The Future of Video Content: Lessons from the Music Industry
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Recently, I have delved into the concept of "infinite TV," first introduced in my piece, Forget Peak TV, Here Comes Infinite TV. This notion posits that advancements in technology, especially virtual production and AI tools, are set to significantly lower the barriers to producing high-quality video content in the near future. If this prediction holds true, we could witness a shift in focus from distribution disruption—characterized by Netflix's rise—to the transformation of content creation itself.
Understanding the ramifications for media conglomerates is complex, particularly as they continue to navigate the distribution upheaval ignited by Netflix over ten years ago. However, looking to the major music labels might provide valuable insights.
In the music realm, both the creation and distribution processes have already undergone significant disruption. The availability of music has become virtually limitless. Yet, surprisingly, major labels have managed to either maintain or enhance their standing within the value chain.
In the following sections, I will analyze why this is the case and the potential implications for media giants as video experiences a similar evolution.
Key Takeaways: - How will media conglomerates adapt if barriers to content creation diminish, leading to an "infinite TV" scenario? - A relevant comparison can be drawn with major music labels. - Both music labels and film studios act as intermediaries between creators and consumers, offering essential services such as financing, marketing, and distribution. The central question is whether they can sustain their relevance as artists gain the ability to fulfill these roles independently. - The music industry offers a glimpse into this dynamic. Despite the surge in independent artists and music supply, labels remain dominant in terms of market share, profitability, and ability to attract top talent. - Labels aid artists in managing the complexities of the music business, control crucial catalog rights, and possess significant bargaining power with streaming platforms.
The Decline of Barriers to High-Quality Video Content Creation
Before diving into the current trends in the music industry, I want to reiterate my belief that the barriers to high-quality video creation are bound to decrease.
When considering user-generated content, the volume of video available today is effectively infinite. In 2019, YouTube reported that 500 hours of video were uploaded to its platform every minute—an astonishing figure that has likely only increased since then. This amount parallels Netflix's entire library uploaded each hour.
Figure 1: An Outdated Yet Significant Statistic: 500 Hours of Video Uploaded to YouTube Every Minute
Source: Tubefilter, May 2019.
For the average viewer, professionally produced content and creator-generated content do not directly compete; they serve different purposes and quality standards. Many creator videos focus on instructional content or entertainment, while I assert that creators will eventually produce content that rivals traditional quality, resulting in a significant increase in premium content availability.
From one angle, this may seem overly optimistic. Those involved in TV or film production understand the multitude of elements required for compelling long-form narratives. However, history demonstrates that technological advancements consistently lower barriers to entry across various media.
The digital revolution has drastically reduced distribution costs for all media forms. Conversely, the impact of technology on creation costs has varied across media types. The costs associated with text creation decreased long before the internet due to innovations like word processors. Similarly, the costs for music production have diminished thanks to digital audio workstations and improved home recording equipment.
Is there something inherent to video that makes it immune to these technological changes? I believe the answer is no. Fueled by advancements in AI, new video creation tools are emerging rapidly. To see the current innovations and their pace, refer to this ongoing Twitter thread.
Digital Music: An Analogy
The concept of infinite TV is still in its infancy and raises numerous questions, particularly regarding the future of major video companies like Disney, Netflix, and Warner Bros. Discovery in this landscape.
While there are no straightforward answers, the music industry provides a useful analogy. The barriers to entry in music have already decreased, leading to an effectively infinite supply. As of Q4 2021, Spotify boasted 11 million artists and 100 million tracks, with approximately 100,000 new songs uploaded daily. This translates to over three hours of new music uploaded each minute.
The ratio of new tracks to existing tracks on Spotify highlights how recent content influx shapes the industry.
In music, the major labels—Universal Music Group, Sony Music Entertainment, and Warner Music Group—mirror the major studios in film. They serve as established entities with vast resources, extensive content catalogs, and long-standing relationships in the industry. Both labels and studios primarily provide services that facilitate the creation of content rather than producing it themselves, acting as intermediaries between creators and consumers.
How have labels navigated these changes, and what lessons can be gleaned for media conglomerates?
The Labels' Resilience Amidst Change
Over the past two decades, music labels have faced monumental shifts.
The recorded music sector stagnated for two decades.
The International Federation of the Phonographic Industry (IFPI) chart illustrates the long-standing revenue trends in recorded music. Following the rise of digital distribution and piracy, revenues declined from 2001 to 2014, before gradually recovering through subscription and ad-supported streaming models.
Figure 2: Recorded Music Revenue Took 20 Years to Surpass Its Prior Peak
Source: IFPI
A near-limitless supply of music exists outside major labels.
The majority of music is now independent of major label systems. Spotify estimates that only 200,000 of its 11 million artists are "professional" musicians, indicating that over 98% are not represented by any label. This highlights the growing independence of artists and the diminishing share of major labels in the music market.
