How to Save the Online Economy

Summary

This video explores the challenges of monetizing digital content in an age where consumers are reluctant to pay for music, news, or apps. It discusses the impact of piracy and the strategies of platforms like Spotify and Netflix to offer value through convenience and scalability. The script highlights the struggle for fair compensation for creators and the importance of unique, user-friendly services. Sponsored by Setapp, it concludes with the need for sustainable business models that benefit both consumers and creators.

Takeaways

• 📰 The frustration of encountering paywalls while browsing content like Reddit is a common experience, highlighting the challenge of accessing content without subscription fees.
• 💼 Paywalls are necessary for compensating the labor involved in creating, editing, and publishing content, which is often overlooked by users.
• 🚢 The historical context of deepwater navigation allowed merchants to sell specialized products globally, which parallels today's digital marketplace where niche products can find a worldwide audience.
• 📉 The music industry has seen a significant decline in revenue since the peak in 1999, largely due to the shift from physical formats to digital and the rise of piracy.
• 💡 Spotify's success came from offering a better user experience than piracy, by making music streaming convenient and worry-free, which is a lesson for other industries facing similar challenges.
• 🎵 Streaming services like Spotify have led to an increase in music consumption, with people listening to an average of 32 hours a week, and have started to turn around the declining revenue trend.
• 🔄 The economic model of streaming services is based on scalability; however, for music, this means more users equate to more costs without improving economics, unlike video streaming services like Netflix.
• 💰 The difference in profitability between Spotify and Netflix is due to the scalability of their business models, with Netflix benefiting from additional users post-content licensing costs, while Spotify does not.
• 🎤 Musicians often rely on concert revenues as their primary income source, with streaming services acting as promotional platforms rather than significant revenue generators.
• 🏆 The future of the music industry may involve a focus on exclusive content to differentiate services, and the potential for services owned by larger companies to act as loss-leaders to sell more hardware.
• 📚 The script suggests that for industries to thrive, they must adapt to change, offer unique services, and ensure sustainability for all stakeholders involved, including content creators.

Q & A

What is the main frustration discussed in the video script about accessing content online?

The main frustration discussed is encountering paywalls while browsing content online, such as articles, which require a subscription or payment to access.

Why do content creators implement paywalls for their work?

Content creators implement paywalls because the creation, editing, and publishing of content require labor and resources, and they need to be compensated for their work.

How does the script relate the concept of deepwater navigation to the current digital content market?

The script uses deepwater navigation as a historical analogy to explain how the digital content market allows creators to reach a global audience, similar to how merchants could sell their goods worldwide once navigation was improved.

What is the impact of unlimited supply on the value of digital content according to the script?

The script suggests that when there are no barriers to entry and supply is unlimited, the value of digital content trends towards zero, making it difficult for creators to earn a living.

How does the script compare the music industry's response to piracy with the approach of companies like Spotify?

The script contrasts the music industry's initial fight against piracy through legal means with Spotify's approach of creating a better product that offers convenience and a better user experience.

What was the turning point for the music industry in terms of revenue, and how did it affect the industry?

The turning point was the introduction of digital formats and services like iTunes and Spotify, which initially led to a decline in revenue but eventually adapted to a new model of streaming that increased consumption and, for the first time since the 90s, growing revenue.

How does the script describe the business model of Netflix compared to Spotify?

The script describes Netflix's model as more scalable because they license content for a set period and can profit from additional users beyond their content costs, unlike Spotify, which distributes most of the subscription fee among the songs listened to, making it less scalable.

Why is Spotify's pricing model more challenging compared to Netflix's?

Spotify's pricing model is challenging because it faces intense competition and customer expectations that every song be available on every service, limiting their ability to raise prices or take a larger cut from each stream.

What is the script's prediction for the future of music streaming services?

The script predicts that music streaming services might end up being owned by larger companies as loss-leaders to sell more devices, or struggling to make money if they are not part of a larger ecosystem.

How does the script suggest that content creators can ensure sustainability in their business models?

The script suggests that content creators need to make their services cheap, convenient, and unique, and ensure that the business model works not just for consumers but also for the creators themselves.

What is Setapp and how does it relate to the discussion in the script?

Setapp is a subscription service that offers access to over a hundred Mac apps for a fixed monthly fee. It is mentioned in the script as an example of a successful business model that provides value to both users and developers.

