The People Are Speaking with Millions of Dollars: How Media and Entertainment Companies Can Thrive in a Direct-to-Consumer Age


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Direct-to-consumer campaigns are thriving. Filmmakers, video game developers, musicians and novelists use the Internet to raise funds from their fans to invest in their projects, completely bypassing studios, video game giants, record labels and book publishers.

The dynamics of financing, sales, and distribution of media and entertainment are shifting away from mass marketing channels. Will media and entertainment conglomerates become irrelevant in the face of direct-to-consumer campaigns?

In this new Executive Insights, L.E.K. examines how quickly the direct-to-consumer movement has gone from a trend to mainstream and how its success is threatening to disintermediate traditional market forces. Readers will also discover the nine rules for successful direct-to-consumer fundraising, and how savvy media companies can turn this new business model to their own advantage.

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The People Are Speaking with Millions of Dollars: How Media and Entertainment Companies Can Thrive in a Direct-to-Consumer Age

  1. 1. L E K . C O ML.E.K. Consulting / Executive Insights EXECUTIVE INSIGHTS VOLUME XV, ISSUE 15 INSIGHTS @ WORKTM curiosity but a powerful commercial trend. Warner Bros, which originally produced the “Veronica Mars” series, had been unconvinced that it warranted a major movie. But the enthusi- asm shown by fans on Kickstarter persuaded the company to greenlight the film. The dynamics of financing, sales, and distribution of media and entertainment are changing in ways that savvy companies can no longer afford to ignore. Once no more than an intriguing Internet sideshow, direct-to-consumer campaigns are now going mainstream and triggering concerns that traditional purveyors of creative products will be threatened by disintermediation. But we do not believe that the traditional players are trend- ing toward irrelevance. Far from it. If they seize the moment, traditional media and entertainment companies will find that the direct-to-consumer revolution presents them with considerable opportunities — including new and powerful ways to identify talent, connect with customers, and unlock previously hidden value in mass and niche markets alike. Fan-Funding Takes Off Websites like Kickstarter have, for the first time, made it feasible for artists to reach out to fans on a massive scale to fund their content creation. Indeed, “Veronica Mars” is just the tip of the Who knew that big media companies could raise big bucks direct from consumers while developing new launch platforms for content? In March 2013, Rob Thomas, the creator of a defunct TV series called “Veronica Mars,” launched a historic funding campaign. His goal was to raise $2 million in 30 days on Kickstarter, an increasingly popular online platform for financing creative projects. Thomas hoped that fans of his detective show might contribute enough money to help finance a movie adaption. Potential donors were offered rewards that included a limited edition T-shirt (for a $25 pledge), two tickets to a “red carpet” movie premiere ($1,000), and even a one-line speaking part in the film ($10,000). It took just 12 hours for the online fundraising campaign to reach its $2 million target. Within 30 days, 91,585 fans from 21 countries had pledged more than $5.7 million. Is this a one-off or part of an emerging pattern of success? We show the pattern of emerging success and give nine rules for winning the game. Since its launch in 2009, Kickstarter says it has raised $650 mil- lion to fund more than 43,000 creative projects ranging from movies to music, dance to design. But the runaway success of the “Veronica Mars” campaign was a watershed, demonstrat- ing that the phenomenon of “crowd-funding” is not just a The People Are Speaking with Millions of Dollars: How Media and Entertainment Companies Can Thrive in a Direct-to-Consumer Age The People Are Speaking with Millions of Dollars: How Media and Entertainment Companies Can Thrive in a Direct-to-Consumer Age was written by Dan Schechter, Managing Director and Head of L.E.K.’s Global Media, Entertainment & Technology Practice.
  2. 2. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORKTM Even the Pulitzer Prize-winning writer David Mamet recently an- nounced that he would self-publish his next book — a sign that respected writers are increasingly willing to decamp from tradi- tional publishing houses and take their loyal readers with them.. Even more striking, in 2011, it took just 12 days for Louis C.K. to sell 200,000 downloads of his comedy performance “Live at the Beacon Theater” for $5 apiece. He made almost a million dollars for a single night of work. Then, in 2012, he cut out the middleman again, bypassing ticket agencies to hawk $6 million worth of tour tickets in one week directly to his fans. Page 2 L.E.K. Consulting / Executive Insights Volume XV, Issue 15 EXECUTIVE INSIGHTS fan-funding iceberg. In April, Zach Braff — star of the sitcom “Scrubs” and director of “Garden State” — began a Kickstarter campaign to fund a movie called “Wish I was Here.” He hit his $2 million target in just four days. Charlie Kaufman, the writer of “Being