Creative industries in the platform economy

By Catherine Jewell, Communications Division, WIPO

The digital revolution has dramatically changed the creative landscape, generating opportunities for some and challenges for others. And in the face of falling revenues, rampant online piracy and fake news, the dominance of tech giants like Amazon, Facebook, Google, Netflix and Spotify is the source of growing concern. Sangeet Choudary is a leading expert on the so-called platform economy and has written extensively on the impact of platforms on businesses, the economy and society. Mr. Choudary recently shared his views with WIPO Magazine on what the rise of the platform economy means for the creative sector.

Why is there so much interest in platforms today?

Platforms create a lot of value by organizing the content market. They are the new intermediaries. YouTube, for example, provides the basic infrastructure for connecting creators of video with consumers of video. Platforms are the matchmakers and the taste-makers in today’s digital content market and are gaining huge market power, which, in the long-term, may have a negative impact on the creative sector.

Platforms are the matchmakers and the taste-makers in today’s digital content market and are gaining huge market power.

Sangeet Choudary

How do you explain the rise of the platform economy?

The content market has been transformed by digitization over the past 20 years. In the pre-digital era, content was monetized and distributed via a bundle. For example, music was bundled into an album, tied to a CD, and pushed out. In the digital world content became divorced from physical media. Digitization enabled content to move freely at near zero cost. Content could be unbundled and packaged in new ways. Then, as new sources of supply emerged with the availability of online tools that allowed anyone to create content cheaply, we saw an explosion in content production. Consumers found it increasingly difficult to find the content they wanted. Platforms were a natural solution to this problem. They began curating content and helping consumers find the books, films and music they wanted and to decide what was worth consuming through their recommendation systems.

In the music industry, CDs gave way to Napster and Kazaa, which offered a new distribution model for singles. Fast forward a few years and Apple began offering tools for musicians to record music, creating new supply tied to the Apple iTunes store, where musicians could upload and sell individual tracks. Then Spotify and Pandora emerged, assembling and curating music from different sources and enabling users to filter their favorite songs and benefit from their recommendation systems. Similar trends are evident across the creative sector.

Because there are so many connected consumers and so many suppliers of creative content, the companies that create a platform to organize the content market occupy the most powerful position in the content market today. In effect, they determine what content is shown and to whom.

What makes platforms so powerful?

Platforms have control points; in particular, their unique understanding of their users, resulting from data we provide every time we consume content on a platform, and their recommendation systems, which enable them to attract even more consumers and draw in even more creators. This gives them huge market power. With high-quality consumer data, platforms get to know more about the kind of content that works than the content industry itself, and then start moving into production. Netflix has done this and Spotify is starting to do so. At this point, platforms start creating lock-in mechanisms that make it inconvenient to leave the platform. This is what Amazon did in launching its Kindle Publishing Platform. Anything published on that platform was usable only on Amazon. Authors became locked into the platform, and Amazon was able to distance authors from its competitors.

Why were companies like Amazon, Facebook, Google and Netflix able to become so valuable and scale so rapidly?

First, unlike traditional media companies, platforms enjoy a network effect – a self-reinforcing cycle where more creators attract more consumers and more consumers attract more creators. Second, the mass of consumer data they own allows them to take advantage of artificial intelligence to automate and inform their content creation processes. Netflix and Amazon are already doing this. Third, platforms win because they use cross-subsidization and cross-selling very effectively. Amazon can acquire content at below cost, give it away for free, and still remain a highly profitable business because, as the owner of much of the world’s retail inventory, it can subsidize any content it creates by monetizing the products its content promotes.

What impact are platforms having on traditional creative companies?

In general, traditional intermediaries – publishers, film studios, record labels – are far less scalable than platforms and have been substituted by them, so they have suffered in the platform economy. Amazon’s Kindle platform, for example, has created a mechanism for authors to publish their work without having to go through a publisher, forcing many smaller publishers to close. While authors may or may not be discovered, the platform always wins because all transactions flow to the platform. Similar trends are evident in music and film, although Spotify still works with record labels and Netflix still works with the studios. This is because it takes heavy investment to bring a new artist or film to market. But as Netflix accumulates data on the kinds of content that are profitable to own and gets into content production, it will gradually make film studios less relevant. Netflix is uniquely positioned to shape what consumers want. Its content is readily available and always salient, so consumers get a lot of value from using Netflix.

How are creators reacting to the rise of the platforms?

Their reaction has been mixed. Some are losing money and feel that platforms are not doing enough to return value to them. But others highlight the way platforms have democratized access to the content market and enable them to interact directly with their fans and build a following.

What are the downsides for the creative community?

First, the fundamental business model for platforms is to exploit the creative ecosystem’s resources while pushing all the risk back to the ecosystem. That is why artists’ revenues are falling, and online anti-piracy efforts are lukewarm at best. As platforms scale, their owners – a handful of investors and private companies – acquire huge market power and start making decisions that work against their creative communities. So we need to develop alternative ways to fund platforms if we are to solve the problem of risk and reward in the platform economy.

Platforms are fundamentally changing the economics of content creation and the assumptions that go into determining what content will succeed and what will not.

