Posted by Tom Foremski - January 30, 2012
Should Apple buy Hollywood? Should Google buy the New York Times?
Foremski's Take: People in the tech communities have long discussed the need for tech companies to buy media companies. More recently, there has been discussion about Apple using its $100 billion cash hoard to buy music and movie studios.
This won't happen, for many reasons. I discuss some of those reasons here:
- The tech industry does not place much value on content -- even the way it calls the subject "content" devalues it. For software engineers, "content" is a database of files that are published via a set of Internet and web protocols, wrapped in an advertising channel.
For example, Google's approach to TV is "search." But is this really the best way to access content? There's no appreciation of the marketing and curation that needs to take place so that people can find good content.
Jordan Kurzweil, head of consultancy Independent Content, notes:
From iTunes, to Netflix, to YouTube, and to Yahoo!, AOL and MSN before them, not a single tech company has been able to build and launch a single media brand that connects in any real way with an audience. They have failed time and again to build awareness and excitement for original shows, live events, new content verticals and new apps with audiences remotely approaching mass.
- The tech industry has no idea how content is created, or how expensive it can be to produce, market, and distribute it.
Yahoo tried many times to create its own content. It used to have a financial news channel with a state-of-the-art TV studio.
It is far easier for a tech company to offer a distribution platform and let the content creators deal with the production and marketing, and let the markets decide what is successful.
- Most importantly: Content production companies aren't very profitable. They don't came anywhere close to 30% to 40% operating profit margins that tech companies enjoy.
Tech company shareholders would rebel if their companies proposed acquisitions of marginally profitable businesses. It would dilute their earnings and affect their share price.
- Why buy the cow when you can get the milk and skim the fat cream. There's no "Long Tail" economics going on here -- it's all creamy short-tail profits to be made. Look at Apple, growing very fat, off of creating what are essentially Media Consumption Devices that need content to exist, yet it isn't the content creators that have amassed a $97 billion cash hoard, or report nearly $14 billion in quarterly profits -- a $1 billion a week.
You can make lots of money off of content without needing to understand, or own the content creators. Google, Apple, AOL, Yahoo, Netflix, Facebook, Twitter, Flipboard, and thousands of startups know this simple truth. If you have to make content to make money, you won't make much of either.
Which is why I wish people would shut up about tech companies buying content companies, they, and the tech companies, are clueless about content companies. Plus, has everyone forgotten the biggest, most costliest, failed merger in US history? AOL - Time Warner. Nuff said.
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BTW, here is a speech given by Courtney Love, twelve years ago. I promise that you will have a completely different view of Courtney Love: her analysis, insights, and trends foresight are remarkable, it's as if it were written today (minus references to dotcoms that no longer exist).
She starts off with a very simple breakdown of a $2 million record deal that a band might be very lucky to get. And she shows how this can result in band members making about as much as they would at a 7-Eleven.
Then she gets stuck into the economics of the Internet and how bands can become the distributors and owners of their music. However, that part of her scenario is still in development, we are getting closer but the record labels are still hanging on, still controlling the business, and still making lots of money while the bands, the content creators get very little.
Courtney Love does the math - Salon.com
To some extent, there is an allegory here that seems to apply to all content creation. Artists, writers, and even journalists, create content for very little money, and that's the way it will stay for the majority. Many will do it for free because they feel compelled, it's their passion, a calling.
However, there is a huge amount of money to made from all the industry that takes place around their content.
In the online economy, money is made from the process of aggregation. This devalues any individual piece of content by placing the value in an aggregate amount of content. The economics of the system is set up that way and set up to maintain things that way.
For example, online advertising rates are essentially set by the main players, largely Google. This keeps rates low but Google can still make lots of money through aggregating lots of content. But this means online advertisement rates are too low to adequately pay for the production costs of individual units of content -- the money is made in aggregating many units.
The system is set up to reward the aggregators.
When I was at school, we studied dynamic systems in equilibrium. Make a change in one part of the system and it rebalances to maintain the equilibrium. The Internet economy is a dynamic system, and systems always move to maintain their status quo, which in this case is of aggregators:creators. By keeping online advertising rates low, it maintains that status quo.
Which is why the content industries continue to be in a tailspin, and why stock markets value content producers at such low levels -- they have a risky future. Flipboard, which produces no original content, has a private valuation greater than that of the McClatchy newspaper group -- with $1.4 billion in revenues.
And that's why tech companies won't be buying content producers anytime soon, or later -- there's no decent money to be made in producing content!
However, at some point, the tech industry's ability to profit off of content will falter, because if the content producers can't cover their costs, then guess what?
These are interesting times.