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And Radio’s Best Chance for the Future is…

If there’s one book this year that best sums up what the radio industry has to do to compete in a world of infinite choice, it’s this one: Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment

. It’s a heavily researched and highly readable book by Harvard professor Anita Elberse.

I talked with Anita to test some of my own theories about radio’s future in the presence of her research. The result is a clear strategy and plan of action. Now the rest is up to you.

Click here to listen to my interview: Download Audio

Or here for the sharable SoundCloud version:

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Here’s a partial transcript of the Q&A:

Anita, the audio space is built around hits. In fact, we always say in the radio business, “Just play the hits.” The fewer songs the station plays, the higher the ratings it often enjoys.

And then a few years ago this book came out called The Long Tail: Why the Future of Business is Selling Less of More

by the former editor of Wired, Chris Anderson. The premise of that book was based on platforms like Netflix and Amazon and iTunes, platforms that offered everything anybody could want. The book argued that the ability to get anything you want means you will seek out everything you want and big money will be made from small markets satisfied to their full extent. In other words, the long tail will get longer and longer, and will generate more and more revenue and the “short head” will get shorter and shorter and will be less consequential to the overall revenue equation. Is that true or not, based on your research?

It’s certainly true on the supply side. We certainly see an enormous amount of offerings, of products. Music, but also many other entertainment products that are there now and wouldn’t have been there if we didn’t have these digital channels. But I think the book was mistaken about developments on the demand side – what consumers are actually interested in. There is some demand for these long tail offerings without a doubt, but actually if we look at how demand is developing we see more and more consumers actually focus on the hits, on the head of the distribution, and not so much the tail.

So, there’s a really, really long tail, but most of those products in the tail tend to not move at all, or move maybe one or two copies in a given year. The statistics really are staggering. And the large focus still is on the big products in the head. So, this increased access that we all have to entertainment products is particularly benefitting the hits.

In your book you reference the music industry in particular and you say a huge number of titles in the iTunes store sell exactly one copy.

Yes, exactly. I provide some statistics for the market for digital tracks in 2011. That’s the latest year I had data for when I wrote the book. I think it’s 94% of all songs that are sold at least once are sold fewer than 100 times. 74% are sold fewer than 10 times. And a staggering one third of the 8 million unique tracks that were sold at least once were sold exactly once. Those are I think staggering statistics for anyone who has invested some money in the development of those products. I think we see this in other areas, too. I saw some data from Spotify more recently that said, “We have been around for five years. We have a database of 20 million tracks.” And of those, 20%, 4 million tracks, have not been played at all. So, they’re just sitting there waiting for their first click. Those, I think are the realities of today’s music space.

So what is it that makes consumers aspire to an infinite variety in choice, yet makes them ultimately settle on the same choices everybody else is making: The hits?

That’s a great question. I think there are a number of different factors. Certainly have a taste for products with high production values and products that have had some investment behind them. We can hear the difference between something that’s really good, and something that’s not so good. We also have a taste as consumers for consuming products that are also consumed by others. It’s really great to talk about a song that someone else has also heard, and you can say, “Isn’t it great?” Or together we experience a song live or experience a song in a club, which drives the hits to become even bigger hits. But there are also some supply side factors. Only a small number of songs that can be advertised by the major labels, or even by independent labels, and they’re only a small fraction of songs that will make it onto the radio. And that will obviously drive further demand. So it’s a combination of supply and demand factors.

One of the things you talk about in the book is that increasingly labels are driving towards what you refer to as 360-degree deals with talent. So if they find an artist, they’re interested in the full scope of that artist’s activities, not just the artist’s music. They’re going to invest in that artist quite heavily and in return they expect to be part of the entire tapestry of that artist’s professional exposure. Can you talk about that a little bit? I’m particularly thinking about the consequences of that relative to the audio space where we deal with talent, we deal with morning shows, we deal with talk hosts, we deal with stars. What are the consequences for how to monetize stars in a blockbuster world?

It’s a great question. I think what happens in today’s world is that stars have many more abilities to monetize their talent than ever before. One particular trend we see in the music space is that stars can go direct. We saw a few years ago Radiohead soft-releasing their album. Most people were focused on the fact that they said you can name your own price, but what to me was just as important and just as revealing was the fact that they self-produced it and they sold it on their own Web site. So, self-produced and self-distributed. That is a trend that’s not going to go away. So partly as a result of that, the labels have gone looking for other ways to provide services for artists that make them want to sign with the label. And, of course, we’ve also seen the decline of recorded music sales as a source of income and the increased monetary importance of live music. These 360-degree contracts give a label a share of all these different sources of revenues – they’re a good way to protect them from further declining recorded music revenues. So stars are becoming more powerful and content producers need to work harder to make sure that they provide a valuable function for those stars. I think that’s a common trend across the different entertainment industries.

Also, doesn’t it imply that if I’m making a deal with the talent, then my investment in that talent has to be monetized to a degree by all the activities of that talent? In other words, aren’t broadcasters increasingly, theoretically, in the talent-development business across platforms, not simply in the “let me put you on the air and monetize your radio show” business and then you go off and do whatever you want elsewhere?

Yes, absolutely. I think you’re right on the mark there. In fact, it reminds me of a quote. I interviewed hundreds of people for the book and one of the people was James Diener who runs A&M/Octone Records together with his colleagues. And he talked about this very fact, that in a way the 360 deals are a better reflection of the work that the labels have been doing for a long time. They’re building brands and they should be rewarded in a way for how these brands are being monetized across different channels. And to just benefit from recorded music seems actually completely unfair.

