This is part four of a five-part series. Part one is here.

The story so far: national independent media releases are economic and cultural goods, however the local advertising-supported media market is not large enough to justify their production. The government should regulate to support creative industries.

High-level summary of this post: The Internet doesn’t give a fuck about your business model.

Peter started with Wikipedia’s long-tail graph, and so will I (it’s public domain).

Wikipedia describes the graph well:

Given a large enough availability of choice, a large population of customers, and negligible stocking and distribution costs, the selection and buying pattern of the population results in a power law distribution curve, or Pareto distribution. This suggests that a market with a high freedom of choice will create a certain degree of inequality by favoring the upper 20% of the items (“hits” or “head”) against the other 80% (“non-hits” or “long tail”).

The business logic is that, in the absence of frictional costs, serving the tail can be very profitable (the area under the graph is revenue). NetFlix, for example, has 10 million subscribers and 75,000 titles. 21% of rentals come from titles outsides of the top 3000.

There is a caveat though: The long-tail is noisy and crowded. From the point of view of small producers it’s tough to get noticed. Good search and good community help, but good promotion is becoming more necessary and more difficult.

There are roughly three kinds of audiovisual expression online: user-generated, low-value programming (largely TV transplants like sports and news), and high-value programming (Dr. Horrible).

User-generated content is exploding. In 2007 North Americans watched 10 billion videos online with an average length of under three minutes. Content is generally very low production value and not really possible to charge for. The hype is that user-generated content is a meritocracy, but blog popularity is also a Pareto distribution.

Low-value programming is generally content that was produced for local broadcast and transplanted to the internet. Local news and sports have, essentially, a built-in long-tail market. Similarly, moving shows like The Daily Show online lets content licensees re-use relatively low-cost content for marginal advertising dollars and promotional eyeballs. This is also where news-documentary programming like TED Talks and BoingBoing Video fit.

High-value programming, particularly drama, doesn’t really exist online (there are only a few examples). In short: No one’s invented a viable economic model for it yet.

The Internet is good at aggregating media, not financing it. Finance is control: French films that accept Hollywood dollars become American under French law, and the Canadian attitude is very similar.

Old Media gatekeepers still finance most new, high-value content, and so still have control. Currently they are abusing their power to force old media business models onto the new media market (through geographic, temporal, and rights restrictions). The mantra in the executive offices is, “We are not going to trade analog dollars for digital pennies” (that’s a direct CEO quote).

Internet content tends to be in short, “webisode” format. The problem is that the ad-supported online market isn’t rich enough to justify funding productions of more than about two million dollars. Programming that cannot be financed doesn’t exist, so high-value programming tends not to exist online.

The executive view is that online is accretive to “regular” viewing (for example, that people who watch SNL digital shorts will tune in to the regular broadcast). It turns out that this isn’t the case. As soon as a viewer hits the internet they are devalued. Internet viewers who move to “regular” broadcasts aren’t worth as much to advertisers.

But there is hope: Television is different from the Internet. People who want hour-long dramas still have to go to the old networks, and probably will for quite a while. The Internet wants content cheap and short or not at all*. Still, the market has changed and the industry will have to content itself with structurally-lower revenues.

What does this imply for Canada’s national media strategy? In theory Canada is used to fighting for space in a long-tail market — that’s what we’ve been doing with America for decades. Eventually all content finds its way online (the Internet is the ultimate media aggregator), so maybe we can leverage long-tail effects online.

Let’s revisit the government’s…

Cultural Toolkit

• Public broadcasting — the CBC should be given a mandate to produce diverse, local, high-quality Internet content. The BBC is, again, the best-practice case study. Their online presence is frequented by UK citizens and is consistently well-rated (with some caveats about rights restrictions). Deutsche Welle is another good example, particularly their free online German language lessons.

  The CBC has the most popular TV website in Canada with about 4.5 million viewers per month, but needs more funding. Currently the CBC gets about EUR 19 per capita while Deutsche Welle gets about EUR 75 per capita and the BBC about EUR 85. Increasing CBC funding, directing it to new content, and putting the content online would serve the existing 4.5 million audience members and would expose Canadian media to long-tail effects.

• Scheduling rules — Can Con online. Require large media company websites based in Canada to show Canadian-produced audiovisual content.
• Spending rules — Like the CPE rule, but for ISPs. Charge ISPs a production levy that would go into a fund administered by the CBC and Telefilm specifically for the production of online content. Currently 50% of data moving across Canadian networks is audiovisual. However, this levy would likely be passed through to ISP customers and might damage the Net Neutrality argument (the levy is essentially a tax on audiovisual content, marking those as “privileged packets”).
• Ownership — Canadian ISPs and telecoms already require Canadian ownership. That said they tend to avoid spending on new content and technology and focus instead on innovative billing models ($0.10 text messages — WTF). Since they act like monopolies anyway it might be time to nationalize them.
• Competition policy — Require Canadian online services to regularly purchase or fund development of new Canadian content and display it prominently. Do the same with the CBC. This is different from scheduling rules because it’s focused on creating a commerically-viable market for small producers.
• Subsidies — The government should directly subsidize small online media operations, particularly their promotional costs so they can capture more long-tail dollars. Additionally we should subsidize broadband infrastructure deployment in Canada with a goal of 100% market penetration. This latter subsidy must be in addition to new content subsidies, otherwise it’d be like renovating all the theaters in Canada with public dollars and then letting them show only Hollywood films.

So: Most of the ideas in the cultural toolkit are incompatible with the realities of the Internet. However, there are a couple of ideas we can salvage for a national online media strategy:

• Whatever we focus on will eventually end up online.
• The CBC should be continually expanding its Internet offerings.
• Expenditure rules can be used to “trick” the Internet into funding new high-value content.

Peter is “above the fray” but has the following advice to producers: You should focus on funding a wide variety of high-quality webisode-like media to fit the strengths of the online market. The low-cost Internet short is here to stay. The Degrassi webisodes are a perfect case study: a Canadian production company sold 150 episodes to Viacom for $25,000 each. Of course, because of old media geographic restrictions you can’t watch them in Canada.

In summary, the old media networks have no choice but to trade “analog dollars for digital pennies”. The government has a regulatory opportunity to position Canadian content favorably in the long-tail online media market. In the absence of government action small producers will have to re-think their business models or die. Tomorrow, some Regulatory Suggestions.

* I’m uneasy with this point. Nearly 100% of the television I watch is commercial free, over-the-internet. More on that later.

There were roughly five parts to Peter Grant‘s talk: “Why Local Drama?”, the Economics of TV, the Economics of Film, the Economics of New Media, and Regulatory Suggestions.