Friday, April 03, 2009

Peering Through the Fog

(Updated with new links at the bottom.)

I've been reading a lot of interesting books in the last year, all of them about the economic shift that's resulting from the web. This shift started before the economic downturn, but the downturn is accelerating it in various ways.

For the record, the books include Crowdsourcing by Jeff Howe, Here Comes Everybody by Clay Shirky, The Wisdom of Crowds by James Surowiecki, Remix by Lawrence Lessig and What Would Google Do by Jeff Jarvis. All of these books are about aspects of the web that have fundamentally changed how the economy functions. The first three talk about how improved communication allow for people to organize themselves or find information in ways that were not efficient in the past. Remix is about how digital tools allow us to use existing media as raw material for new expressions. What Would Google Do examines Google's business model and seeks to apply it to other industries. Jeff Jarvis feels that we're not in a recession or depression so much as a fundamental restructuring.

The problem with this kind of shift is that nobody knows where it's headed. Here's Clay Shirky from a fantastic essay on the what's happening in the newspaper business.

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can’t predict what will happen. Agreements on all sides that core institutions must be protected are rendered meaningless by the very people doing the agreeing. (Luther and the Church both insisted, for years, that whatever else happened, no one was talking about a schism.) Ancient social bargains, once disrupted, can neither be mended nor quickly replaced, since any such bargain takes decades to solidify.

And so it is today. When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution. They are demanding to be told that old systems won’t break before new systems are in place. They are demanding to be told that ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.

There are fewer and fewer people who can convincingly tell such a lie.

According to Jeff Jarvis, one of the fundamental changes is that the old economy was about managing scarcity where the new economy is about managing abundance. Here's an example from before the web. Initially, there were three U.S. TV networks. If your company wanted to advertise a mass market product, you literally only had three places to go to reach large numbers of people. The networks could charge a premium because what they offered was scarce and the demand was high. While a network ad could reach 30 million viewers, it was highly inefficient in that there was no way to know how many of those viewers were actually in the market for the product. You could pay to reach 30 million, but maybe only one or two million would be interested.

Once cable TV fragmented the audience into specialized niches, advertising migrated to cable because while the audience was smaller, it was more targeted. In order to reach the two million interested viewers, you might only have to pay to reach 5 million. What you get here is a lower cost and higher efficiency. The cost is lower because the resource is no longer as scarce.

The web takes things even further. You can advertise on Google and tie your ad to a keyword search. Therefore, everyone who sees your ad is interested in your product because they're actively searching for information about your product category. And you can count click-throughs precisely.

This has had a devastating effect on any media based on advertising. Newspapers and magazines are suffering because their revenues are dropping faster than their costs. They're trying to preserve inefficient models while customers and advertisers are voting with their browsers for something that works better for them.

Efficiencies cut costs. They also eliminate jobs. When photocopying was used to transfer animators' drawings onto cels, inkers were eliminated. When scan and paint software became available, fewer painters were needed. When Flash or ToonBoom allowed for a library of assets that only needed to be coloured at the time of their creation, more painters lost their jobs as did inbetweeners and assistant animators. When this happens on a massive scale, as is happening now, it takes time for all these people to figure out how to earn a living.

One of the aspects of the Google economy, according to Jeff Jarvis, is that in an abundance economy, you want to keep your profit margin as low as possible. Otherwise, you're inviting someone to undercut you. It also means that any efficiency you can imagine will eventually be put in place, by some other company if not by your own. Therefore, the companies that most rigorously pursue efficiencies are the ones that have a chance to survive.

I think that this means flatter management structures and fewer middle men. In entertainment, this is a good thing as those in the middle add cost to a project and often slow down its production.

It also might imply more outsourcing. I'm on record as being against this, but I'm not sure if outsourcing doesn't work because of the difference between entertainment and machine parts, or if it doesn't work due to the managerial structures of the old economy. There are unlimited opportunities for improved communication via the web. Would outsourcing work if was artist-to-artist as opposed to management-to-management? I don't know the answer to this.

Those companies on the high end of animation are still in the business of managing scarcity. Whether it's feature films or big budget video games, they're protected temporarily by the difficulty in assembling the money, talent and technology to enter the field. I don't believe that we'll see new companies that are capable of competing against Pixar, DreamWorks, Electronic Arts, etc. However, the danger for these companies is not direct competition, it's the erosion of their audience. TV once again provides an example.

Broadcast television used to be filled with ensemble dramas at 10 p.m. Shows like ER, Law and Order, St. Elsewhere, NYPD Blue, etc. were the standard and they took money and talent to produce. They were not destroyed by direct competition, but by the audience moving to cable. When the audience got smaller, the economics of those shows were no longer viable. What the broadcasters did was to clone the remaining successes, which is why there are so many versions of CSI right now. What the broadcasters were also forced to do was go to less expensive programming. That's why there are so many reality shows and Jay Leno is now at 10 p.m.

