Singularity Law

In the mid-1990s, I spoke on a panel at the “Digital World” conference in Hollywood, California. It was one of the first conferences to bring together the entertainment industry and the nascent Internet industry. I remember clearly that the keynote speaker, one of the major studio heads at the time, starting off his speech with the words “Content is king. It always has been and it always will be.” No one disagreed. Indeed, at that time content was king. And there was nothing to indicate otherwise.

But that was several lifetimes ago (in Internet years), and the content industry is having a difficult time grasping the current reality. Content is no longer king. Instead, distribution is king.

For decades in the book, music and movie industries, distribution was viewed as a necessary evil. Antitrust cases forced some content creators out of the role of distributors of their own content, and other industries just found in easier to let others distribute their content. Content creators developed close relationships with the distributors of their product –- making sure that the distributors made enough money to stay in business, but not allowing the distributors to make too much money, or to have too much control over distribution of their content.

After all, those developing the content were the creative people who wore the tuxedos and designer gowns at the gala celebrations of their industry, while the distributors were those faceless minions who got their hands dirty warehousing and shipping content through a maze of wholesalers, jobbers and retailers, until that content finally reached the consumer. Content creators made money by the millions, while the distributors made a few cents per unit. Content creators were household names. And that was the way it was suppose to remain.

But no one told the Internet entrepreneurs. Steve Jobs, Jeff Bezos and others did not grow up answering to the entertainment industry content owners. They grew up talking to venture capitalists, investment bankers and major shareholders. As long as they had a vision for their companies and could execute on that vision to the satisfaction of their investors, they were free to do virtually whatever they chose.

In the early days of the Internet, the major interactions between the techies on one hand, and Hollywood and the publishing industry on the other, were generally in the area of licensing pre-existing content for videogames, CD-ROM titles and the like. At that time, the low processing speeds of personal computers (and videogame consoles), combined with low network speeds and limited storage capacity, did not allow for the distribution of music or movies online. While books and other printed materials could have been distributed online, few viewed that as a viable business model.

But that has all changed over the last decade, as computers have become blindingly fast, storage has become dirt cheap, technology has permitted enormous files of music and video to be compressed to a manageable size, and broadband technologies have made it possible to distribute content almost instantaneously to an array of devices – from computers to cellphone and e-book readers.

Today, digital content distributors, such as Apple’s iTunes Store, Amazon’s Kindle Store and Google, have established themselves as the gatekeepers for the distribution of music, books and virtually everything else. Content creators/owners are still acting as if they controlled the distribution of their own products –- when it is obvious to virtually everyone outside the hallowed halls of content companies, that they do not.

That is not to say that the content creators are incapable of establishing their own online distribution networks that could rival (or exceed) those of Apple, Amazon, Google, et al. But the fact is, they have not done so, and there is no evidence that they will do so (at least not in the near future). The question is why they have failed to do so.

There are myriad factors that have lead to the situation that content creators find themselves in today, but there are two that are paramount. First, those in charge of the major content creators today (the movie studios, the record companies and the book publishers) reached the top of their professions because they were good at executing the old business model. Today’s movie moguls were good at distributing films to movie houses (and more recently distributing movies on shiny discs for home viewing). The same is true for record company executives, who reached the pinnacle of their industry by being good at distributing shiny discs to consumers through a multi-layered distribution system. Similarly for print publishers, who know how to print and distribute paper-based products. Not one of these top-level executives became successful by executing an online, digital distribution business model. To them, the choice is either try to squeeze a few more years of profitable operations out of their tried-and-true business model until they can retire with a fat pension -– dumping the digital transition in the laps of their successors. Or to try to execute a risky, digital distribution model with a significant chance of failure. Not surprisingly, most have chosen the former -– using litigation and lobbying for new laws to help them prolong the old business model and slow down the digital juggernaut.

The second primary reason for their failure to develop a successful digital distribution model is the fact that content creators are still dependent on their existing distributors for the bulk of their revenues. Despite all of the hoopla surrounding digital distribution, the fact is that the vast majority of content is still delivered the old fashioned way — in tangible form. Content creators cannot alienate their traditional distributors, who also see that their business model is going away and are trying to hang onto their markets as long as possible. Content creators cannot be seen as favoring digital distributors over the traditional distributors and cannot establish their own digital distribution systems that would be seen as competing with their traditional distributors.

Content industry executives, who may have hidden their heads in the sand when digital distribution was in it infancy, fully understand where the future lies. Unfortunately, they are carrying an enormous amount of baggage that they cannot just jettison for a new digital business model. As a result, entrepreneurs who are not encumbered by such baggage have been able to establish themselves as the dominant players in the digital distribution market. They are the ones who are wearing the crowns and reaping the spoils from their investment in technology. They are the kings.