John Malkovich” and “Eternal Sunshine of the Spot- less Mind,” raised $406,000 on Kickstarter for “Anomalisa,” an animated featurette about “a man crippled by the mundanity of his life.” In February, a documentary called “Inocente” became the first Kickstarter-financed film to win an Oscar. It isn’t just filmmakers who have benefited from this new source of financing. Last year, Amanda Palmer spurned her record label and set out instead to finance her new album, “Theatre is Evil,” via Kickstarter; her fans ultimately pledged nearly $1.2 million. Meanwhile, the developer of the video game “Wasteland 2” bagged $2.93 million on Kickstarter from 61,290 backers. And while Kickstarter leads the pack, it’s hardly alone. Crowd-fund- ing platforms are proliferating, including industry-agnostic play- ers such as Indiegogo and niche specialists like PledgeMusic. Direct-to-Consumer Distribution From The Artists:Are Big Media Companies ‘Dead Men Walking’? The Kickstarter effect has significant implications for traditional middlemen, including media conglomerates, movie studios, video game giants, record labels and book publishers. These players are simultaneously witnessing a parallel trend in which more and more creative artists are attempting to sell their own wares directly to consumers. In 2007, Radiohead famously re- leased the album “In Rainbows” on the Internet, allowing fans to pay whatever price they chose. This proved a mixed success, with about a third of their buyers apparently paying as little as one cent. Times have changed, and new, more transparent models are having better success. After her rejection by various publishing houses, the novelist Amanda Hocking sold over two million books via Amazon and other e-Book websites, generat- ing more than $2.5 million in sales for her paranormal tales of trolls and vampires. Nine Rules for Successful Direct-to-Consumer Fundraising and Distribution 1. Be transparent with your customers in your fundraising and self-distribution • Customers appreciate a detailed breakdown of where funds are going and what they will be used for (including funds for self-distributed products) 2. Consider donating a percentage of raised funds to charity • This will increase the "feel good" concept and encourage more fans to fund 3. Work toward long-term relationships with your customers, so that they will trust your brand as long as high quality, content and products are delivered • Louis C.K. did this by releasing a "heart-felt" thank you note to his fans after the wild success of ‘Live at the Beacon Theater’ 4. Build relationships with customers using an approach that is engaging, personal and honest 5. Release free content to convert casual browsers to devoted fans 6. Provide DRM-free, easy-to-share material • This creates openness and mutual trust and respect with fans 7. Create a reasonable price • When the price point is attainable, both fans and people on the fence are willing to pay for the product rather than hunt for a pirated version 8. Offer value that cannot be found elsewhere • "Veronica Mars" offered red-carpet party attendance 9. Have fun! • Most successes are underpinned by a sense of humor, which does not always come naturally to big companies
  3. 3. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORKTM L.E.K. Consulting / Executive Insights Making Direct-to-Consumer Work forYou How worried should traditional media and entertainment companies be about these new models of funding, sales and distribution? The first thing to remember is that the direct-to- consumer boom offers as many opportunities as challenges. One way for traditional businesses to capitalize on the trend is to trawl through this non-traditional realm in search of fresh talent to partner with, treating it in much the same way as a baseball scout would treat a farm team. In most cases, artists still prefer to follow the traditional path when given the option; they still covet a shot at the major leagues. Indeed, Hocking, the novelist, eventually decided that the direct-to-consumer route was too arduous and distracting. In 2011, she signed a $2.1 million deal with St. Martin’s Press to publish her next four books. Defending her decision in a blog, she confessed to her fans: “I want to be a writer. I do not want to spend 40 hours a week handling emails, formatting covers, finding editors, etc.” Likewise, record labels are also finding ways to profit by signing musicians who have already attracted a devoted following on- line, not least on Facebook, Twitter and crowd-funding sites. A British band, Scars on 45, raised about $24,000 on Slicethepie, another fan-funding platform, and then joined a major U.K. label, Atlantic/Chop Shop Records. The band cited the benefits of teaming up with a company that offered professional exper- tise in promotion and marketing, along with industry contacts that “Slicethepie cannot provide.” Sure enough, a 2011 survey found that 75% of unsigned musicians still want to sign with a label — another indication that the traditional model is far from dead.1 The television industry is also embracing this possibility of dis- covering new content online, then providing a more-prominent launchpad for it. Lisa Kudrow (of “Friends” fame) created an improvised online series, “Web Therapy,” which Showtime sub- sequently took on, developing