How to Get Rich
Platforms: managing risk for fun and profit
Welcome back to Entertainment + Tech. Each week will cover an interesting way technology & entertainment are colliding and where things might go from here.
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There’s an old chestnut that says “if you want to get rich in a goldrush, sell pickaxes.” It’s solid advice but a bit reductive. Why limit yourself to a one-time sale when you’re dealing with prospectors who may soon hit the motherlode? The people who really got the richest in the gold rush probably owned platforms that gave them a cut of the success–trains for transport, housing for growing populations, plants for processing raw materials, etc.
Last week, I talked about why Netflix would want to focus on creating new content, but there’s another interesting dynamic that’s worth discussing. Every once in a while, one of those romcoms Netflix makes is a Kissing Booth or To All The Boys I’ve Loved Before breakout. It turns out that because Netflix is a platform, they can take advantage of the lucrative but spiky nature of film success while not actually needing any individual movie to succeed. [1]
Lots of Chances At The Gold
An important dynamic of many platforms is that they de-risk themselves through scale & the Law of Large Numbers. [2] Making creative content is unpredictable, with lots of misses and rare big wins. For a filmmaker, or a game developer, or a YouTuber, they’re hoping their shot hits the jackpot, and they get the big upside that comes with it. For the platform–Netflix, the App Store, YouTube–they have access to hundreds, thousands, millions of these shots being taken. Some percentage of them will turn out, and the platforms make sure to capture some of that upside. [3] Even better, since a small percent of a big number can still be a big number, these platforms can do this on a large scale.
There are lots of different models the platform can use to make money–e.g., take a cut of sales through the platform, show ads, sell subscriptions, invest in the content itself, sell a product to creators. Apple takes 30% of revenue generated through iOS apps. Netflix sells subscriptions. Unity charges professional developers $1800/year for their game development tools.
Most of these models align content success with the platform’s success, but that’s not to say they’re always in step. They still have different economics because of the platform dynamic. Netflix canceling a show is a lot less damaging to them than to the creators. YouTube can demonetize or demote controversial content for the health of the rest of their platform.
What’s In It For the Prospector?
So why would I as a creator give away some (or all) of my potential reward? Because the platform makes it more likely for me to succeed or pays me directly. Some of the ways platforms do this are by helping with:
Distribution
They host or distribute my content [4]
They make it easy for people to discover my content (especially people who’d really like it) through marketing, algorithms, etc.
They help me understand my audience
Monetization
They pay me for my content [5]
They monetize my viewers, usually with ads or subscriptions
They connect me with brands & sponsorships
They provide commerce tools, e.g., selling content or merch
Creation
They give me tools that make it easier to create
They give me resources for production
To make this support even more valuable to a creator, once they’ve gotten a hit, they get the benefit of accumulated advantage. If they’ve been successful before, they’re more likely to be successful again. YouTubers who go viral get followers who will then watch their next video. Directors who make a hit get more leeway, funding, and marketing on their next project. Trading a slightly worse deal for better odds of success means bigger wins in the future.
What Else?
Obviously, I’ve lumped a number of different types of platforms together here to talk about the general effect of de-risking the search for big winners, but the unique ways they apply their models lead to their own fun dynamics. Netflix’s subscription model changes how they calculate the upside of a hit and makes it much more important for them to actively manage their costs, leading them to invest in Originals. [6] Amazon can still make money off of the long tail of non-popular products - millions of small sellers making a few dollars is still big money in aggregate. Many platforms also get something else extremely valuable by being a gatekeeper: a relationship with the consumer.
The obvious indicator of the power of platforms is that YouTube’s revenue was $15 billion in 2019. Ryan Kaji, the highest paid YouTuber that year, made $26 million. The best prospector doesn’t make as much as the company giving everyone a chance at the gold.
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[1] Similarly, it’s hard to make money as a DTC brand, but Shopify is doing great.
[2] I’m taking a very broad view of platforms in this article, but I’m generally referring to businesses, technologies, and tools made to be built upon - they’re not about making a thing, they make it possible/easier for other people to make things. Netflix is a platform, Stripe is a platform, corn is a platform.
[3] This is also Blumhouse’s genius on the production side–make a bunch of horror movies on a modest budget knowing that most won’t hit, but one success will make up for the others. Debatable whether you want to call them a platform, but it’s definitely a similar approach to managing risk.
[4] Usually, this is an existential need, so it’s one of the more common & important things platforms do. People have to have somewhere to find your content (unless you can do something like host on your own website and actually drive people there).
[5] Often by purchasing rights and/or paying for production. Once a creator has de-risked a project enough creatively–e.g., by being a notable name with a great pitch or having a great script or shooting a pilot episode–the purchaser can de-risk the creator by buying into it.
Also: Though shows like The Office and Friends are already huge successes, here the value a platform like Netflix provides is by purchasing the streaming rights and being an additional revenue stream (and contributing to their continuing popularity).
[6] The term “Netflix Original” isn’t as clear cut as you’d think, so here’s a great deep dive by Matthew Ball.
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