Book Excerpt: Harvard Business School Professor Reveals the Hidden Truth About Hits

Digital media was supposed to dim prospects for Hollywood hits. But a new book from Anita Elberse contends the opposite occurred

Anita Elberse: Harvard Business Professor on Art of Blockbusters

Harvard Business School professor Anita Elberse isn’t the type of academic to blindly accept conventional wisdom. To the contrary, she drew notice five years ago for penning a direct refutation of “The Long Tail,” an influential 2006 book contending digital media would dilute the dominance of blockbusters in popular culture. Elberse, 40, expands on her contrarian notion in her new book “Blockbusters: Hit-making, Risk-taking, and the Big Business of Entertainment” (Henry Holt & Co.). In an exclusive excerpt below, Elberse analyzes what YouTube’s $300 million experiment in original programming says about the future of entertainment.

Two years ago this month, Robert Kyncl, YouTube’s global head of content, and his colleagues put the final touches on a plan that they hoped would revolutionize the world of online video — and perhaps even of television more generally. They had come up with an idea to create more than 100 YouTube “channels” with original content. Hoping to jolt the creative community into action, they had earmarked a reported $100 million in advances in an attempt to solicit new material from producers, actors, musicians, comedians and other talent, and another $200 million in advertising support. For the company that had built its name by enabling millions of everyday users to freely upload, share and watch videos, the move was a significant departure.

Reflecting on the evolution of television in an interview in early 2012, Kyncl commented: “People went from broad to narrow … and we think they will continue to go that way — spend more and more time in the niches — because now the distribution landscape allows for more narrowness.”

Alex Carloss, YouTube’s head of entertainment, told me: “There are many examples of narrower content types that we can focus on. A lot of these channels would never see the light of day in the traditional television infrastructure — they are just too specific — but on YouTube they are a natural fit.”

In such a world without limits, betting on a select group of blockbusters and superstars may appear old-fashioned and ill-advised. That, at least, is the central tenet of a bestselling book, “The Long Tail: Why the Future of Business Is Selling Less of More,” written by Chris Anderson, then editor of Wired magazine, and published in 2006. When consumers can find and afford products more closely tailored to their individual tastes, Anderson argues, they will migrate away from hit products. The wise company will therefore stop relying on blockbusters and focus on the profits to be made from the “long tail” — niche offerings that cannot be offered profitably through bricks-and-mortar channels. “The companies that will prosper,” Anderson declares, “will be those that switch out of lowest-common-denominator mode and figure out how to address niches.”

The idea caught on with many industry insiders. Google’s then chief executive officer, Eric Schmidt, for instance, claimed — on the cover of the book — that Anderson’s beliefs “influence Google’s strategic thinking in a profound way.” And in its communications with analysts and other industry observers, Netflix took pride in calling itself a long-tail company.

No one disputes that online businesses offer much more variety than their analog counterparts. When the costs of selling decrease, and physical constraints on selection disappear, merchandise assortments can grow exponentially. That’s why Apple’s iTunes Store lists millions of albums and songs, and why Amazon offers hundreds of thousands of albums, whereas even the largest offline music stores typically stock only 10,000 titles. Similarly, whereas Netflix’s title count is in the six figures, bricks-and-mortar retailers usually stock no more than a couple thousand DVDs. And YouTube enables a long tail in online video by making it possible for users to share videos for which there isn’t room on traditional television.

But in his book, Anderson goes much further. Online channels, he argues, actually change the shape of the demand curve. In his view, consumers value niche products geared to their particular interests more than they value products designed for mass appeal, and as Internet retailing enables consumers to find more of the former, their purchasing will change accordingly. In other words, consumption will shift from the head to the tail of the curve — and the tail will steadily grow not only longer, as more obscure products are made available, but also fatter, as consumers discover products better suited to their tastes. Ultimately, obscure products will erode the huge market share traditionally enjoyed by a relatively small number of hits.

While these predictions might be music to any YouTube executive’s ears, the changes Anderson describes would spell trouble for a content producer relying on what I call the “blockbuster strategy” — the dominant strategy among leading television networks, film studios, book publishers, music labels, videogame publishers and producers in other sectors of the entertainment industry, which involves making huge investments to acquire, develop and market concepts with strong hit potential, and banking on the sales of those to make up for the middling performance of other, smaller investments.

Fortunately for those betting on hits rather than niches, actual data on how markets are evolving tell a much different story than what Anderson predicted. As demand shifts from offline retailers with limited shelf space to online channels with much larger assortments, the sales distribution is not getting fatter in the tail. On the contrary, as time goes on and consumers buy more goods online, the tail is getting longer but decidedly thinner. And the importance of individual bestsellers is not diminishing over time. Instead, it is growing.

Take the music industry. According to Nielsen, which collects recorded-music sales information, of the 8 million unique digital tracks sold in 2011 (the large majority through the iTunes Store), 94% — 7.5 million tracks — sold fewer than 100 units, and an astonishing 32% sold only one copy. Yes, that’s right: Of all the tracks that sold at least one copy, about a third sold exactly one copy. (One has to wonder how many of those songs were purchased by the artists themselves, just to test the technology, or perhaps by their moms out of a sense of loyalty.)

And the trend is the opposite of what Anderson predicted: the recorded-music tail is getting thinner and thinner over time. Two years earlier, in 2009, 6.4 million unique tracks were sold; of those, 93% sold fewer than 100 copies, and 27% sold only one copy. Two years earlier still, of the 3.9 million tracks that were sold, 91% sold fewer than 100 units, and 24% sold only one copy. The picture is clear: As the market for digital tracks grows, the share of titles that sell far too few copies to be lucrative investments is growing as well.

These statistics for the recorded music industry are no fluke: My research on other sectors, such as video rentals, sales and online views, yields the same patterns. Rather than a shift of demand to the long tail, we are witnessing an increased level of concentration in the market for digital-entertainment goods. The entertainment industry is moving more toward a winner-take-all market.

Facing mounting costs for its vast long tail, YouTube and Google’s executives have caught on to this reality. Remarkably, Schmidt seems to have had a change of heart about the long tail. A couple of years after championing the idea, he said: “I would like to tell you that the Internet has created such a level playing field that the long tail is absolutely the place to be — that there’s so much differentiation, there’s so much diversity, so many new voices. Unfortunately, that’s not the case.”

It is too early to tell how YouTube’s gamble will fare, but so far the results do nothing to dispel the realities of competing in the new media environment. In late 2012, YouTube doubled down on its investment, providing a second round of funding to as many as 60 channel owners. At the same time, though, it pulled the plug on 60% of its programming deals. By terminating so many of its initial deals, YouTube showed that in fact it is ruling the “airwaves” here. Meanwhile, among the 10 most popular channels in early 2013 were those run by Jay-Z, auto magazine Motor Trend, humor site the Onion, Warner Music’s The Warner Sound, and wrestling giant WWE — all entrenched, popular brands that could presumably have achieved YouTube fame even without Google’s funds. Once again, blockbuster and superstar brands are carrying the day.

Realizing that a few winners still go a long way — and probably further than ever before — other online businesses are following suit. Most prominently, Netflix of course has entered the arms race for premium content by spending big on its own television series, “House of Cards,” “Orange Is the New Black” and “Hemlock Grove.” Like YouTube, Netflix executives love to describe their efforts as catering to niche markets and individual tastes. But the truth is that by upending their original models and placing large bets on original, professionally produced content, the former darlings of long-tail prophets are moving ever closer to the strategies that traditional content producers have lived by for years. The entertainment business remains a business of blockbusters, and increasingly so.