it as a TV series that premiered in 2011. Other artists have found themselves mainstreamed in similar ways: for example, after his successful adventures in the world of self-distribution, Louis C.K. signed a deal with HBO to air his concert special. This enabled him to access the money and distribution might of a network that has about 30 million U.S. subscribers. Most web-content remains too short, too weird, or simply not good enough to go mainstream. But these examples and others demonstrate that the boundaries between the traditional and non-traditional sales routes are now begin- ning to blur. The New Rules for Success in Direct-to- Consumer Despite all the buzz about the direct-to-consumer model, there is little doubt that the traditional players retain a significant competitive advantage, given their financial strength, status, expertise and distribution reach. They also provide another value-creating service: editorial oversight. While artists cher- ish their creative freedom, many also recognize the benefit of editors, record producers and other overseers who can help separate the wheat from the chaff. The vast majority of con- sumers also value some level of curation; without it, cyberspace can feel like a casting room populated by hundreds of millions of artistic hopefuls all auditioning at once. In many ways, “Veronica Mars” offers a fine example of how well this changing environment can work for successful, estab- lished companies. Warner sat back and watched the crowd- funding euphoria unfold on Kickstarter, then shrewdly recog- nized that the fans’ enthusiasm offered commercial ratification for its project. The company then stepped in to provide the financial support required to make it a major movie, along with expertise on everything from soundtrack clearances to market- ing. Meanwhile, the company is well-positioned to benefit from the seed capital and promotional buzz provided by the project’s fan-funding success. Traditional players can also benefit from the success of the direct-to-consumer model by deconstructing how these en- terprising artists have used the Internet to forge strong rela- tionships with consumers. For example, Louis C.K. built trust among his fans by providing them with a detailed breakdown of how he would use the funds he was raising, charging them a reasonable price, donating a substantial portion of his profits 1 Source: ReverbNation and Digital Music News
  4. 4. EXECUTIVE INSIGHTS L E K . C O MINSIGHTS @ WORKTM Page 4 L.E.K. Consulting / Executive Insights Volume XV, Issue 15 to charity, and writing them a heart-felt thank you note for their support. His economic transparency, generosity and openness deepened his bond with his fans in an era when many con- sumers crave a more personal, value-driven touch. Similarly, Amanda Palmer’s success stems largely from her gift for using social media to strengthen her bond with her fans. Indeed, she recently boasted having more than 187,000 Facebook "likes." Companies would do well to deepen their understanding of why such artists resonate so strongly with their followers, and how innovatively they use social media to communicate directly with them. Seeing the success of trailblazers like Amanda Hocking, Louis C.K. and Amanda Palmer, many other artists will undoubtedly follow in this quest for direct-to-consumer riches. For artists who are sufficiently well-known, it’s a particularly attractive route, since they already have a sizable following with which to connect. In the coming years, this direct-to-consumer model promises to develop into a thriving ecosystem, especially in sectors such as comedy and book publishing where the start-up and marketing costs are not as prohibitive as in movies, video games or music. These trends will gather momentum, causing a measure of disruption. But for companies that play their cards right and use the nine rules (see sidebar), this rapidly changing environment will be a great opportunity. L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2013 L.E.K. Consulting LLC L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and analytical rigor to help clients solve their most critical business problems. Founded 30 years ago, L.E.K. employs more than 1,000 professionals in 22 offices across Europe, the Americas and Asia-Pacific. L.E.K. advises and supports global companies that are leaders in their industries – including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. L.E.K. helps business leaders consistently make better decisions, deliver improved business performance and create greater shareholder returns. For further information contact: Los Angeles 1100 Glendon Avenue 21st Floor Los Angeles, CA 90024 Telephone: 310.209.9800 Facsimile: 310.209.9125 Boston 75 State Street 19th Floor Boston, MA 02109 Telephone: 617.951.9500 Facsimile: 617.951.9392 Chicago One North Wacker Drive 39th Floor Chicago, IL 60606 Telephone: 312.913.6400 Facsimile: 312.782.4583 New York 1133 Sixth Avenue 29th Floor New York, NY 10036 Telephone: 646.652.1900 Facsimile: 212.582.8505 San Francisco 100 Pine Street Suite 2000 San Francisco, CA 94111 Telephone: 415.676.5500 Facsimile: 415.627.9071 International Offices: Auckland Bangkok Beijing Chennai London Melbourne Milan Mumbai Munich New Delhi Paris Seoul Shanghai Singapore Sydney Tokyo Wroclaw INSIGHTS @ WORK TM