April 18, 2019

Streaming according to Pareto

Commonly known as the "80/20 rule," the Pareto principle was formulated by Vilfredo Pareto to describe the distribution of wealth. For example, 80 percent of the wealth being held by 20 percent of the population. Or 20 percent of the items in a store accounting for 80 percent of the sales.

To be sure, "80/20" represents an idealized distribution. The real world is bound to differ. But as a power-law probability function, the Pareto principle describes many real-world economic, social, scientific, and actuarial phenomena. It also applies to digital entertainment services.

Back in 2004, Chris Anderson observed that at Netflix, 20 percent (or so) of the titles accounted for 80 percent of rental traffic (the DVD still ruled back then). But he also noted that the other 80 percent, what he termed the "long tail," still added up to a significant amount of business.

As inventory costs have fallen towards zero for digital media, the value of the "backlist" (as it is known in book publishing) has grown substantially.

A flaw in Anderson's original thesis is that few media services are willing to sink the resources into their search and sorting engines that Netflix did. Without discoverability, the safe money is again on the hit productions that generate 80 percent of the revenue.

Cable television has long been in the business of selling the hits and the long tail. But the cable model has increasingly revealed the misleading way the long tail is commonly visualized, as a two-dimensional line that slowly tapers off to zero, rather than spreading out in all directions.

There isn't one long tail but hundreds, often with nothing in common. Imagine that back during the 1990s, if you wanted to subscribe to PC Magazine, you had to subscribe to every periodical Ziff Davis published. And Sports Illustrated. That's how the legacy cable model works.

Streaming, however, creates an economical way to split the long tails into standalone packages. Actually, digital television led the way, with OTA broadcasters carrying digital subchannels like QVC, Comet, Charge, PBS Create, and NHK World that aim specific content at specific audiences.

Curating titles in their own genre silos addresses the discovery issues, and makes it easier for the audience to identify the channel and content they wish to watch. But it's up to the customer to do the heavy lifting.

As opposed to grabbing the remote, turning on the TV, scrolling through the channel guide, and clicking on whatever, streaming customers have to install the apps, sign in, and queue up what they want to watch (though the first two steps should only have to be done once).

Those decision trees forge a closer relationship between spending choices and viewing choices. As Jared Newman puts it, "The easier cord-cutting is, the less money it saves."

Back when the DVD was king, nothing did Netflix's bottom line better than customers who signed up for their "best deal," its unlimited three-DVDs-out-at-a-time plan, but only got around to watching two or three when they could be cycling through a dozen DVDs a month.

As long as the cable companies can sell customers overpriced "fat packages" chock full of channels they rarely if ever watch, they will be loath to offer customized "skinny bundles" at a steeply discounted price.

And for the time being, they have little impetus to. "Traditional cable" remains the default choice in 90 million households. But for how much longer?

Only a decade ago, Netflix ran Blockbuster out of business. Today, shipping DVDs is a tiny (but still profitable) part of its revenue stream. Netflix was willing to deprecate its original business model in order to adapt to the changing technological times. Blockbuster was not.

Blockbuster CEO John Antioco attempted to pivot the company. The Blockbuster board was on board at first, but couldn't believe the world was changing that fast and refused to accept the substantial hit to the bottom line. Antioco got fired. Six years later, Blockbuster went bankrupt.

Will "traditional cable" turn out to be Netflix or Blockbuster? Well, antenna-only households have grown by 50 percent in less than a decade. One way or another, a tipping point is approaching, probably faster than we expect.

Related links

Why Blockbuster really failed
Japanese media update

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# posted by Blogger Joe
4/20/2019 8:23 PM   
Another factor: 5G

I suspect a lot of cable customers get it as part of a broadband package and/or combined with sports package. If 5G holds up, the competition would put huge pressure on cable.