June 30, 2016

The streaming scythe

What at first appeared to be a full-scale purge of anime at Hulu turned out to be a far less-drastic but systematic cull of low-rated titles. Live-action Japanese television series are pretty much gone altogether (as always, Korean dramas are alive and well).

So what threatened to be a ruthless application of the 80-20 rule ("Twenty percent of inventory accounts for eighty percent of sales") was more the lopping off of the bottom 10 percent. The way CEO Jack Welch once boasted of running General Electric.

I suspect Hulu will be repeating this "Rank-and-Yank" process on a regular basis. In other words, truncate the long tail and concentrate on hits. Or at least the midlisters and up. And let's be clear: including the midlisters and up, Hulu still has a ton of anime.

Incidentally, this is why Cosco has three times the earnings-per-employee as Walmart and thus can pay a higher base wage. Cosco carries about 4000 SKUs while Walmart warehouses a staggering 140,000. It costs big bucks to maintain that physical inventory.

When it comes to anime, Hulu wants to be more like Cosco. So does Netflix.

Or rather, more like HBO: produce a few shows that capture the cultural zeitgeist and backfill the rest with reruns of standard Hollywood fare. It's  about "narrow-casting" to the broadest possible audience. In other words, the subscription model since forever.

Rather than broadcasting a signal to the whole wide world and hoping a few percentage of available households tune in, send it instead only to the viewers who already have a vested interest in watching.

As the cable industry has long proved, if you can get subscribers hooked on one or two channels (or even one or two shows) and fiddle with the packages to hide the sunk costs, they'll stick around out of sheer momentum.

In his 2004 treatise on the subject (and 2006 book), Chris Anderson cited Netflix as an example of the long tail in action. Streaming would seem to bolster his argument. Except what Netflix really wants is a heavily curated long tail. That's not too long.

Justin Fox at Bloomberg confirms that

Today's Netflix and its "brand halo" seem to have a lot more in common with existing TV channels, most obviously HBO, than the back-catalog specialist that it was back in 2006.

I don't think Chris Anderson was wrong about the long tail, simply wrong about it aggregating under one roof, the exception being virtual department store retailers like Amazon and Walmart. But even those behemoths can't stock everything.

The long tale very much exists, except it's been it's been stretched and scattered across all creation. So it takes a bit of dowsing to find the viable concentrations of your particular ore.

One thing remains very true about Anderson's original thesis: going completely digital cuts inventory costs drastically. The marginal costs for adding each additional title or user are close to zero.

Which is why Amazon could build out its existing infrastructure and turn AWS into such a profitable enterprise. And why every new software play must somehow leverage the "cloud." The challenge is what to do with it, how to collect and collate all the content to fill it.

Sure, information wants to be free, but the licensors are still going to charge whatever the market will bear.

And there's no better way to get control over content licensing fees than to produce it in-house. Though as HBO has discovered, getting irrationally exuberant with that approach can lose you your shirt.

Netflix has already been the principal producer on several anime series, and adapted Matayoshi Naoki's award-winning novel Hibana for a series that will be shown in all Netflix markets. Here the advantage goes to streaming over the traditional cable model.

But for those of us not so much interested in the smorgasbord?

The past is prologue and streaming economics hearkens back thirty years when the average middle-class household had a dozen magazine subscriptions (not counting the catalogs). "Big tent" at one extreme, (extremely) specialized at the other.

Such as a newsletter just for the QX-10. My dad subscribed to one of those. Today it'd be a website.

Going forward, the streaming market in the U.S. will probably be left with Crunchyroll, Funimation and maybe Hulu as the major online anime distributors, with Amazon and Netflix providing a generous but more curated catalog.

At the end of the day, though, when everything shakes out, we'll still have orders of magnitude more choices than the bad old days of praying for a single new anime release to show up at Blockbuster.

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