Here’s another observation that I’ll make based on your book: In the audio space a lot of talk focuses on discovery. You mentioned Spotify. A lot of the online radio services put their best foot forward with regard to discovery whether that’s what’s driving the bus or not, but it occurs to me that discovery really only has impact in the presence of blockbusters. In other words, blockbusters create the context and the environment that enables discovery to matter because it gives discovery a running start.

Yeah, I think that’s right. And that’s I think the difficulty with today’s market. It would seem that because we have all these tools now to search for ourselves as consumers and to access this wide variety of content that’s available, it would seem that discovery is easier and easier. But, because there is so much stuff available, average consumers have a hard time figuring out what it is that they need to consume or what they would find really suiting their tastes. So, I think radio stations and these other intermediaries play a key role in curating that content for them. And the record labels in order to get on these big curators need to have scale. The importance of scale, I think is an important theme in the book. And to get back to this example of A&M/Octone Records is a really interesting case because they do a lot of the legwork that major labels often shy away from in actually developing and nurturing an artist and making sure that an artist can find a voice and can find a great positioning in the marketplace. And then, once they’re on the verge of breaking through with an artist (and they used this model really well with Maroon 5), they link up with a major label and then the marketing muscle and the distribution arms of those major labels come into play and they really push the product out to mass market. That I think is a key phenomenon that is not going to go away even in today’s music space. And, in fact, it’s much more important now than ever before.

Okay, let’s talk about that because one of the points of your book is that the fact that the head is shorter than it used to be doesn’t mean the head is less valuable. In fact, using examples like sports content, for example, you indicate quite clearly that the head is more valuable than ever before and in fact, T.V. upfronts continue to be quite strong, indicating that even though more people are watching videos than ever before and fewer people are watching T.V. in primetime than ever before, the value of that primetime is greater than ever, right?

Yes, absolutely. There’s data in the book for the music industry to further support that claim. Of the 8 million unique tracks that sold at least once in 2011, there were just over 100 tracks, that together accounted for 15% of the market. That percentage that is accounted for by the top 100 songs is going up and up and up every single year. So, that’s 0.001 percent of all offerings accounting for 15% of sales. Right? So it’s a very thin slice of the market when you look at the offerings that are accounting for an ever, ever larger share of the demand.

We would look at sports and say, “Okay, well, we understand that the sports franchises are going to be able to monetize more effectively because sports is scarce and it’s a blockbuster, and the blockbuster movies are able to monetize more effectively because they are scarce and they are blockbusters.” But, for a radio station that plays the hits – the blockbusters, if you will – we’re finding that as more and more competitors can equally play those hits across more and more platforms, our ability to monetize our air through spots is actually declining. So, how do I reconcile the increasing value of blockbusters with the fact that my airtime on my radio station, in a world where anybody can play those blockbusters, is worth less?

That’s definitely a phenomenon that exists, and it’s comparable to the television space where you can have a really big hit if you’re a broadcast network, but your competition for eyeballs has increased so much in recent years that there is enormous pressure on the advertising rates that you can get for those hits. So, that is a really big problem. And in a way, it follows from the sheer power that content producers that are behind those hits have in today’s marketplace. They know they can monetize across a number of channels so they can really squeeze and make sure that you pay top dollar for that.

That’s something that ESPN sees, having so much of today’s big blockbuster content in the sports area. They pay top dollar for the NFL and for other properties. The NFL knows how important they are and every single deal cycle the prices, the fees, for their content goes up. And once ESPN has secured that content they can really make a strong argument to Comcast and other cable operators that are in today’s landscape and can make sure that they get top dollar for their channel. So, what you see is that those people who have the blockbuster content have all the power in the marketplace.

And this, of course, is why so much of television is vertically integrated now, right? Comcast is a perfect example.

Yes, and to extend the example of ESPN, I think it explains to a large extent the success that Disney has. If you have ESPN in your portfolio, it becomes a lot easier make sure that Comcast buys a number of your other channels as well.

So, the implication of that, it seems to me, is that if you’re in the business of being a distribution channel, you’d better rethink your model because what you’ve just described is a scenario whereby content creators and content owners who also own distribution are infinitely more successful and profitable than distribution owners which don’t own content, right?

Yes, I think that’s right. In the book I describe case studies on the NFL and MLB. And if there’s one trend that is similar across those two properties, it’s that they realize how powerful they are and they’re establishing direct channels to the customer making their partners compete harder for that content. So, yes, I think you’re absolutely right that is certainly one of the consequences.

Now, broadcasters will argue, “Okay, we understand that we need unique and compelling content, so we’re going to create unique and compelling content. There’s someone who’s answering phones – we’re going to put her on the air and see how she does as a co-host.” That falls under the category of a small bet. In the book you write that making more smaller bets is not safer than making fewer larger bets. Could you talk about that?

What the leading content producers do really well is that they realize they need to spend a disproportionate amount of their budget on what they think are the most likely winners. That’s the way to compete effectively in this space. That’s the way to ensure the highest chances of success and it’s intuitive to many people, but it’s also the exact opposite of the strategy that seems quite intuitive, right?

This notion that, well, it’s inherently uncertain what will work in entertainment. We can all think of things that seem great on paper and went nowhere. Lots of people in the film industry say “Nobody knows anything.” Right? So, hits come out of nowhere, seemingly. In that world it seems very intuitive to say, you don’t know what’s going to work, let’s spread our resources equally across a larger number of different products. And that is actually the wrong strategy. My analysis, both quantitative and talking with people that work in the industry, shows that the blockbuster strategy of making big bets is actually the way to go.

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