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We're here with Derek Thompson, author of "Hit Makers" and the senior editor at The Atlantic. Derek, welcome. Thank you! First up, quickly your background because you look--and I'm sure you've heard this before--you look like you're 14, so how did you get here? So "Hit Makers" is a book that I wrote, came out last year, paperback just came out about three months ago and it's a book about the science of why we like what we like. To sell something familiar, you want to make it surprising but to sell something surprising, you want to make it familiar. When Spotify was debuting, was working on the app that became Discover Weekly--you know, it's really popular download of 30 new songs every single week--when they were testing that app internally at first they wanted it to be all surprising songs by all new artists but there was a bug in the algorithm that accidentally let slip through some old familiar songs so they fixed that bug and they kept testing it internally and after they fixed the bug, engagement with the app plummeted. It turned out that a few familiar songs in that discovery app made the app more popular so again to sell something surprising the key was to make it familiar. So what if you look at products out there or media vehicles out there, can you give us examples of things that you think are gonna be very successful and not so successful based on your theories? Yeah well, I think that one of the things I think is really important that I talked about over and over in the book is the power of distribution because there are some companies that are really, really great content companies then it doesn't matter if you've made the best documentary, the best song, the best app, no one's going to find out about it. So when I look at who's gonna be successful in the future, the first question that I ask is who has the power of distribution? Right now you see in streaming of course Netflix has the power of distribution so it frankly doesn't even matter that a lot of their programming is like B minus, C plus, they own distribution and that's why they're worth ninety five percent of Disney right now. I look at a company like Amazon. Amazon's Prime is in I don't know what percent of households with rulers-- two-thirds of households--so they own the pipeline, the metaphorical pipeline, to these people's houses and that means that they have the power to build a lot of products on top of that so even though their programming to date has been really, really bad for video, I think that because they own the distribution, it's given them the confidence to now spend a lot of money on surefire hits. That's why they spent a quarter of a billion dollars on the rights to J.R. Tolkien's books because they essentially see that we own the distribution, once we have any content that has the potential to be a hit, we have the power. So you're a distribution not a content guy? Because there's definitely two camps. Right now I just had lunch with a guy who's at a company called--I think it's called real vision or real video--and their viewpoint is that great content, you'll be able to find distribution. Your point is you got to start with the distribution. Well my point is that a lot of content people radically downplay distribution and actually that we the media have given them permission to do so because we have taught them this lesson of virality. We've bought into this viral myth and when you believe that a piece of content can just go viral, that gives you an excuse to not work on a marketing and distribution play for it. If you say, "I've already made the greatest app, I've written the greatest song." and you believe in the viral myth and you just believe this thing is like the measles and it should just take off and infect everybody automatically, but time and time again, what we've seen in pop culture history is that that doesn't happen. Some of the most successful songs in fact failed over and over again until they found the right distribution platform. A great example would be "Rock Around the Clock". "Rock Around the Clock" is the second best-selling song of all time, it's the first rock and roll hit to ever hit number one in the Billboard Hot 100 and when it came out--Bill Haley & His Comets? Boom! Well done. When it came out in 1954 it was an utter failure, it was a total dud and through an incredible series of events, the director of a movie called Blackboard Jungle kind of one of these juvenile delinquency films. Sidney Poitier? He was in it, wow, look at you, yes fantastic. I'm just really old. He goes to a stars house--Glenn Ford-- yeah and he says Glenn I want a song to kick off this movie, what do you got? And Glenn Ford says you know, my favorite kind of music is Hawaiian folk so that's not gonna be very helpful for scaring people about the problem of juvenile delinquency, but my 10 year old son, PD Ford listens to this new race music, maybe you should ask him. So the Director of Blackboard Jungle, Richard Brooks, goes to this 10 year old boy Peter Ford and says show me the songs that you have, give me some vinyl records, and Peter Ford gives him a stack of vinyl records that includes "Rock Around the Clock" and it's only after "Rock Around the Clock" plays at the beginning of Blackboard Jungle that it soars to number one on the charts and becomes essentially the hit that all of us know so again if you're a content person, if you say content is king and