Sangeet Choudary

Second, the way platforms monetize content creates a tension between the outputs the creative industry should create and the kind of outputs it ends up creating. Data-driven platforms prioritize consumption over variety. Facebook’s monetization model is entirely based on making users click on links. That requires engaging users with edgy content that makes them interact with the platform. A Wall Street Journal study found that every time users interact with YouTube, they are driven to ever more polarizing content. This has an impact on creators because if consumers respond better to polarizing content, then creators will produce it – that is where the demand lies. So the way platforms are funded and make money often works against the long-term interests of creators and the quality and diversity of creative outputs. These dynamics reduce the risk-taking appetite of traditional creative businesses. When Amazon required publishers to charge lower prices for books sold through the platform, publishers’ margins plummeted, making it more difficult for them to offset the cost and risk associated with taking on new authors with revenues from best sellers.

The platforms are fundamentally changing the economics of content creation and the assumptions that go into determining what content will succeed and what will not. In the streaming era, Netflix can capture more granular data on our viewing habits – how long we watch a particular film sequence, when we pause or abandon a movie, and so on. It uses these data to determine the content, the plot lines and the actors that work best with audiences and is starting to move consumers to the content they create versus the content the rest of the creative community is creating. When platforms determine that formulaic content is more profitable than other content, we will see less variety as the appetite for creative risk-taking declines. As long as platforms can capture what consumers want, they will know how to apportion value across the ecosystem and will exert a strong influence in shaping the cultural ecosystem.

How can creators safeguard their interests in the platform economy?

Creators need to recognize that in the platform economy some intellectual property-protected art can be monetized and some can be used as a marketing tool to create spread. They also need to be clear about all the competitors that are entering their space and that can substitute their work. They may be competing with the Marriott Hotels group, for example. It has a 100-member team of content creators, but doesn’t need to monetize that content – it simply makes it available for free to encourage people to stay at their hotels. So creators need to understand how cross-subsidization works in a platform economy.

Creators also need to think about their personal brand and develop and leverage it across multiple platforms. Some creators have huge followings on multiple platforms. They use YouTube to post their content and Twitter and Instagram to engage directly with fans. Some even pull in fans from these platforms to crowdfunding platforms like Kickstarter to fund their projects. What really matters in the platform economy is being discovered and creating a following, so how artists engage with fans is really important.

The real challenge for artists is that their negotiation power with a platform is very low. That’s why the creative industry, as a whole, needs to embrace new technology-driven ways to negotiate at scale with platforms. Without these tools, all other policy or negotiated solutions will be incomplete.

And what do platforms need to think about?

Resource-rich platforms need to up their game in returning fair value to artists and tackling online piracy. Start-ups such as the Create Music Group in California are signing up artists and using algorithms to track the use of works. Why aren’t the big platforms doing it?

The best way to regulate a platform is to think like one. Regulation has to become data-driven.

Sangeet Choudary

Platforms could also start thinking about how to use Blockchain technology to create a more transparent and sustainable system for the creative industries. Blockchain technology’s decentralized mechanisms could potentially digitize the whole creative value chain using smart contracts to return value to individual creators on the basis of what they have created.

And regulators?

Regulators need to step in to make platforms more accountable, so that the creative ecosystem becomes more equitable. Artists alone can’t achieve this. The best way to regulate a platform is to think like one. Regulation has to become data-driven. Regulators need to require platforms to open up their data. They need to create platforms and regulatory standards based on real-time data. This will involve working with independent data analysts to map what is actually happening on the platforms and ensure regulatory benchmarks are met.

Is there a role for WIPO here?

WIPO can promote better understanding among policymakers of the influence that platforms are having on the whole creative value chain. As connectivity expands, the power of the platforms will increase, so it is critically important that we are proactive in developing effective ways to regulate them. WIPO can bring policymakers together to develop and deploy continuous metrics-based regulatory standards and mechanisms so the appropriate checks and balances are in place to ensure the world’s cultural industries continue to thrive. 

About the 2018 WIPO Conference on the Global Digital Content Market: Focus on Asia-Pacific

New Delhi, India - November 14 and 15, 2018

The conference brought together hundreds of participants, including business, government and creative-industry leaders, to discuss the challenges associated with accommodating demand for public access to music, film and other creative works and the ability of creators to earn a living from their work.

The event was hosted by India’s Department of Industrial Policy and Promotion (DIPP) at the Ministry of Commerce and Industry, in New Delhi, India.

In his opening remarks, WIPO Director General Francis Gurry said the “digital economy has transformed the creative sector,” creating “new tools for the creation and distribution of cultural content.” He noted that while “the global shift to digital” is “providing exciting new opportunities for both consumers and creators alike,” it has also “shaken the foundations of long-established business models at a rapid pace – and new adaptive practices need to emerge.”

Mr. Gurry underlined the continuing importance of copyright in incentivizing and financing creative activity. “While new business models have been disruptive, one principle remains intact: the centrality of copyright as a financing mechanism for the creative content that underlines human cultural activity,” he said.

In his remarks, India’s Joint Secretary, at the DIPP, Mr. Ramesh Abhishek said that the conference highlighted “India’s commitment to digitization.” Like other developing countries, India is witnessing a radical shift in business model dynamics within the creative sector. In this context, he said, India is seeking to “attain great heights as a digitally empowered society and knowledge economy.”

During the two-day event, panel discussions covered:

• Music – New Channels and New Models
• Education Publishing – Curated Content and Education Outputs in the Digital Era
• Film – Sustaining the Film Industry in the Digital Environment
• Broadcasting and Media Convergence – From Paper to Screen
• Digital Rights and Infrastructure - Policy and Diplomacy Considerations
• Digital inclusion – How the Benefits of Digital Advances Can be Shared Across All Levels of Society