The value proposition of music labels has evolved.
Historically, labels financed production, managed distribution logistics, and handled marketing for artists. However, technology has diminished the necessity for these roles. Today, independent artists can easily produce and distribute their music independently, leading to a remarkable shift in the power dynamics within the industry.
Despite these changes, major labels remain dominant, with an increasing share of revenue and market influence.
Revenue Market Share
According to estimates from Omdia, major labels collectively account for over 70% of global recorded music revenue, a figure that continues to rise.
Figure 3: The Majors Are Dominant and Have Been Gaining Revenue Share
Source: Omdia (Music & Copyright)
Consumption Share
The share of streams on Spotify for major labels remains around 80%, despite a slight decline over the years.
Figure 4: The Majors and Merlin Still Have ~80% Share of Spotify Streams
Source: Spotify Form 20-F
Operating Margins
The operating margins for major labels have displayed an upward trend over the past eight years.
Figure 5: Generally, the Majors’ Operating Margins Have Been Climbing
Note: WME results for F2020 normalized for one-time expenses. Source: Company reports.
Profit Pool Analysis
A holistic view of operating profits in the music industry reveals that labels extract the majority of value from the market.
Figure 6: The Labels Extract Most of the Value in Music
Note: Figures are for fiscal years. Source: Company reports, PWC, Midia, Author estimates.
Ability to Attract Talent
Despite the rise of self-distributed music, most emerging artists eventually sign deals with major labels. This trend indicates the continued appeal and importance of label support in the industry.
Why Are Labels Still Important?
The resilience of labels in the value chain can be attributed to several factors:
Validation
Signing with a major label remains a significant mark of validation for emerging artists.
Complexity
The music business is rife with complexities, and labels provide essential support in navigating these challenges, drawing on their experienced teams and industry relationships.
- The rights framework is intricate, with multiple parties involved in the payment process.
- The global nature of music makes it difficult for independent artists to manage their performance across markets.
- Musicians often monetize through various channels, necessitating comprehensive legal and logistical support.
Technology Has Reduced, But Not Eliminated a Label’s Value Add
While technology has enabled artists to bypass traditional label functions, labels still add value in several ways. They facilitate financing for production and have critical industry relationships that can be advantageous for artists.
Bargaining Power
Major labels possess significant bargaining power over digital streaming platforms (DSPs). Despite criticisms regarding streaming payouts, the revenue generated from streaming is substantial, allowing labels to negotiate favorable terms for artists.
The Labels Face Real Challenges
Despite their dominance, labels face significant hurdles:
- Rising Artist Bargaining Power: Emerging artists can command better deals due to their established followings and hits.
- Increased Pressure on Reversions: Artists are seeking to regain rights to their masters after a certain period.
- Supply Explosion: The increasing number of tracks uploaded daily poses a challenge to labels’ market share.
- AI Risks: The rise of AI-generated music presents legal complexities for labels.
- Retail Pricing Power Concerns: The competitive nature of DSPs may limit labels' ability to set favorable pricing.
The label business is not without its challenges, yet they have successfully maintained a significant role in the value chain.
Comparing Music and Video
What implications does this have for media conglomerates?
Imagine a future where the cost and time needed for high-quality video production decrease drastically. In this scenario, traditional studios would face greater challenges from independent creators who can produce compelling content without major studio support.
Figure 10: Music Labels are Positioned Better than Media Conglomerates
Source: Author analysis
The Positive Aspects
Studios would still play a crucial role in this environment, benefiting from reduced production costs:
- Control Over IP: Established franchises and IP are more valuable than ever.
- Validation for Creatives: Collaborating with major studios offers validation for emerging talent.
- Development Support: In-house development teams can significantly contribute to a project’s success.
- Cost Savings Opportunities: Reduced production costs could enhance profitability for studios.
The Challenges Ahead
However, major studios face greater risks of disintermediation:
- Simplified Monetization: The video business has fewer revenue streams, making it easier for independent creators to operate without major studio support.
- Less Importance of Catalog: Unlike music, the value of catalog content in video is less critical.
- Commoditization of Streaming: The streaming video landscape remains complex, with many players operating in overlapping spaces.
- Talent Resistance to New Technologies: While technology could reduce costs, studios may encounter resistance from creative professionals.
Media Conglomerates Must Acknowledge Risks
In exploring the concept of "infinite TV," I have become increasingly convinced that the upcoming decade will see disruptions in premium video content creation that could rival the previous decade's upheaval in distribution.
The encouraging news for media conglomerates is that they still have time to adapt and strategic actions they can take. The music industry's ability to thrive in an infinite content landscape offers hope, but media companies are not as well-positioned. They must remain vigilant about potential risks and take proactive measures to maintain their influence in the evolving value chain.