Creative diSrUptioN

The Present and Future Disruption of Digital Media

Digital technology has disrupted industries around the globe, none more so than creative media markets such as music, publishing, photography, and video. This disruption has affected every functionary within these industries, from artists, agents, publicists, and managers to publishers, concert promoters, and retailers to fans and consumers. What is more perplexing is the often-expressed desire to return to the past, as if this was a temporary detour instead of a permanent roadblock that requires an alternate route.

To begin, there is a radical shift in market strategies between the legacy age of physical media and the modern age of digital media. The age of physical media allowed for centralized control over the supply and distribution of physical content, whether vinyl records, print books, print photography, or cellulose film. Publishers’ and distributors’ roles as gatekeepers gave them control over price and profit margins. This control permitted high margins on certain content that enabled music, film, and publishing companies to pool and allocate resources for new artist development, as well as subsidizing certain less profitable market segments like jazz and classical music, documentary film, or literary fiction.

Digital formats and digital communications have turned this publisher-distributor model inside out, and with it, its legacy revenue and reinvestment model. Everyone across these industries has had to adapt to lower or non-existent profit margins on sales. We now live in the world of low-priced digital with streaming distribution models that focus on renting rather than buying content.

The Problem of Price

Technology has given creators digital tools that have lowered production costs, driving marginal costs almost to zero — production costs now are basically reduced to time invested, which is far less with these new tools. Digital communications, duplication, and file-sharing have also reduced the cost of distribution and opened up access to global consumer markets, driving distribution and retail margins down to the zero bound as well. As a result, the available supply of digital content has exploded, while the distribution of that supply has become scattered and chaotic.

It is not banal to point out the economic truth that price equilibrates supply and demand. Digital technology has led to the explosion of supply that has overwhelmed effective demand and collapsed the price of content: an $18 vinyl album has become a few 99-cent mp3s. A $25-$35 hardcover book has become a $2.99 eBook. An $18 movie ticket has become a $1.99 DVD rental. Much of our digital images are easily shared and captured for free. This change in fortunes is probably the most significant aspect of the digital revolution

There’s no way to go back to a world where a few large publishers and distributors controlled content and price. Nor would we want to. We’re experiencing the democratization of creativity, but at the same time seeing the erosion of commercial viability for many segments of these creative industries. Lower revenues have put the squeeze on every function within the market and this is why we’re living in a DIY digital world. But, as risk-taking becomes untenable, this implies long-term consequences for the innovation of art and culture — something none of us should welcome, no matter how much cheap content we can consume. In art, there’s truth to the saying that you get what you pay for. Will we regress from past ages of artistic giants to a future of trivial mediocrity?

Streaming Libraries

Because the cost of duplication and distribution of digital content is so low, a new trend for consuming content has arisen: online streaming. (In fact, it’s a rather old trend as broadcast television and radio have streamed free content for decades in return for control over that content and streaming channel.)

The subscription streaming model optimizes for maximum choice at minimal cost for consumers, so music and publishing have turned to this distribution channel to meet consumer demand. Streaming has also gone global, expanding the world market for digital content by several orders of magnitude. It is now assumed that streaming is the de facto consumption model for the future of digital media. However, this assumption may be short-sighted.

With low prices and plentiful supply, the real constraint is the time required to discover and consume content, so perhaps it makes sense to rent rather than buy. But as the search costs for both artists and consumers become prohibitive and constrain overall demand, the true challenge we face is sorting and curating that global sea of content. (We can desire or demand something and have the money to pay for it, but if we can’t find it, that demand is not effective.) The diversification of markets into specialized niches also means mass marketing efforts are inefficient. In art, it’s quality, not quantity, that we want.

The streaming networks’ Big Data solution is to use AI algorithms to solve the sorting and discovery problem. This essentially is the model for Spotify being duplicated by its competitors, or Amazon Kindle with lending subscriptions. With machine learning, AI recommendation engines can intuit preference behaviors and become quite sophisticated and useful. But using AI algorithms to curate subjective creative content depends on metrics that homogenize those critical subjective differences. This tends to commoditize content, so we end up comparing the value of bits and bytes that all look pretty much the same.

