Modular Subscription Models, Content Exchanges, and the Future of Media

Disclaimer: In this post, I’m going to take a stab at predicting the future of media distribution. Obviously, much of what I’m about to say will turn out to be wrong. I don’t care.  In any predictive activity, I can only ever trade in probabilities and never certainties, and I have no problem with being wrong as long as I’m wrong in interesting ways.

So, let’s talk about media. And let’s start with a bit of probably-obvious-but-nevertheless-critical context.

For a long, long, looong time, media “content” was inherently tied to a physical object, i.e. “the medium” (from the Latin for “middle.”) The medium, whether book or scroll or record, literally stood between the creator of content and the consumer.

The entire network of business models that make up the current “content industry” (e.g. Hollywood, the Recording Industry, etc.) was built around the notion of media-as-physical-object. When “an album” is not just a set of tracks but also a physical vinyl record, an enormous amount of logistics had to go into manufacturing and distributing that record. While “talent” was necessary, it wasn’t at all sufficient – the most talented singer in the world was unlikely to have the capital and experience in industrial operations to put out a physical record at any meaningful scale. And when the real bottleneck is manufacturing and distribution, it makes perfect sense to have large corporations handle distribution because they can benefit from accumulated expertise and economies of scale.

But an interesting thing is happening right now – the physicality of media is very rapidly disappearing. And as goes physicality, so goes the entire classical business model of the content industry. The complete digitization of media is here to stay, and it’s only going to accelerate going forward. Why? Because it makes sense – there’s simply zero reason to consume the resources to manufacture and transport physical objects when a tiny electric signal will produce the same effect. At least to me (and anyone younger than me), a CD already seems like a painful anachronism. And even though I still buy physical books, I freely admit that it’s mainly from a persistent collector’s aesthetic appreciation for the physical object. 

So what does this easily anticipated trend mean for the industry?

First, it means that the industry should shrink. The capital that’s being used for manufacturing and physical distribution is being deployed inefficiently and should be put to more productive uses. It’s not at all a bad thing if the revenue of the industry is falling – they’re selling a product that now cheaper to produce, and if we can all now get music for less than we had to pay before then we’re richer as a society.

Second, it means that the industry needs to really understand and focus on the areas where it is actually adding value: production, marketing and rights management.

The production and marketing functions of the content industry should be fairly obvious, so I’m going to finally get to the meat of this post and talk about rights management.

In the post-physical media world, the main scare commodities are rights, i.e. the exclusive power to control access to a creative work and the legal claim to profits generated by the consumption of that work. At the moment, the industry is doing a truly abysmal job of managing rights. While some companies are certainly much better than others, the by-and-large reaction of the industry to the dematerialization of media has been to try to use rights as a weapon to oppose progress by trying to force consumers back into buying CD’s or the closest digital analog. Witness the SOPA/PIPA brouhaha for the latest example of the industry’s ham-handed attempts to roll back the clock.

This method will not work. In a democratic society, the law cannot be used to hold back technological progress that unambiguously improves the life of the average Joe. Copyright is not a “natural right” like the right to free expression, but rather a granted license from the government for the purpose of enhancing cultural and scientific progress. In the USA, copyright comes from a clause of the constitution that reads:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Even if the content industry can ram through some sort of SOPA-style law, they’ll only be sticking their finger in the dyke and increasing the pressure behind the wall. As soon as the average person starts to feel the pain of laws that serve no purpose except to facilitate rent-seeking at the expense of progress, America will (eventually) vote in Congressmen who’ll overhaul the laws to align them back toward promoting economic and cultural progress.

So what’s a content industry to do? Simple – accept that no matter how long it takes for us to get there, we’re going to end up in a world where every form of media (music, movies, “TV”, books, games, etc.) is going to be immediately available to any consumer on any screen. And the notion of consumer “ownership” of media is going to disappear.

The media consumption of the future is going to be all about leasing access rights, (i.e. “renting content.”) Consumers will pay $X for the right to consumer content Y during Z period of time. This means the future of media is going to look a lot more like a financial exchange (e.g. the NASDAQ) than like a record store.  And it means that the content companies that are going to win the future are going to be the ones that master financial engineering.

There are a lot of ways that access contracts can work, but they all generally boil down to “how long are you allowed to watch the Little Mermaid, and how much do you have to pay for that?” At one extreme is the one-off rental (“pay me $2, watch the movie once”) while at the other extreme is the purchase (“pay me $10, watch it forever.”) Both are just access contracts with different terms.

