Blockbusters and Winner-Take-All Effects

In my last post I talked about Anita Elberse's Blockbusters, and how companies like Netflix seem to be moving away from "long tail" niche strategies toward strategies that focus on the creation/acquisition of premium content that drives blockbuster sales in the "head." Blockbusters, by Anita Elberse (Henry Holt and Company, 2013); see post titled Heads, Long Tails, and Light Consumers.

A couple stories came out right after this post: (1) Netflix announced it was giving up movies distributed by Epix -- including a few blockbusters -- to produce more original content, with Hulu picking up the Epix catalog; and (2) a rumor has developed that Apple is considering producing its own video/media content, possibly for a future Apple TV service. 

In Blockbusters Elberse talks about how premium content production can turn into a winner-take-all battle. As an example, she notes how major opera production outfits like the Met have started to dominate live-stream opera events, leading to an ever-growing, spiraling dominance. As the Met has expanded its live-stream efforts, its revenues and budget have grown larger, giving it the ability to sign better talent and create better productions than smaller opera houses trying to compete in the live-stream market. Smaller opera houses are being squeezed out of the market. Id. 

Elberse says one of the ironies of the opera house example is that cheap digital reproduction, distribution, and consumption don't actually democratize the opera house market (or any other media market). Instead, digital technology allows large production outfits like the Met to cheaply distribute the best opera product to markets formally served by smaller, less polished local players (the smaller, more regional opera houses). Id. Cheap digital distribution makes blockbuster strategies even more appealing, amplifying winner-take-all effects and increasing the importance of superstars and premium, big budget productions. Id.

In light of this, it seems like Netflix is making a mistake in giving up the Epix relationship, unless Netflix lacks the budget to simultaneously (1) acquire blockbuster content from Epix and (2) produce premium content in-house.

If you accept Elberse's theories, it also seems to make sense for Apple to try producing blockbuster content in-house. Apple has resources far greater than the other over-the-top providers/distributors -- Netflix and Amazon -- currently trying to produce premium content in-house. If content/media production is a winner-take-all (or most) market, then Apple's ample resources/budget could be a big competitive advantage/differentiator relative to alternative offerings from Netflix and Amazon.

Because it has a thriving device business, Apple is also well-positioned to distribute this content cheaply and conveniently to end users. Apple could make any content produced in-house exclusive to iTunes, possibly for a limited term, and then license this content to other distributors like Netflix and Amazon. Apple could leverage in-house content in a flexible way, maximizing the content's value.

The idea of Apple producing in-house content makes me a little nervous -- I've always appreciated Apple's focus on making the best hardware. At the same time, however, Apple's services business -- which includes Apple Music -- has always seemed to operate as a unique, separate entity (as noted by Horace Dediu at asymco.com). I think Apple can produce content through Apple services without interfering with its hardware business. It also doesn't seem like much of a stretch to go from the curated/produced content in Apple Music (like the Beats Radio shows) to movies and miniseries videos produced in-house by Apple. Premium movies and video could enhance the Apple brand and give Apple a more unique, differentiated ecosystem, which is consistent with Michael Porter's definition of effective strategy. See Concepts page and discussion of Michael Porter. 

It's interesting -- digital technology makes distribution cheap and easy, which opens movie and video production up to companies that formerly lacked the theaters or networks or other distribution vehicles needed to make content production financially appealing. Now that distribution is cheap, big budget, blockbuster productions are still strategically appropriate but are no longer the sole province of traditional content studios/networks like Disney or ABC.

Addendum (added 9/2/2015):

I should add that one other aspect I like about Apple producing movies and video is that art, whether it's a beautifully designed product, a movie, a miniseries video, or a piece of music, is always unique and differentiated and doesn't commoditize. And art doesn't have to improve over time the way most other products do -- it's timeless. As a result Christensen's concepts of overserving and "good enough" aren't really relevant. I like the idea of Apple adding ecosystem elements that are unique and don't commoditize. See post titled Art Doesn't Commoditize.

The author owns stock shares of Apple.

Heads, Long Tails, and Light Consumers

I'm currently reading Blockbusters by Anita Elberse and wanted to summarize a few thoughts on the book. Blockbusters, by Anita Elberse (Henry Holt and Company, 2013).

Elberse talks about the general effectiveness of blockbuster strategies, or the idea of a company focusing most of its resources -- including its marketing and talent funds -- on just a few products or services, whether it's movies, music, books, or electronic hardware. She makes a strong case for focusing on the "head," or sales driven by a few blockbuster products that are expensive to develop and market, versus focusing on the "long tail," or sales from targeting multiple niche market segments with a range of specialized products. Big profits are driven by the head and not the tail. Id.

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Citing William McPhee's Formal Theories of Mass Behavior, Elberse also makes the interesting point that "light consumers" who buy less frequently and know less about product alternatives tend to opt for the most popular choice. Companies with blockbuster strategies naturally monopolize light consumers. Id. "Heavy consumers" who buy a product frequently are more aware of their alternatives and are typically the ones who choose niche, long tail products. Id.

Ironically, McPhee found that heavy consumers tend to appreciate popular products more than the obscure products they often buy. Id. This suggests that heavy consumers of obscure niche products are prime candidates to eventually switch to more popular blockbuster products.