However, a book is not just a book, when it’s written either by Dante, Fitzgerald, or your neighbor’s teenage daughter. And an mp3 is not just an mp3 when comparing Mozart, Gershwin, or Miles Davis to a local garage band. In other words, an algorithm is less than ideal for curating subjective artistic content. We might assume that popularity will make these distinctions, but popularity is being driven by the initial algorithm, thus feeding back on itself. Popularity has now become the lowest common denominator for artistic value. This has greatly amplified the winner-take-all nature of these markets while also elevating mediocre content.

In addition, it must be noted that with most streaming models today subscription prices are below cost, being subsidized by the streaming companies’ shareholders and investors. The transaction costs of renting content are not insignificant in terms of centralized storage and operations, as well as licensing royalties. The price squeeze means the total revenue pie has shrunk, but as the largest piece is being grabbed by streaming servers and paid out to those who own publishing rights, artists are being squeezed out more than ever. The number of streams it takes to earn a sum comparable to the minimum wage is astronomical, which means only the top elite artists can even come close to earning a significant payout.

The only way to survive this ecosystem is to be one of those the top echelon of artists who are now monetizing their brands to a global audience. Everyone else is starving. Yes, the “starving artist” is a stock character of history, but we should hope the democratization of human creativity through technology would mitigate rather than aggravate their (our) plight.

Is There a Better Way?

The future for creative markets will depend largely on how we solve the search and discovery problem. The universal curse of the Information Age is too much information (TMI), giving rise to the futility of matching creators and consumers through content.

Perhaps we can use technology to squeeze out the middlemen taking the largest slice of the revenue pie. In other words, what little margin there is should probably be retained by the creator. Independent artists do this with individual websites and direct digital sales. But the high search and discovery costs in a sea of content is still a problem for niche markets. The only recourse has been for artists to give distribution channels free content purely for the promotional benefits of building an audience, which the distribution channel monetizes for its own benefit. This is just a quicker route to starvation.

As this demonstrates, the future will also depend on how the data generated by the behaviors within creative market networks are monetized. The challenge can be thus stated: Data, not content, is king; but without valued user content, there is no network data. So, how do we incentivize new innovative artistic content in order to build more valuable sharing networks that work for all the necessary participants?

We might start by challenging some of the assumptions behind the where disruption has taken us. First, the price of content is cheap, very cheap, not only to rent but to own. This questions the idea that renting content, i.e., streaming content, is always and everywhere superior to owning content. It’s a lease vs. buy trade-off that may vary across different market segments and consumer needs. Consumers have demonstrated a clear preference for streaming content in music, podcasts, gaming, and books, but film and television also have faced this challenge of charging for content that formerly was free. The cable services overcame free broadcast and theatrical film has managed to survive television and personal video devices. It would be a mistake to believe consumers will always consume through only one format on one channel at one price.

Second, low-priced or free content is used to build out networks of fans and consumers that can be monetized in other ways. All of the major network servers (those tagged with the FAANG acronym) reap the lion’s share of their value from the customer networks they create. What would a social network like Facebook be worth if it had no users? Amazon? Google? Artists need to retain this value generated by their fan networks. Some artists, James Taylor recently, have decided to give away their physical content to concert ticket buyers, essentially promoting ticket sales by allowing fans to own free content.

Unlike in the past, there are now two kinds of people in the world: those who own and run the networks, and those who merely use them.

— Niall Ferguson, The Square and the Tower.

It’s All About the Network

There are many ways to monetize data networks, the most familiar being the advertising model. This is the model for broadcast television that we have consumed for the past two generations: we consume free tv shows and the network sells access to advertisers and we get 10 minutes or more of commercials for every 20 minutes of free programming. Advertising has become the model for Facebook and Google, where we get free accounts and free services in return for selling our network data to the highest bidder.