I'm guessing that cloning is the final stage before collapse and movies and videogames are taking the same path right now. Everybody, including Pixar, is now producing sequels. That's certainly true of the videogame business. What's going to hurt these companies is the abundance of choice for the audience. It's going to steadily erode their bottom line until, like 10 p.m. dramas, the product will no longer be profitable.

These companies may act like newspapers, trying to preserve the structure of their businesses more than understanding what their product really is. Jeff Jarvis and Clay Shirky have both pointed out that newspapers are in the news business, not the paper business. Printing and distribution are costs that the newspaper business can no longer afford and Jarvis and Shirky argue that newspapers should abandon paper altogether and put their remaining resources into re-inventing themselves online. I don't know what feature and gaming studios should be doing to reinvent themselves, but I worry that the economics of the blockbuster won't remain viable.

Another thing that Jeff Jarvis points out is that the more control you can give to your customers, the happier they will be. Right now, Hulu is a website that makes TV shows available on demand. Another site called Boxee allowed Hulu's material to actually play on a TV. Hulu is now working to encrypt their videos so that Boxee can't use them, because Hulu's owners (Fox and NBC) are afraid of killing their broadcast earnings. This is what Jarvis refers to as the "cash cow in the coalmine." Hulu can't see that a screen is a screen is a screen. Trying to maintain a barrier between a TV screen and a computer screen is useless as the computer screen places more control in the customers' hands, which is why viewers are abandoning TV in the first place. Spending time and money to prevent people from watching your product on the screen of their choice is doomed to failure and a waste of resources.

Similarly, restricting your online content based on geography in order to preserve existing distribution agreements is also problematic. Besides alienating the people who want to consume your content, you're creating a niche that pirates are happy to fill.

This essay probably rambles more than my writing typically does (at least I hope my writing doesn't usually ramble), but it's a reflection of the chaos we're experiencing now. Nobody knows what's coming except for broad outlines: abundance instead of scarcity, greater user control, and closer relationships between companies and their customers.

There is now literally more animation being produced than any person can consume. Between features, DVDs, TV, and videogames, you could literally spend all your waking hours consuming animation. With TVs, desktops, laptops, netbooks, and cellphones, there's no shortage of screens. Ultimately, animation is going to have to be produced as efficiently as possible and is going to have to find an audience that can be monetized somehow. Just like TV and newspapers are undergoing massive transitions, I think the same thing is going to happen in animation. We're not going to recognize the industry in five years. It hasn't been conceived yet and it won't be conceived by those people with a vested interest in the status quo. Something different is coming, but who knows what it will be?

(For those interested in reading more, see Jeff Jarvis's series in progress, "The Great Restructuring." Here's part 1, part 2 and part 3.)

4 comments:

John said...

Hi Mark,

A friend of mine sent me a link to your article, and I'm glad that he did because you address so many issues currently ignored by the entertainment industry. I'm on the other end of the spectrum: a graduate student in animation faced with finding my "place" in the industry so I can pay back loans and support my family. I am hopeful and optimistic for the future, and I view the current economic climate as a challenge to come up with new ideas and business models that are forward-thinking and sustainable. Thank you for writing such an insightful article.

Rafi animates said...

Another great post Mark - on point. Your writing echoes much of my views on this subject. I'm an independent animator excited by the change that's happening in our industry, right in front of our eyes. Like many of my peers I've embraced this with open arms and find myself constantly exploring a wide variety of possible avenues to get my art out there. There's never been a better time to be creative than right now. The complete ignorance of the older establishment amuses me to no end. Revolutionary times indeed.

Steve Schnier said...

Hi Mark,
Great post as usual. The key element in the "new econonmy" (and I hate that overused term) is to find or create a compelling reason for viewers to watch your programming. No matter what the medium, creators/producers must give the audience a reason to watch and to keep watching. In the economy of abundance, pretty pictures and nice stories aren't enough - because you can find that anywhere.

warren said...

Would outsourcing work if was artist-to-artist as opposed to management-to-management?

Yes. Artist-to-artist 'outsourcing' is collaboration.

Happens all the time on the web, and for commercial projects too - many tv series pilots for major networks are put together this way.

I've also been involved in feature films for big studios which are initially set up for collaboration until a certain critical mass is reached and it all must happen in-house due to the large number of people involved in a fast-paced creative environment. However, I believe that if everyone was truly dedicated to this model of business, it would work even for an entertainment project of that size. All the software and hardware is in place, if a company is truly willing to utilize it to replace face-to-face meetings. Some software applications work really hard to fulfill that need.

The thing is, the face-to-face meeting is a fundamental urge of human nature - almost an evolutionary instinct. There is no logical reason for it in this digital age - telecommunications can effectively fill that gap with the right amount of bandwidth and processing speed. And yet, what do we hear each time we meet with an online/conference-call colleague? 'So nice to put a face to the name'. There is something else at work, I think.

All that aside, this is an era when the users, as always, will define the moneymaking model. On 'Boxtorrents.com' they've announced that a major North American licensing company is in negotiation with the site about their becoming a lincensed distro for the company's shows and movies. (LINK).This kind of model is inevitable. The faster an entertainment company moves in this direction, the better for them, IMO.