms sales or might benefit artists through increased exposure.
Despite early theoretical models suggesting piracy might benefit industries by increasing awareness or removing price-sensitive consumers, comprehensive academic research reveals a strong consensus: 22 out of 25 peer-reviewed studies show piracy significantly harms legal sales. Beyond just reducing purchases, piracy undermines the entertainment industry's business model by competing on timeliness, quality, and usability-forcing producers to lower prices and change release strategies as consumers gain free, immediate access to high-definition content.
Studies demonstrate that targeting piracy sites can effectively change consumer behavior. The Megaupload shutdown caused a 6.5-8.5% increase in digital movie sales, with greater impact in countries where the site was more popular. Similarly, when the UK blocked nineteen piracy sites simultaneously in 2013, visits to legal movie-streaming sites increased by 12% overall (23.6% among heavy users of blocked sites).
These findings confirm Steve Jobs' insight that you can't stop piracy but must compete with it-either by making paid content more convenient and reliable, or by making pirated content harder to access. However, piracy isn't the only threat facing entertainment companies; the explosion of self-produced content presents another significant challenge.
Chapter 7
Creator Liberation: How Artists Gained Independence
The digital revolution has democratized content creation and distribution, breaking the traditional gatekeeping power of major studios, publishers, and labels. Production costs have plummeted, with professional-quality equipment now accessible to the masses. Distribution platforms like YouTube, Amazon's Kindle Direct Publishing, and crowdfunding sites like Kickstarter have created new pathways for creators to reach audiences without traditional intermediaries.
Artists now have unprecedented ability to bypass traditional gatekeepers. Many independent artists eventually "graduate" to major labels, but with significantly more negotiating power. Amanda Hocking, after self-publishing success, started a bidding war among publishers that resulted in offers exceeding $2 million. Established artists are also leveraging new options-Radiohead released "In Rainbows" independently with a pay-what-you-want model, earning more digital income than from all their previous albums combined. Louis C.K. earned $750,000 profit in 12 days by selling his comedy special directly to fans for $5. J.K. Rowling retained digital rights to Harry Potter, creating Pottermore.com as the exclusive e-book seller, forcing even Amazon to refer customers there.
Technology has fundamentally changed how consumers interact with content, with many shifting to independently produced material. Despite industry dismissal of self-produced content as "inferior," market data shows independent artists increasing their market share from 25.8% to 34.5% between 2007-2014, now exceeding any individual major label. Self-published titles grew 300% from 2006-2012, surpassing traditionally published works.
The most dramatic shift appears in motion pictures, where millennials are abandoning traditional media-movie theater attendance among young people dropped 40% from 2002-2012, prime-time TV ratings for 18-49-year-olds fell 50% from 2002-2011, and one in four millennials has cut cable service. Instead, they're going online-YouTube now reaches more 18-34-year-olds than any cable network, and 50% of 18-24-year-olds say they "can't live without their smartphone."
The explosion of self-produced content is transforming relationships between content providers and online distributors. Book titles increased from 122,000 in 2000 to 3.1 million in 2010, new music albums quadrupled, and YouTube receives 300 hours of video uploads every minute. This abundance has shifted the discovery process from top-down curation by industry gatekeepers to downstream platforms that aggregate content, learn consumer preferences, and make personalized recommendations.
Chapter 8
Platform Power: The New Gatekeepers
When traditional media companies attempt to assert power over digital distributors, they often discover the balance of power has shifted dramatically. NBC's 2007 standoff with Apple illustrates this perfectly. Believing it had leverage as the top supplier of video content (40% of iTunes video sales), NBC refused to renew its iTunes contract, assuming customers would simply migrate to other legal platforms like Hulu, Amazon Unbox, or their planned NBC Direct service.
The strategy backfired spectacularly. The weekly increase in BitTorrent downloads after NBC pulled content from iTunes was twice the total weekly iTunes sales before removal. Once customers learned BitTorrent, they downloaded entire seasons instead of just selected episodes. The piracy surge created more robust BitTorrent "swarms," making even older NBC shows like Saved by the Bell and Xena available for piracy. Legal alternatives saw minimal adoption-DVD sales didn't increase, and NBC.com, Hulu, and Amazon Unbox captured only a tiny fraction of former iTunes consumption.
Worse still, piracy for ABC, CBS, and Fox increased 5.8% as iTunes customers who learned to pirate NBC content applied those skills to other networks. When NBC returned to iTunes in September 2008 with essentially the same terms they'd previously rejected, piracy decreased by only 7.7%-far less than the initial surge. The damage was done.
The Internet threatens entertainment industries not just through long tail processes, piracy, and increased artist power, but by concentrating retail power in the hands of a few dominant players. While Amazon, iTunes, and Netflix have helped the industries in many ways, they've also reversed the traditional power dynamic where studios and publishers could play retailers off against each other.
Several factors create barriers to entry in online retail: First, consumer search costs-the time and cognitive effort required to compare prices and learn new websites-make users willing to pay more for convenience rather than shop around. Second, uncertainty about retailer quality drives consumers toward established, popular platforms they trust. Third, personalized recommendations increase switching costs, as sites that have accumulated customer data can provide more accurate suggestions.
Consumers strongly prefer having all their digital content on a single platform rather than scattered across multiple services. Beyond search and switching costs, digital-rights-management encoding often restricts purchased content to a particular distributor's ecosystem. Once consumers own multiple iTunes movies or Kindle books, they're effectively trapped in that ecosystem, making it extremely difficult for new entrants to gain market footholds.