Elberse notes that YouTube and Netflix formerly seemed interested in pursuing long tail strategies, trying to provide a niche offering to every market segment. This strategy was enabled by the negligible transaction and search costs associated with digital goods. YouTube and Netflix initially seemed to believe that long tail sales would widen and lengthen because consumers would value niche offerings more than blockbuster offerings, leading to declining sales in the head and growing sales in the tail. This apparently hasn't occurred. Id. YouTube has since shifted its focus to premium "channels" from well-established stars/brands like Jay-Z, while Netflix is spending big on premium content produced in-house, like the House of Cards series with Kevin Spacey. Id.

The implications for companies like Apple seem pretty clear. Focus your resources, including your marketing and talent funds, on just a few blockbuster products, thereby monopolizing light consumers while also attracting heavy consumers. Heavy consumers may start with a niche product but they're likely to appreciate the blockbuster product more, making them prime candidates for product switching.

Addendum (added 8/26/2015):

The effectiveness of blockbuster strategies versus long tail approaches should also be good news for premium content producers like Disney, ESPN (a Disney subsidiary), and HBO. Regardless of whether consumers get this content through cable providers like Comcast or over-the-top services like Apple TV or Roku, premium, blockbuster content should remain a healthy source of profits.

The author owns stock shares of Apple.

Chance Favors the Prepared Mind (Company)

Steve Jobs had a prepared mind which allowed him to see and take advantage of opportunities. Jobs also prepared Apple and its executive team to see and take advantage of opportunities. Apple's vertical integration is a form of preparation which allows the company to opportunistically follow the river. Following the river refers to a company's ability to intuitively adapt to the natural evolution/flow of products and technologies, such as the way music went from CD's to downloads to streaming, or the way television is moving away from cable toward over-the-top broadband options like Apple TV, Netflix, and HBO Now. Vertical integration gives Apple the flexibility and in-house capabilities needed to follow the river. Integration, intuition, and jobs-to-be-done thinking allow Apple to create new product categories and meaningful product improvements in response to the natural evolution of products and technologiesSee post titled Focus, Functional Toys, Tradeoffs, and Following the River.

Apple prepares for new product categories and meaningful product improvements by hiring the best people and by developing/acquiring and integrating the key product technologies (fingerprint technology resources/processes, mobile chip technology resources/processes, and so on). Apple also applies follow the river learning from prior products to help it develop new product categories. iTunes learning leads to the iPod, iPod learning and Apple's computing capability lead to the iPhone, and iPhone learning leads to the Apple Watch.

When an integrated company like Apple follows the river, relying on capabilities and learning from prior products to develop a new product category, it can be difficult for companies that haven't followed the same river to compete. Feature phone makers couldn't compete with the original iPhone because they didn't follow Apple's river -- companies like Nokia and Motorola never developed products like iTunes, the iPod, and the PC, so they lacked the capabilities and learning needed to develop a small, handheld computer that also functioned as a phone and music player. Traditional luxury watch makers are facing the same problem in trying to compete with the Apple Watch.

The author owns stock shares of Apple.

Riding Waves

I just listened to another excellent podcast from Asymco's Horace Dediu: Critical Path #145: "Arbitrage." Near the end of the podcast Dediu talks about how cord cutting and the demise of cable television is following a slow but predictable path. The downward trend in cable subscriptions may accelerate as over-the-top ("OTT") content distributors like Apple, Netflix, Google, and Amazon offer more and more unbundled alternatives to the current oversupply of bundled cable channels. Dediu's comments reminded me of how Steve Jobs compared taking advantage of technological change to picking and riding a giant wave:

"Things happen fairly slowly, you know. They do. These waves of technology, you can see them way before they happen, and you just have to choose wisely which ones you're going to surf. If you choose unwisely, then you can waste a lot of energy, but if you choose wisely it actually unfolds fairly slowly. It takes years."

The Cord Cutting Wave

You can really see Apple riding the cord cutting wave with Apple TV: years of overserving and price inflation in the cable TV business have created a huge wave for OTT providers. See post titled HBO, ESPN, and Jobs-to-be-DoneAnd Apple's closed ecosystem of hardware devices amplifies its ability to exploit this wave -- Apple will get more benefit from cord cutting hardware than companies without a closed ecosystem, since Apple TV will drive the sale of other Apple ecosystem products that work with the Apple TV (Apple Watch, iPhone, MacBook, etc.). OTT providers like Netflix, Google, and Amazon won't get these same benefits because they don't have a viable, prosperous range of closed ecosystem hardware all running a consistent operating system.

The Cloud Storage Wave

The other big wave Apple seems to be riding is the way people are moving their personal photos and videos (as well as all other content) from their computer hard drives to the cloud. With the release of Apple's latest Photos app, people are going to stop storing personal media on their hard drives and start storing it on iCloud. Because Apple's range of closed ecosystem devices makes the user experience the easiest and most convenient, Apple is going to be in a great position to charge for iCloud storage of this media (even if Google and Amazon are giving cloud storage away). iCloud storage of personal media is really going to lock customers into Apple's ecosystem, dramatically raising switching costs. This trend/wave is just starting, and Apple will be able to ride it indefinitely as data storage demands continue to rise.

The author owns stock shares of Apple.