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Bob Dylan had it right. “Businessmen, they drink my wine, ploughmen dig my earth” he said. “None of them along the line know what any of it is worth”.
Every day brings an article about how music labels, video studios or book publishers are facing new headaches caused by the content revolution. But they aren’t headaches – they are opportunities, and, luckily for everyone, the opportunities are so large that pretty much everyone in the content business is going to win, and win big, because of the very “headaches” they are trying to fight. And that dynamic puts their stock near the top of my buy list.
You have to love the irony. Old school Hollywood is busy panicking over the loss of its ability to control and get paid every single time their content gets put in front of the digital public but the value of that content is exploding precisely because they have lost the ability to control (and get paid) when their content goes out to the public.
Content consumption is not a zero-sum endeavour. It is a virtuous cycle that feeds the value of the content as more people are exposed to it. The more people who are exposed to that content, the more people will be willing to pay for it.
Take, for example, the incredibly stupid move by Lorne Michaels and the suits at NBC and General Electric who decided that free exposure for their ageing Saturday Night Live franchise was a bad thing after millions of us watched the SNL mock rap video “Lazy Sunday” on YouTube.com.
Ignoring for a moment the obvious futility of their efforts (type “Lazy Sunday” into any search engine and you’ll soon find the clip available for free), they are apparently trying to seal SNL’s decline into irrelevance. They won’t succeed in failing. Any time SNL puts together a clip funny enough to become popular on video internet sites, they’ll get free exposure.
If everybody can get the content for free, how will the content owners make money? Well, revolutions disrupt old business models – note the impact of digital photography on Kodak’s century-old model of selling cameras and film. It is not shocking that the content-ownership business has been disrupted since people realised that every piece of content created could easily be converted into bits and bytes.
And there are virtues to the new cycle. Until YouTube.com picked up “Lazy Sunday”, SNL had an addressable audience of maybe 200m people. Of those, fewer than 0.5 per cent bother to tune into that show at the time and on the channel that NBC forces us to. Since someone published that clip on YouTube.com, more than 10 times that number have watched two white guys rapping like hard-core gangstas about watching a movie on a lazy Sunday afternoon. And suddenly SNL’s addressable market can be measured in the billions, as anyone with access to the internet can now watch the show.
SNL has now started making its best clips available for purchase on iTunes. People are buying them and the show will generate tens of millions of dollars in revenue on iTunes this year and next. It turns out that people are willing to pay for content they could get for free.
What got people interested in buying that content from iTunes? Well, unless you’re over the age of 35 or so, and you remember when the show displayed some occasional creativity and even brilliance in the era of John Belushi and Dan Aykroyd, the only reason you sat still long enough for an SNL clip was because you were exposed to it for free on the net.
To be sure, the content owners have the right to try to control their assets. But it is completely disingenuous for them to pretend that they have ever been able to control all the use of their content – or that it would make business sense to do so.
As consuming content on the net becomes easier, the new business models of content ownership will be much more valuable than the old. I have just finished watching the entire second season of television show Lost that’s on ABC at some time and on some night of the week that I don’t even know. I had never bothered to watch it until I was able to download it on three different computers and my video iPod. Now I think I’ll get started watching The Office (that’s on NBC at some time and some night that I’ll never bother to find out). I would rather pay a couple of dollars and own a bad copy of it on my hard drive.
And it is these virtuous cycles that have made unfashionable names such as Walt Disney, Time Warner, Lionsgate and other content owners buys in my book. The value of their content libraries is racing upwards. And they won’t be able to mess it up, no matter how hard they try!
Cody Willard is a hedge fund manager at CL Willard Capital.