content is destiny, you can't explain the story because "Rock Around the Clock" sounded the exact same in 1954 when it was a dud and in 1955 when it was the HIT of the century. The difference was context and distribution so again and again, I just think it's so important to think once you've made something great, you're halfway done. Disney, Netflix, Amazon--those are easy-- give us some media companies that you think will be hits and why-- I mean, Axios and Quartz, how are they gonna do? I think an interesting thing about Axios is that one of the things that sets it apart is the fact that it has breaking news that cable news networks want to talk about, right? So if you're a new media company--you want to get scoops--and you're like how do i co-opt the distribution that already exists, how do i co-opt the attention platforms that already exist? The best idea is to say I'm going to produce content that is catnip for cable news networks because I can put all of my reporters on those news networks and get the name out there Axios, Axios, Axios all over-- and they do that and so I think that in many ways it's a really, really great sort of post advertising business model, it's a great marketing strategy to essentially say where are all the people looking that we want to reach, all right now let's find a way to co-opt those networks so that like the people who own those distribution networks want us to reach them. So does Spotify break through, how does Spotify--just recently public--is it a buy or does it screw it even with a better product because they can't get distribution? Spotify is a buy, but not because of its current business model, because of its possible business model. Its current business model is essentially constructed so that Spotify basically has to lose money because it's basically a co-op that is co-owned by the music labels right, like that's why it's so difficult to make money under the current model, but what does Spotify have? They have distribution, they have tens of millions of people who adore the product, who have it at the bottom of their phone on the most valuable real estate in media, yeah, so why not build other products on top of that? Why not make Spotify a natural home for new video products? I think that is where you're going to see them push the company now that they're public, I think that's where they're gonna move the next three years and I think they absolutely have the potential to use the distribution network that they've already built and then put in for profit or higher margin products on top of that. So you said Amazon or Netflix versus Disney--I always thought that the Celebrity Deathmatch was gonna be Amazon versus Netflix--do you think it's Disney versus Netflix? I think it-- well it's interesting--so Amazon, I absolutely consider to be a company with enormous potential in video, but I'm also not entirely sure what their video strategy is at the moment because it's in such a u-turn, like for a long time it seemed like they were really focusing on like indie darlings and like sort of optimizing for Oscars which is not a mass media play for, you know, the biggest e-commerce company in the world so I was confused by that strategy but it definitely seems like we've hit an inflection point where now they're spending a billion dollars on hits like Tolkien style hits so if they do that, if they reorient around a Disney style strategy, buy up all of the available, most valuable IP and then just churn out sequel by sequel and spin-off by spin off given that IP, that's the strategy right? So Amazon essentially is trying to be Disney while Disney tries to be Netflix right? Disney essentially has all the content you could possibly hope for. They have that incredible catalog--kids, sports--of animated stuff. They have Lucasfilm, they've got Star Wars and Indiana Jones, they've got Pixar, they've got Marvel which is just this factory of film hits, but what they don't have is streaming distribution, like that's the thing that they have to build and I do think that we're in a position right now where if Disney builds a halfway-decent distribution product for streaming, it is going to be really, really tough news for Netflix for two reasons. First, I just think Disney's content is a lot better, so once you equalize in distribution then you have to give it to Disney on content. Second, like look at Netflix. Netflix's stock right now-- it's 95 percent as valuable as Disney--even though its profits are like one tenth of Disney's, even though it like basically is spending, it could very well lose money this year and it seems to be sort of like using a Jeff Bezos strategy in order to grow, but television shows and warehouses are not that similar so like if you overspend in a television show right now that's not very good, by 2020 what's the value of that television show? Basically zero, you can count the number of people who're gonna be watching it on two hands. When Amazon spends a lot of money and pushes down there their profits as we've talked about--you know, the warehouse that they're building in like you know suburban New York or suburban Cincinnati--that warehouse is going to be just as valuable, if not more valuable in 2020, so it's weird to me that Netflix is essentially using an Amazon model for a non-Amazonable business and I'm nervous about the future of their business because there's going to be a future where they're essentially neck-and-neck with Disney but Disney obviously