Outlines

00:00

📰 The Struggle with Paywalls and Content Monetization

The first paragraph discusses the frustration of encountering paywalls while browsing content online, such as on Reddit. It highlights the dilemma faced by content creators who need to monetize their work but also face backlash from consumers who are accustomed to free content. The speaker explores the historical context of content monetization, drawing parallels with the music industry's transition from physical media to digital formats. The narrative then shifts to the success of streaming services like Spotify and Netflix, which have managed to adapt to consumer expectations by offering all-you-can-eat subscriptions. The paragraph concludes by questioning the sustainability of these models, especially in the music industry, where revenues have been declining despite the rise of streaming.

05:03

💰 The Economics of Streaming Services: Spotify vs. Netflix

The second paragraph delves into the financial models of streaming services, contrasting Spotify and Netflix. It explains that Spotify's revenue model is inherently unscalable due to its per-stream payment system, which means that as more users join, costs increase proportionally without a corresponding increase in revenue. In contrast, Netflix's model is scalable because they license content for a fixed period, allowing them to profit from additional users beyond their content costs. The speaker also discusses the challenges Spotify faces in raising prices due to intense competition and the expectation that all music should be available on all platforms. The paragraph concludes with a prediction that Netflix will focus on exclusive content to differentiate itself, while the music industry may face a bleak future unless significant changes are made.

10:06

🎧 The Future of Content Monetization and the Role of Setapp

The third paragraph focuses on the future of content monetization, suggesting that companies like Netflix will rely on exclusive content to attract subscribers, while the music industry may struggle unless it finds a new model. The speaker predicts that smaller companies may be absorbed by larger corporations or fail to generate sustainable revenue. The paragraph also highlights the importance of making content easily accessible and affordable for consumers. The speaker then introduces Setapp, a subscription service that offers access to over a hundred Mac apps for a single monthly fee. Setapp is praised for providing a good value to users and a fair revenue stream to developers, encouraging them to create high-quality apps without resorting to annual upgrades or in-app purchases. The paragraph concludes by encouraging Mac users to try Setapp for free and acknowledges the sponsorship of Setapp for the video.

Keywords

💡Paywall

A paywall is a system that restricts access to content on a website, requiring users to pay a subscription or fee to view the material. In the video, paywalls are discussed as a source of frustration for users who encounter them while browsing content like articles, with the example given of having to pay to read about what happens next in a story.

💡Subscription

A subscription refers to a payment model where users pay a periodic fee to access ongoing content or services. The video mentions subscriptions in the context of accessing content like articles, music, and videos, highlighting the shift from one-time purchases to ongoing access.

💡Piracy

Piracy in the context of the video refers to the unauthorized use or distribution of copyrighted material, such as music or movies. The script discusses how piracy has historically impacted industries like music and film, leading to the development of legal alternatives like Spotify and Netflix.

💡Supply and Demand

Supply and demand is an economic principle where the availability of a product (supply) and the desire for it (demand) influence its price and distribution. The video discusses how the internet has removed barriers to entry, leading to unlimited supply and a decrease in the perceived value of content.

💡Streaming

Streaming refers to the delivery of content over the internet in a continuous flow, allowing users to access music, video, and other media without downloading. The video highlights streaming services like Spotify and Netflix as successful models for monetizing content in a digital age.

💡Scalability

Scalability is the ability of a system or process to handle a growing amount of work or its potential to be enlarged to accommodate that growth. The video contrasts Spotify and Netflix in terms of scalability, explaining how Netflix's model allows for increased profits with more users, unlike Spotify's model which does not improve economically with more users.

💡Revenue

Revenue is the total income generated by a business from its business activities. The video discusses the decline in music industry revenue over time and how streaming services have begun to reverse this trend by offering new ways to monetize content.

💡Music Industry

The music industry encompasses the businesses involved in the production, distribution, and sale of music. The video script discusses the challenges faced by the music industry, including piracy and the shift to digital distribution, and how services like Spotify have adapted.

💡Record Labels

Record labels are companies that manage the production, distribution, and promotion of music and music videos. The video mentions record labels in the context of the music industry, highlighting their control over the distribution of music and the revenue that artists receive.

💡Setapp

Setapp is a subscription service that provides access to a curated collection of Mac apps for a monthly fee. The video script mentions Setapp as a sponsor and discusses its value proposition, which includes providing users with access to a wide range of apps without additional costs.

💡In-app Purchases

In-app purchases are additional content or services that a user can buy within a mobile app. The video script contrasts Setapp's model, which includes all app updates and features for a single subscription fee, with the common practice of in-app purchases that can add up in cost.

Highlights

Setapp offers a subscription service for over a hundred Mac apps at a single low price.

The frustration of encountering paywalls on platforms like Reddit during work hours.

