Online Video Needham Insights analyst Laura Martin and colleagues are out with an interesting report this week comparing and contrasting the demand curves for analog and digital entertainment goods, and the pricing implications of each.
According to their analysis, demand for entertainment goods in the analog world, in this case consumers’ willingness to subscribe to a particular TV channel, is fairly inelastic, in that a change in price at any point on the curve has relatively little effect on the amount consumed. Thus, the demand curve exhibits a traditional, smoothly curved shape as prices decline (below).
In the digital world, however, their analysis shows that demand is top heavy: a small slice of the audience accounts for a huge percentage of the use, making for a much steeper demand curve when plotted against the total consumer spend on the goods or service in question (below).
Their conclusion: Media companies should package and price digital goods to “super-serve” the price-insensitive “super-fans,” of their hit content, such as by offering exclusive chat rooms with the stars of a TV show, invitations to tapings and other “ultra-engagement” opportunities for $50 – $80 per season — the MLB.tv model — rather than chasing a broad but price-sensitive Internet audience on Hulu, Netflix or other free or low-priced platforms.
Fair enough. But what really caught my eye was a caveat of sorts the analysts threw into the report regarding disintermediation:
We urge caution with the notion that the Internet gives content owners a direct relationship with their customers. There are near-monopoly gatekeepers (Facebook, Google, etc.) between content and their consumers on the Internet, and an algorithm change can undermine content’s ranking (such as demand media’s experience with Google last week) with no negotiating recourse. Content’s current distribution partners have proven themselves thoughtful intermediaries, and content can protect its rights through recurring contract negotiations.
The message is aimed at investors: Don’t get carried away with the idea that the Internet means content owners can cut out the middleman by going directly to consumers, thereby boosting margins. But it could just as well be applied to content owners themselves.
Like it or not, the digital world is full of intermediaries, many of them self-appointed. And they can have a lot of say over how value is created, captured and, most importantly, apportioned on digital platforms. The media companies are far-better off, according to Martin, et. al., sticking with intermediaries with whom they have contractual relationships — such as the traditional cable and satellite providers — than trying to go direct to the consumer and risk finding themselves bushwhacked along the way by a Google or Facebook, or a Huffington Post for that matter.
You could certainly get an argument on that point in some circles, say, around the bar at this week’s SXSW conference in Austin, for instance. But it’s a point worth heeding by content owners. Much as content owners may resent intermediaries, they have long-helped create and capture value around entertainment products, whether through video rentals or TV Everywhere services. Fight with those intermediaries if you must, over revenue splits, windows and the rest. But it’s better to have a deal than not.