has the profits and the content and the IP and Netflix just has sort of the legacy signups for the product. When you talk about Disney needs the distribution or they need the technology or the streaming, are we really saying Disney needs to cross the chasm and go to a different business model? I mean, they already have the technology, it's about moving from a business model where they get ton of affiliate fees and a lot of advertising and moving to a Netflix model where they charge $9.99 a month and literally forego billions in advertising and affiliate fees. It's sort almost what, was it, Adobe did? Where they said--yeah absolutely-- selling stuff at twelve hundred ninety nine bucks, we're gonna go $29.99 and their profits went like this--right--and then they came back, but they came back as a recurring revenue model which has a greater multiple. It's hard for those companies to do that, it feels like Bob Iger's one of the few people that can pull it off, but it's not as much technology and distribution, they need the stones to go to to an entirely different Netflix like business model no? Yeah, there's content, there's distribution and there's stones and I think that's a great way to put it, I mean let me make the bare case for Disney and and end with the ball. The bare case is that Disney had all of these moats and the moats are now flooding the fairytale castle like they used to be the number one sort of paid TV television company and now half of people between the age of 22 and 45 didn't watch any paid TV in 2017 so that model is collapsing. You look at movies: on the one hand like they I think have made 8 of the 12 biggest movies of the last decade, but at the same time the number of 18 to 24-year olds who are going the movies every year has declined by 17% in the last five years, so all of the moats are flooding the castle right? There's lots of reasons why you should be a bear on Disney, at the same time, a Disney streaming product, a Disney-flix has the potential to be so much bigger than Netflix because what Netflix is selling you is just video, they're just selling you that one hour that you're watching, but the genius of Disney going all the way back to Walt Disney has always been the understanding that the alternate value of their company is in the power to merchandise fantasy to take the fantastical experience of that movie of that television show and turn it into a blanket, a theme park ride, an experience and so Disney-flix won't just be Netflix for Disney, it has the potential to be Amazon for Disney, Kayak for Disney Groupon for Disney, if they know that you love Frozen then they're going to be the best company in the world that's saying we know that your kid loves frozen because he or she has watched it 17 times in the last 24 days, maybe he or she, maybe your little kid wants a blanket, a pillow, a mug? We will give you a 30% discount to go to Frozen New York City and that's how Disney essentially I think becomes not just the Netflix of entertainment but the Amazon, Disney prime I think is what we're looking at. What if Time Warner and Disney got together and they merged and started a competitor to Netflix? Well the thing that I definitely don't understand and it's a it's it's sort of a separate issue but I think it's so interesting is we're in a period right now where throughout sort of antitrust history the DOJ has always blocked the horizontal mergers and been relatively kind to vertical mergers but right now we're in a scenario where AT&T and Time Warner-- clearly a vertical merger--is now being blocked by the government, but Disney and Fox--a horizontal merger which has always gotten scrutiny-- --is basically getting the green light. You have this fascinating theory that we went over the last time we were together where you said that the best thing that happened to Google and Facebook was Netflix, can you expand on that? Sure let's go back to the year 2000 let's say that Google and --2004 let's say so Facebook exists--and Google and Facebook get together in a sort of cigar smoke filled room and they say what can we do to optimize the value of our business in 20 years and what they would say I think as they were chomping their cigars is we need to build some corporate shell that somehow destroys the paid TV business model that gets a bunch of people to keep watching video but all that video is ad free and once television goes from a dual revenue business model of both affiliate fees and advertising to a one revenue business model which is just subscription fees, forty billion dollars of advertising that previously went to television will be freed up and there'll be nowhere else for it to go but online where we Google and Facebook will be the duopoly right, so that's the end of that you know make-believe scenario--that company exists--it's Netflix. Netflix is almost single-handedly leading the effort to destroy the paid TV business model in the United States. I just gave you the stat that 50% of Americans between the ages of 22 and 45 didn't watch any paid TV last year. That is just remarkable, you were just seeing the calamity in the paid TV market and as a result all that advertising is being freed up and the only place for it to go is Google and Facebook. Google and Facebook accounted for 99 percent of that, of digital advertising growth in 2016 so Facebook and Google could not have come up with a more ingenious corporate assassin than Netflix and the thesis of this of this story is