Digital technology makes piracy easier and thus has long threatened the dominance of Hollywood studios, the music industry and publishers in the creation and distribution of content. But this technology also lets anyone develop and disseminate content: Authors self-publish, musicians bypass record labels to release songs directly to the public, and filmmakers do the same without a major studio.
This democratization has led to a tsunami of content and ushered in a new Golden Age of entertainment, said Joel Waldfogel, associate dean of MBA programs at the University of Minnesota and a former Wharton professor of business economics and public policy. Waldfogel joined the Knowledge at Wharton radio show on SiriusXM to explain his view, which is encapsulated in his new book, Digital Renaissance: What Data and Economics Tell Us About the Future of Popular Culture.
An edited transcript of the conversation follows.
Knowledge at Wharton: How has digitization changed both the entertainment industry and popular culture?
Joel Waldfogel: Well, really massively. The technological changes began with Napster and piracy, which was huge bad news originally for music. But then other things came along like streaming, which in some ways seemed like good news, but artists complained about how little they got paid.
Maybe the biggest change was just the huge reduction in the cost of producing new stuff, which is great news in one sense — it means it is easier to make stuff. But it is also bad news for the traditional guardians of culture — the labels and the publishing houses and so forth who decide what ought to get made and which good stuff should go forward.
Knowledge at Wharton: That becomes an even bigger issue when you think of payment not only to the artists but the producers and others behind the scenes.
Waldfogel: Overall, music industry revenue fell by over half between about 2000 and 2010. In addition to that, there are these questions about who gets what little payments are left. You might have expected a huge fall-off in production. If there is no money available, you might have expected nobody to continue making new stuff. But what is amazing is that what happened was kind of the opposite. Because the cost of making stuff fell, we got a huge explosion in the amount of new music, new movies, new television, new books. All of these industries had this creative explosion.
Knowledge at Wharton: The number of movies produced annually has skyrocketed over the last decade, partly because of the numerous outlets for these films to find an audience. Would you agree?
Waldfogel: Absolutely. It used to be that movies were made to be distributed in theaters. Although there are about 40,000 screens in the U.S., the truth is that there is really just room for a few hundred movies per year. But now, people view movies on their phones, through their televisions. Every screen is a venue, so there is capacity for the thousands of new movies that are being created, most of which never really get shown in theaters in any appreciable amounts.
“Because the cost of making stuff fell, we got a huge explosion in the amount of new music, new movies, new television, new books.”
Knowledge at Wharton: How will this affect production companies moving forward?
Waldfogel: I think there are a couple of different players. Obviously, there are the Netflixes of the world who are trying to become — and in many ways succeeding in becoming — the distribution channel for much of this new stuff that is not intended for theaters. The traditional movie studios are going to continue to prosper making many of their traditional kinds of movies, the big budget movies that kids appreciate in theaters. I think the question is, who is going to step in and make the smaller budget movies?
By and large, it has been smaller players, not the traditional players. But I think the question for the traditional guys is, should I jump into that market, too? It is true that it takes a lot of $5 million movies to equal one $300 million movie. That said, there do seem to be these profitable opportunities to making these mid-level movies.
Knowledge at Wharton: Tell us about the corresponding changes in the television industry.
Waldfogel: They have a lot in common. Just as in movies where theaters used to be the mode of distribution, now every screen is a distribution channel. We have seen a similar explosion in the number of new programs. One of the arguments I make — not just about television and not just about movies, but of all these different cultural products — is that with this growth in quantity, we have also had a growth in quality. Not that all of the new stuff is good. In fact, most of the new stuff is not good. But the nature of this industry is that we don’t know which things are going to be good when we invest in them. But if we can take a lot of new draws out of the urn, although most of them are going to be bad, a few of them will turn out to be quite good.
If that were true, what you would see is that a lot of the stuff people are really liking, a lot of the stuff that ends up as bestsellers or most popular, is stuff that would never have made it to consumers before. And that is exactly what you are seeing. For example, in TV, if you look at either the most popular or the most award-winning shows, it used to be that was just dominated by the traditional networks. Of course, the share has just plummeted.
Now it is mostly coming from outside of the traditional channels. Similarly in movies, and astoundingly in books. The number of self-published books, most of them are big losers. But if you look at bestsellers, a large fraction of them started life as self-published books.
Knowledge at Wharton: What about the newspaper industry?
Waldfogel: The newspaper industry has suffered in ways quite similarly to the ways that the music industry suffered. In fact, their revenue looks just like music industry revenue. It wasn’t Napster that did them in; it was just the availability of better ways to advertise. They have suffered pretty enormously.