The necessity of payment for content creation, editing, and publishing.

The historical context of the iTunes music store and the App Store's launch dates.

The decline in music industry revenue since its peak in 1999 and the shift to digital formats.

Spotify's innovative approach to combat music piracy by offering a superior user experience.

The concept that most people prefer convenience over piracy if given the chance.

The growth in music listening hours and the increase in industry revenue due to streaming services.

Netflix's business model in comparison to Spotify, focusing on exclusive content and scalability.

The economic challenges Spotify faces due to its subscription model and competition.

The impact of record labels on artist revenue and the minimal earnings per stream.

Predictions for the future of streaming services, with a focus on exclusive content and potential industry consolidation.

The sustainability of streaming services and the importance of fair revenue distribution for creators.

Setapp's subscription model as a solution for app access, providing value to both users and developers.

Personal endorsement of Setapp by the video creator, highlighting its benefits for Mac users.

The importance of creating unique services and the need for sustainable business models that benefit all stakeholders.

Transcripts

This extra video was made possible by Setapp.

One low price for over a hundred great Mac apps.

Okay, so you’re scrolling through Reddit, because, what else does one do during the

tired hours of 9am-5pm? just minding your own business, when you click

on a link and this happens.

Nothing is more frustrating than a paywall - being told you have to buy an entire subscription

to read this one article.

Sometimes they wait until you’re halfway through, Oh, wanna know what Snape does next?

That’ll be $10.

Well, this one’s free: Snape kills Dumbledore.

Don’t say this channel isn’t a good value.

But when I think about it for, half a second, of course they ask for money.

Writing, and editing, and publishing require labor.

Ya know, the thing you’re supposed to be doing right now but instead opened this video.

And if there wasn’t a paywall, I’d be complaining about how many ads there were.

cough

The same goes for music, videos, apps, and so on.

Long ago, deepwater navigation freed merchants from making only what their town wanted to

buy, Now, they had access to the world’s markets, As long as someone somewhere wanted

their custom engraved potatoes, they could sell them.

Today, you can specialize even further, make a living, say, selling homemade glitter.

That’s pretty cool.

But when there are no barriers to entry, supply is unlimited, and the value of everything

trends to zero.

So here we are.

Nobody wants to pay for music or news or apps,

And yet musicians, and writers, and developers need to get paid.

The question is how, preferably in a way that doesn’t suck.

Spotify, Netflix, the New York Times, and the App Store are all attempts to answer that

question.

Some of which are thriving.

Others, you might be surprised to learn, are failing.

So, what works? and, maybe more importantly, what doesn’t?

The iTunes music store opened in 2003.

The App Store, in 2008.

In other words, the music industry has a head start.

This graph of music revenue over time, adjusted for inflation, tells the story pretty well.

Earnings peaked in 1999, and they’ve been down ever since.

Like, really, really down.

Now, I’d argue this period was somewhat artificially high,

If we zoom out a little, it looks more like an anomaly, a ten-year spike in the long history

of recorded music.

People spent so much, because, they had to.

Their choices were: buy music a whole album at a time, or don’t listen at all.

But then, the numbers just start falling.

If we break it down by format, first, LPs, EPs and 8-tracks, then cassettes, CDs, and

later, digital, You can see this time is different.

Nothing replaces the CD.

At least, not immediately.

You’d think people just stopped listening.

Busy wondering why the world didn’t end or something.

But really, of course, they just stopped paying, in favor of sites like Napster.

iTunes tried to fight piracy by breaking up the album.

But nothing really changed until a Swedish programmer, no, the other one realized something:

“The problem with the music industry is piracy…

But you can’t beat technology.

Technology always wins.

But what if you can make a better product than piracy?…

It took a few minutes to download a song, it was kind of cumbersome, you had to worry

about viruses.

It’s not like people want to be pirates.

They just want a great experience.”

And that’s how Spotify was born.

The lesson is: Companies can fight change, lobby for new laws, burden everyone with annoying

restrictions, even more annoying ads, and sue 12-year old girls for sharing songs.

Or, they can adapt, see it as an opportunity.

Because most of us are lazy.

If we can pay a little more for a lot more convenience, we usually will.

That’s why streaming wins.

Today, people listen to more music than ever before - an average of 32 hours a week.

That’s a lot.

And revenue is actually growing, for the first time since the 90’s.

Now, Netflix seems to be in the same position,

Both are $10, all-you-can-eat streaming subscriptions.

An answer to piracy and, in this case, Blockbuster making a killing on late fees.