that the biggest winner of Netflix versus the cable bundle is not Netflix, certainly not the cable bundle, it's Google and Facebook. So let's make some predictions here, what media company do you think increases its value the most in say the next 12 to 36 months? As long as the market is just going to judge Netflix and subscription numbers, I see no reason to bet against Netflix in the next 12 months, but 12 months from now there's going to be a Disney-flix product and what I think Disney will do eventually maybe not in 36 months, but certainly 48 months, is they're gonna take one of these films like Black Panther and they're gonna say folks the only way that you can watch this movie or Star Wars, a move like Solo would be a great example, the only way that you can watch Solo II or Leia is to become a Disney-flix subscriber. What you're going to see in that scenario is that the earnings report in say late 2019 early 2020 is gonna show 10 million to 15 million people have signed up for this Disney product and that moment that day, if you time it right you're going to make (if you own Disney stock) an enormous amount of money because suddenly--ugly for Netflix--right people's eyes are going to open up and they're gonna say this is not a monopoly anymore this is a two-man race and Disney could win it. Netflix--great short-term. Kind of medium term, you're betting on Disney with their Disney-flix. Any other observations around media companies you think are gonna ascend or descend really quickly in the next 24 months? The low-hanging fruit for Spotify is there. I mean, so you're not worried about Amazon music or Apple music using their distribution to come after Spotify? I'm a little worried for precisely the antitrust reasons that you pointed out. My expectation is my hope in this sort of argument about being a Spotify bull is that we are in an environment right now that is more antitrust than maybe any environment going back to I don't know, the seventies, the sixties and as a result there there will be more scrutiny placed on decisions like Apple essentially enacting an Apple tax on Spotify which should hopefully give Spotify room to breathe. Spotify is an extraordinary product, yeah people adore it all over the world and it has just, I think people underrate the fact that it has the most important real estate media which is that for so many people, it is the part of the phone that is closest to your thumb, it's right there next to texting and email and the web browser. You have distribution that other companies would murder for. I don't see how a group of smart people don't come up with a plan to monetize that by layering a higher profit, a higher margin product on top of music and that product just has to be video. What about Hulu? Hulu is interesting because i don't know, I talked to people at Disney about their strategy for Disney-flix versus Hulu, they're not gonna same thing, they'll be very different. Disney is going to be the family first streaming service and Hulu is going to be for adult entertainment--not Stormy Daniels adult--but like you know Deadpool, The Handmaid's Tale, right R rated pg-13 risky stuff, Fox Searchlight all those Oscar films that Fox Searchlight has produced. Isn't that confusing to the consumer though, shouldn't they have one product and maybe they have you know Netflix manages to segment by genre, I have the kids, I have the other stuff, they mix the content up I mean wouldn't it be better off just they have the technology. Yes! It's so confusing. Hulu becomes Disney-flix, this is why in the piece in The Atlantic where I wrote about Disney strategy, I say you know Kevin Mayer, their chief of strategy and now chief of streaming strategy, has said you know we're all in on streaming. You're not all in, you're all over the place. Yeah you have a Disney-flix product. You have a paid TV strategy, you have a paid TV plus strategy with like ESPN Plus, you have a family streaming strategy with Disney-flix, you have an adult streaming strategy with Hulu, I mean this is not an all-in strategy, it's actually very, very confusing to figure out you know if you're a 35 year old, 45 year old guy who you know likes Oscar-winning entertainment but also has kids, they're basically making you sign up for two products that serve completely different interests you know Netflix is not going to spin-off Netflix plus the stuff we think might get Emmy consideration, that would be very very weird I think, but Disney has essentially done that with their announcement for Hulu being an adult first entertainment product. I don't think it makes any sense and my expectation is that in 12 months they will realize the same. Derek Thompson, author of "Hit Makers" and senior editor at The Atlantic. Thanks very much. Thank you.
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Channel: Gartner for Marketers
Views: 72,246
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Keywords: Scott Galloway, L2inc, Winners & losers, Digital marketing, Social media, Ecommerce, Mobile marketing, Marketing news, Business news, Internet news, Tech news, Social Media news, Digital research, Business intelligence, Digital trend, Market trend, Brand strategy, ted talk, tedx, leo laporte, twit, this week in tech, derek thompson, human psychology, consumer behavior
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Length: 21min 9sec (1269 seconds)
Published: Thu May 03 2018
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