You could argue that there has been growth in smaller scale news outlets. The challenge with news is that not all forms of news are equally true, so I think the fragmentation there is less like a cultural renaissance and more like a cacophony.
“One of the arguments I make is that with this growth in quantity, we have also had a growth in quality.”
Knowledge at Wharton: You take this even further than what we consider to be traditional media inputs. You talk in the book about the impact on photography, travel agencies and other industries.
Waldfogel: A lot of these industries have this flavor that it has become much cheaper to accomplish what we used to accomplish sort of expensively. What is interesting is that a lot of the practitioners will look at the new developments and say, “Well, my goodness that’s not photography.” If somebody can just take a bunch of pictures and accidentally make some good ones, that is not really photography. I get it. There is a loss of craft. But at the same time, from the standpoint of the users of the product, there is more product available at lower prices than before, so it is really a bonanza for the consumers in these industries.
Knowledge at Wharton: How have companies responded to this change in order to remain profitable? What about the music industry, for example?
Waldfogel: I think the traditional players, the major record labels, what they have done is really reduce their artist rosters. They are focusing on more predictably successful artists. They are very good at promoting and distributing a Taylor Swift or something like that. What they are less interested in doing these days is investing in the risky new artists. You are seeing the risky new artists develop themselves through indies or through self-release. Once it becomes clear that there is a market for them, it makes sense for them to transition over to those traditional majors who are much better at marketing and distributing and promoting stuff that would have very broad appeal.
Knowledge at Wharton: Are we looking at a sizable revamp of the entertainment industry in the future?
Waldfogel: The revamp has already occurred. The traditional guys would say they are still a very large share of sales and revenue, and that is true. But take indie music — it used to be less than 10%, and now it is probably more like 20%.
In movies, it is really hard to say because the only revenue we get to systematically observe is box office. The nontraditional stuff is mostly being distributed through digital channels where we don’t get to see the revenue. But I think in many ways, according to product as opposed to revenue, the revamp has already occurred.
Knowledge at Wharton: You mentioned quality, and I think that is an important component with all the different content out there right now. The quality is as good as ever.
Waldfogel: Again, when you look at the enormous pile of self-published books, the enormous pile of new movies and new television programs and pick one at random, it is probably terrible. But what matters for all of us is, is the good stuff good? And what is interesting is that the good stuff — the stuff that people like best among the giant amount of new stuff — tends to stack up very well compared to the traditional things. That is the sense in which consumers are living through this kind of digital renaissance.
“It may well be that we are currently in a period where there is over-production of programming, but I think right now we can sit back and enjoy the show.”
One of my favorite pieces of evidence about quality has to do with consumption choices. In music, it is possible to see not just how much people are buying, but how much people are buying of music that was originally released in different points in time. Music revenue collapsed after Napster, and it really is still in collapse. If you thought that the evaporation of revenue would mean the evaporation of good new stuff, you would expect new stuff in music since 1999 to be bad. But what you see is that usage of the stuff since ’99 is pretty high, conditional on how old it is. That suggests or maybe even indicates that the service flow delivered by new music, even after the revenue collapse, is really quite high compared to historical standards.
Knowledge at Wharton: The consumer is able to experience music in different forms because of all the outlets available today, correct?
Waldfogel: One version of this, and it is true especially for music but also for video, is the bundled sales model. The Netflix sales model, the Spotify sales model. In the old days, if you like the song you had to like it enough to pay 99 cents to buy it. I guess by old days, I mean between 2003 and 2008.
Now with your Spotify subscription, once you are using the product you can go ahead and listen to a song. You don’t have to like that song enough to pay a dollar for it to listen to it, which also means you get access to it as a consumer, but it also means the owner of that song, the label and the artist are getting paid something when people use old stuff that they wouldn’t even otherwise have purchased.
Knowledge at Wharton: We’re just inundated with TV channels, and a lot of people are looking to pare down the package from their cable provider. Then streaming services came along. Have we hit a tipping point in terms of having enough of those, or will the growth continue?
Waldfogel: I think right now we are in this period in which a bunch of platforms are fighting to be the dominant platform and the winning platform. In the last couple of years, Netflix and Amazon collectively have spent tens of billions of dollars creating and buying programming, most of it serial television programming. Others are jumping in. Disney is jumping in. I think a lot of these content producers are afraid of a world in which, let’s say, a Netflix becomes the bottleneck that they all have to go through. So, a lot of different players are jumping in trying to become either the dominant platform or one of the surviving platforms.
It may well be that we are currently in a period where there is over-production of programming, maybe more than what is really sustainable. But I think right now we can sit back and enjoy the show. It is going to be a while before all of the deep-pocketed players give up and say, “I’m not going to produce any more programming.”
