Business Models

The Great Disruptor: Venrock’s David Pakman On Media Unbundling

broken cd The Great Disruptor: Venrocks David Pakman On Media UnbundlingAs a venture investor in internet companies, I look for technology-based innovation which causes major disruption among incumbents. Since advertising is the dominant business model for most of the web, I think a lot about these technologies and their impact on the future. Clearly the new devices we use to access information and entertainment are wreaking havoc on traditional business models based around ad sales. But I think the biggest change is the way new modes of consumption are forcing the unbundling of packaged media across a wide spectrum of industries.

In music, the carrier format shifted many times, from vinyl to cassette to 8-Track to CD to MP3. In all but the last shift, the content owners controlled the format changes. Along the way, largely driven by the allure of bundling economics, record labels started packaging songs together in albums rather than selling them individually as singles. This allowed the unit price to go up 3x – 6x. If singles cost $2 – $3, records cost $12 – $18. Consumer went along with it.

But as digital emerged, the labels were faced with a harsh reality: over the decades, consumers began to prefer singles. There was no economical way to get them, so we bought full albums to get the 1-2 songs we really wanted. We wanted the album unbundled, but we had no choice. With the emergence of alternative distribution (like Napster and then iTunes many years later), the latent demand for singles was unearthed and havoc ensued.

It was havoc because the labels had not prepared a business model or cost-structure for the unbundling of the record. They had grown accustomed to higher-margin and higher unit-priced albums. We started to witness the unbundling of media. And it took the record industry more than 5 years to offer digital singles for sale legally. Now, music industry total revenues are down more than 50% since their peak in 1999, and continue to fall every year. The biggest culprit is not piracy, it is the fact that consumers, when they buy music, are buying 10% of what they used to, because they only need to buy the single, not the album.

In print, newspapers and magazines have taken a bundled approach for decades. It is impractical to pay for editorial content by the article. Bundling articles into convenient formats like newspapers and magazines solved a distribution challenge and made the economics of selling editorial possible. Once editorial went digital and we could consume information by the article simply by following a link, the unbundling began. Today it is still impractical to charge consumers by the article, so newspapers are trying to convince us to subscribe to digital bundles.

But as it was with music, it is getting harder and harder to imagine this model holding for the vast majority of editorial we consume, since we are discovering more often what to read by following a link passed to us through social media. It might be from The New York Times, but it also might be from Reason Magazine or The Nation or Huffington Post. In looking back at the totality of the editorial media we consume online these days, I imagine it is from a far more diverse group of sources than in the past, making it harder and harder to justify these monthly subscriptions to bundled media, despite the model of metered access being touted the latest great hope for print pubs.

I believe the same unbundling is now happening to traditional and cable TV networks. For decades we watched networks. They made judgement calls about what shows we would like, and we had little choice, so we watched them. The economics of cable TV networks are fantastic (with their dual advertising and subscription revenue streams), so more and more of them popped up. But thanks to DVRs, and now internet video, we stopped watching networks and now only watch shows. We don’t even care on which networks they appear, nor do we tend to know. This is the unbundling of television. And if consumers could only pay for the shows they watch and not the 500 channels times 22 hours per day of other programming I pay for but never see, we’d spend a LOT less on TV than we do know, and the total subscription revenues of cable networks would crumble. Until we have real choice among digital distributors, this is not likely to happen. And the powerful forces of TV networks are working very hard to make sure we must be paying them even if we are watching shows online somewhere else (read more about TV Anywhere here.)

My observation is that unbundled media results in smaller markets than bundled media by artificially inflating total revenues. Some will say, “if you only bought (TV shows, newspaper articles) individually, you’d have to pay (10x, 100x) what you are paying now.” That is only true if you assume the cost structures must stay the same. And when media is unbundled, the cost structures do NOT stay the same. They are forced to radically alter themselves and become more in line with what the market is willing to pay to consume those atomized bits of content. We won’t pay $120 per TV episode. We’re willing to pay something closer to $2 per episode, and so production costs are going to have to fall dramatically. Mobile devices and the social web are accelerating the unbundling of media. This is the great disruptor.

David Pakman is a Partner at venture capital firm Venrock in NYC. He blogs at “Disruption: David Pakman’s Blog”, http://www.pakman.com.