Before Netflix, the idea of letting users watch any movie, from any device, at any time

was… ridiculous, What if people share their password?

Netflix was like: Ah, good point, we should make that easier.

They don’t just accept it, they embrace it, letting you make separate profiles on

the same account.

But then you look at money, and suddenly the two companies couldn’t be more different.

One has been profitable for 15 years, making half a billion dollars last year alone.

The other, reported almost the same number a year earlier, except its number was… negative.

Why is that?

In a word: scalability.

Spotify only takes a small cut of your $10 a month, the rest is distributed among the

songs you listened to.

In other words, no matter how many people sign up, the economics never improve.

More users, more costs.

Netflix, on the other hand, licenses shows for a set period of time.

7 or 10.99 a month isn’t a lot of money, but after they’ve paid for content, every

additional user is pure profit.

More users, more money.

So why doesn’t Spotify just raise prices?

Well, competition.

Every company and their mother sells a music service - just pick your favorite color.

There’s also plenty of video sites, Netflix, Prime, Hulu, Showtime, HBO, soon even more.

The difference is, customers can and do pay for several at a time.

Music is winner-take-all.

We expect every song to be available on every service.

They just... aren’t unique.

They also can’t really take a bigger cut, Because artists barely survive as it is.

When Taylor Swift complains about money, you can only imagine what it’s like for the

average musician.

For many, streaming is really just an ad for their concerts, where they make almost all

their money.

The problem is musicians share their revenue with producers, writers, and record labels,

Just three of which: Sony, Universal, and Warner, control most of the industry.

Spotify, for example, pays between six and eight-tenths of a penny per stream.

But after everyone takes their cut, artists are left with just over an estimated 1 tenth

of a penny.

So, here’s my prediction: Sites like Netflix will focus almost entirely on exclusives - the

Stranger Things and the West Worlds that make their service unique.

There won’t just be one winner, but several.

For music, the future may not be so bright.

Unless something drastic changes, like cutting out the labels, services will land in one

of two categories,

those owned by a bigger company, like Apple or Google, who use them as a loss-leader.

Not to make profit directly, but to sell more phones.

And, everyone else, left with no way to make money.

This is already starting to happen.

It’s just not obvious unless you’re looking.

A MoviePass user can feel the business model fail underneath them, Unlimited movies turns

into most movies, turns into some movies turns into only black comedy westerns starring Adam

Sandler, only between the hours of 4 and 5 am... in select Wyoming theaters.

But a Spotify user can just keep happily listening away.

For now.

Every song ever written for less than the price of a single album works only because

investors pay for it.

But that won’t last forever.

The industry may look healthy in aggregate, but it’s mostly the top 1% inflating the

average.

It’s not that I don’t think developers, or musicians, or journalists will survive,

I worry which ones survive.

There are three kinds of companies, those that make money honestly, those that make

money dishonestly, and those that… don’t.

When nobody pays for music or software, independent musicians and developers lose, But there are

still ways to make money, they just aren’t good ones.

Journalism won’t die, but the good kind very well could.

Some would say, largely has.

If you think there’s a problem with freemium apps and in-app purchases today, just wait

until that’s the only thing that works.

The good news is that these industries have an advantage: they don’t have record labels.

And Spotify offers them a few free lessons:

First, people will pay for content, but it’s on the company to make it cheap and convenient.

To adapt, not to fight.

Second, services have to be unique.

And finally, for it to be sustainable, it can’t just be good for you and me, it has

to work for the musician, the writer, the developer.

The companies that apply these lessons will determine which industries thrive, and which

just survive.

Today’s sponsor, Setapp, is a response to the app side of this problem.

It’s a $10 a month subscription to over a hundred and twenty of the best Mac apps.

It’s good for you because it’s a great value.

Use as many apps as you want, no ads or in-app purchases, and every update to every app is

included for free.

Again, full disclosure, this is a sponsor, but what they can’t pay me to say, is I’ve

been using Setapp since February, long before they reached out.

I use Ulysses to write these scripts, CleanMyMac to manage storage, and Timing to track my

time.

New apps are added all the time.

It’s this quick to install and try one out - I’m not speeding this up.

And, importantly, it’s good for developers because they get an extra, predictable, and

fair stream of revenue.

They’re incentivized to make great apps, not charge you for an upgrade every year.

I especially recommend Setapp if you’re a student or do creative work, they have some

of the best apps for studying, writing, photography, and programming.

If you use a Mac, there’s no reason not to go to Setapp.com and try it free for seven

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Thanks to Setapp for making this extra video possible, and to you for listening.