Currently, the digital advertising model is less efficient than we would hope because advertisers are still figuring out how best to engage their customers while the platforms obscure how robust their market reach is through searches and likes, etc. The problem is isolating and measuring the robustness of the advertising reach through social media noise.

This is where we should turn to human psychology and social behavior. Social media has provided an excellent laboratory to study social behavior. But we should also not dismiss the instinctual human behavior that has existed since pre-history. With the rise of social networks, psychologists have questioned exactly why people engage in social media and what they get out of it. The actual results are mixed, as we might suspect. A few years ago, I published a brief monograph reviewing much of the research focused on the interaction of human creativity, social behavior, and well-being and how that relates to technological innovation.[i] Essentially, successful technology empowers us to be more human.

Social media platforms trigger a host of instinctual behaviors for better or worse and the platforms exploit these behaviors without regard to their downstream effects. Network engagement means higher valuations on accessing the data, whether that engagement is silly cat videos or meaningful communication. The result is a sea of white noise that Big Data sorts for us. This has delivered the dystopia of technology by disconnecting us, impeding our humanity.

But what if social media engagement was filtered for only meaningful engagement, assuming we can define meaningful? The psychological studies identify what is meaningful to us: creativity, social connection, actionable information that helps us achieve what we want in life. Social media seems to be moving in this direction with smaller peer networks defined by users’ interests. FB groups coalesce in this way, around bands, music, artists, collectibles, sports teams, arts and crafts, school affiliations, etc.

Decentralization, Ownership, and Control

From the end-user point of view — whether creator or consumer — the legacy publishers have merely been replaced by the network servers as the new distribution gatekeepers. These centralized server platforms — Amazon, Apple, Facebook, Google, Netflix, Spotify — siphon off the network data value created by users that is needed to replace the reduced transaction value of content for creators.

Because network value increases exponentially with the size of the network, these servers have become quasi-monopolies enjoying profit margins that cannot easily be competed away. In other words, users must gravitate to and use Facebook, Apple, Amazon, Google, Netflix because there is no viable alternative to compete for their content or attention.

However, technology offers a promise to fix this by democratizing the power of the Internet. That promise is the decentralization of online platforms through distributed public ledger technologies like blockchain and crypto-tokenization that can secure and distribute value across the user network. Blockchain ledgers offer creators the possibility of owning and controlling and thus monetizing the audience (peer) networks they build up through sharing and selling their content. Peer-to-peer exchange networks can eliminate the distributor middleman for market transactions, while valuable crypto-tokens can be used to reward and compensate users who add value to the network. Ideally, everyone participating in the network contributes and retains value in the ecosystem with no one entity being able to control content or user data. That control ultimately resides with users of the network.

Digital ledger technology and token exchanges are not quite developed in terms of realizing this potential. However, the FAANG model of network servers controlling the digital world is not sustainable because it does not distribute the product widely enough to generate continued consumption demand (hence the tech community’s political support for Universal Basic Income). Many people believe the network servers, what tech guru Jaron Lanier calls the siren servers, have won the ballgame, but we’re probably only in the 4th or 5th inning.

Creativity and Social Connection

The promise of combining social networking with creative expression helps tackle two technology failures of the digital age together: one, helping realize the intrinsic value of creative output and artistic innovation and two, promoting meaningful interaction through online social networks. Both of these ideals help individuals self-actualize while strengthening the fabric of society.

The implicit assumption of the past is that some of us are artists and some of us are consumers and that’s the way of the world. But this idea is a relic of the gatekeeping age of elite patronage (think the Medici, the Church, and the French and English monarchies) or physical media controlled by central distributors (books, records, and film). In both cases, only some artists were given the exposure and support necessary for success. But if one observes human behavior closely from birth until death, it becomes clear that we are all creative in one form or another and we are all social, seeking to share our unique human expression with our peers. Technology can empower us to fulfill those very human needs.

The world has changed and continues to change. But future innovations and disruptions hold the technological promise that the present state of the digital world has denied us. It is ours to embrace.

[i] Michael Harrington. 2016. The Ultimate Killer App: How Technology Succeeds. RSBS Productions.