From the consumer’s perspective, acquiring rights is currently an enormous, completely unreasonable pain in the ass. Nearly every contract has to be individually negotiated with different producers on different terms – want to watch Parks & Rec? Go to Hulu! Dr. Who? BBC, unless you’re outside the UK, then it’s Netflix. Beatles album? iTunes; certainly not Spotify. Like the band Ghost Mice? Mail a physical check to Plan-It-X records and get a CD. The whole thing is the pain in the ass, and the pain is main reason that people give up on the whole hassle of “following the law” and turn to piracy.

But I contend that 95% of consumers actually believe that the producers of content (i.e. the talent and crew) deserve to profit handsomely from their work, and they’re willing to pay a price that accurately reflects the cost of production + a reasonable margin that accrues to the people who actually provide a valuable service. Look, for example, at the recent Louis CK special (which I recommend – buy it at https://buy.louisck.net/). Many, many people (including me) happily paid $5 to download the special because we knew that the money was going to the people who created it, and because Louis didn’t try to impose technical inconveniences on us.

So how can we best ensure that content is easily available consumers, while producers of content still get fairly paid?

Why, with modular subscription models based on a brokered content exchange system, of course!

What the hell does that mean? 

It means that in the future, instead of picking up pieces of media ad hoc, consumers will simply subscribe to services like Netflix or Spotify or the future equivalent for books or video games. Netflix acts like a broker on a commodity exchange – it buys content access from producers (just like a commodity broker buying 10,000 bushels of corn) and then resells those access rights to consumers at a markup that makes the effort worthwhile. Everyone wins – producers get paid for content, brokers have jobs, and consumers have an easy “don’t make me think” way to watch whatever they want.

There are a few obvious problems with the classic subscription model, which is why I introduce the concept of “modular” subscriptions. In a modular system, a consumer pays for a “base” subscription that grants access to the most common content, and then can choose to buy additional subscription modules that grant access to even more specialized or expensive content. For example, Netflix could offer a “new releases” module, where for example the customer pays an extra $10/month and gets ability to stream Hollywood movies that are still in theaters. Or a consumer could buy an “Indie film” module that grants them access to independent films that require extra effort for Netflix to acquire. Or a Spotify consumer could buy a “Monsters of Rock” module that includes Led Zepplin and the Beatles for an extra $4/month.

Why is this system great? Because it solves two critical problems. First, it keeps things simple for the consumer – I only ever have to make ~5 economic choices (i.e. I want modules A, C & D but not B & E), and then I can consume whatever I want without any more mental effort. Second, it lets producers dynamically price content, which solves the problem that some content is a) much more expensive to produce and b) much more in demand.  A movie like “Transformers” was both way more expensive to make and much popular than a movie like “Thank You For Smoking,” so why does it make sense that a DVD for each movie would cost the same amount? The main reason why they actually do is “signaling;” producers don’t want to sell a movie more cheaply because it seems like an implicit admission that the movie is not as good, which they fear will drive away more consumers than it wins.  The modular subscription system fixes that problem by obscuring the price of individual movies from consumers, so there is minimal signaling risk.

In the modular subscription model, producers set “per-view” prices for each piece of content (say a movie). The brokers (say Netflix) pays that price to the producer each time someone actually watches the movie. The broker then has the (actually very interesting to nerds like me) task of sorting the movies into modules and setting the appropriate price for each module that will make sure the broker takes in more money than it pays out to the producers. And all that consumers see is that the price of a module subscription goes up or down a couple of dollars every January 1st (or quarterly, or whatever.)

This may seem a bit outlandish, but there’s actually a very large industry that already works exactly this way – insurance. When I buy a fire insurance policy, I agree to give the insurance company $X a month if they agree to completely rebuild my house if it burns down. The insurance company then goes behind the scenes and runs a huge calculation that figures out the likelihood of my house burning down and the cost of rebuilding, then sets a price for the contract that they think will allow them to profit on the whole across many contracts, even if they have to pay for a bunch of burned houses. And because different customers have different needs, insurance companies sell riders, which let me purchase additional chunks of coverage (for example, “this policy holds even if I accidentally burn down my own house” or “if my house burns down, you have to build be an even better one”) in exchange for a fee that the insurance company sets. This system is very well established, and has worked very well for hundreds (if not thousands) of years.

So, that’s where I think media is going to go. Everyone wins (except companies that used to profit from now completely obsolete distribution methods). Consumers get immediate, easy access to all the content they want and they know that the money they’re paying is really going to people who’ve created the content or added real value in the supply chain. Producers actually get paid for their content, get control over how much to charge, and don’t need to deal with the complexity of distributing to thousands of different outlets. Obviously there are powerful incumbents who lose under this model, so they’ll fight it tooth and nail. But I think they will eventually lose (as they always do) and the solution that’s best for society will win out.

What do you think?

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