Digitization enables selling entertainment in large bundles more profitably than would be possible with physical goods, creating significant economies of scale. Bundling works similarly to price discrimination-with a large enough bundle (like Netflix's 10,000 shows), sellers can accurately predict the average value across consumers, even when individual preferences vary widely. When bundlers compete, the firm with the larger bundle gains two advantages: better prediction of consumer valuations and greater ability to outbid smaller competitors when licensing content.
Chapter 9
Data-Driven Decisions: The New Currency of Entertainment
Unlike traditional studios who rely on "gut feel" and consider themselves tastemakers, companies like Amazon and Netflix embrace data to determine content production. Amazon's Bill Carr states plainly: "We let the data drive what to put in front of customers." This represents a fundamental cultural shift that traditional entertainment companies struggle with.
Unlike baseball's "Moneyball" revolution where all teams could access the same statistics, entertainment platforms maintain strict control over customer data. Netflix knows what content users watch, when they watch it, on what devices, and which scenes they skip or replay. Amazon combines streaming data with e-commerce behavior. These platforms create virtuous cycles where customer data improves experiences, increasing loyalty and revealing more preferences.
However, they share almost no customer-level data with content creators. Apple provides only transaction data with anonymized IDs, while Amazon, Google, and Netflix share even less-sometimes only aggregate view counts across entire regions. This data hoarding represents a strategic shift; when Amazon launched its video store in 1998, it initially attracted studios by promising data insights. Now as content producers themselves, platforms use their data advantage to identify overlooked "blockbuster" opportunities and profitably produce "long-tail" content for specific audiences.
Some industry executives argue that data can't be used to make creative decisions without interfering with the creative process. This objection has two flaws. First, Netflix's Ted Sarandos clarifies they don't use data to interfere with creativity but rather to identify promising shows worth heavy investment. Second, creators actually enjoy more freedom with data-driven platforms. Kevin Spacey highlighted how his experience with Netflix was creatively liberating compared to traditional television where network executives micromanaged every decision.
Data-driven content is winning critical acclaim too-at the 2015 Golden Globes, Amazon's "Transparent" won Best Comedy, beating Netflix's "Orange Is the New Black." By 2016, Netflix received more Golden Globe nominations than any network, ending HBO's 14-year dominance and nearly matching all broadcast networks combined. This success is drawing established talent away from traditional studios, causing industry concern about a "talent drain" to new platforms.
Chapter 10
The Path Forward: Reinventing Entertainment for the Digital Age
To compete in the digital age, entertainment industries must harness customer-level data and embrace data-driven decision making-requiring significant organizational changes in industries with structures hardened decades before such data became valuable. Harrah's Entertainment's transformation under Gary Loveman offers valuable lessons for this transition.
Loveman's first priority was breaking down the fiefdom-like structure where casino managers operated autonomously. He centralized reporting, signaling that customers belonged to Harrah's, not individual casinos. This painful reorganization allowed Harrah's to centralize customer data across properties and extract value from their database containing millions of transaction records and customer preferences.
Loveman elevated data analytics to C-level importance, hiring quantitative experts and infusing analytics into Harrah's culture by demanding all decisions be tested rigorously rather than based on hunches. This approach revealed surprising insights: 26% of customers generated 82% of revenue, and their most profitable customers weren't high-rollers but middle-aged and senior slot players.
With customer-level data, Harrah's could predict lifetime customer value based on minimal playing information, comparing predictions against actual behavior to target promotions effectively. Their integrated platform enabled controlled experiments that often contradicted industry assumptions-like discovering $60 in free chips outperformed a $125 package with room and meals. The strategy worked brilliantly-by 2003, Harrah's posted sixteen straight quarters of revenue growth with $4 billion in revenue.
Entertainment companies must implement similar data-driven strategies to compete in today's marketplace. Like pre-Loveman Harrah's, studios maintain data silos with information spread across business units unwilling to share with each other. Studios should centralize data analytics at the C-level for four reasons: data is most useful when linked across datasets; centralization increases analytics talent effectiveness; elevating data analytics helps attract and retain talent; and centralized reporting provides objective answers to controversial questions without pressure from individual business units.
Data analytics can determine optimal product strategies in evolving markets. When the music industry faced digital disruption, conventional wisdom held that selling singles hurt business more than piracy. Through experimentation with a major label, researchers discovered artists and labels actually make more money selling digital singles than exclusively offering albums-contradicting industry assumptions.
The instinct to disadvantage digital channels to protect physical sales is fundamentally flawed. Analysis of 2012-2013 data showed that delaying digital movie releases after DVD releases cut digital sales by almost half while providing no statistical increase in DVD sales. Without embracing digital distribution, studios miss crucial benefits: market evaluation capabilities, efficient promotion, and the ability to conduct detailed experiments about consumer behavior.
To succeed in entertainment's future, companies must control both content production and the customer interface that generates valuable data. For a century, major studios and labels created value by managing scarcity in distribution channels and production resources. Digital technology has eliminated these scarcities-anyone can create content and distribution channels have multiplied. The keys to future success lie in two new scarce resources: understanding customers' needs and managing their attention.
This requires entertainment firms to prioritize data-driven decision making and make bold investments in direct-to-consumer distribution platforms. Though challenging, this transition demands the same qualities that have always defined success in entertainment: risk-taking on emerging opportunities, investment in talent, creative audience connection, and the skill to transform concepts into reality.
