EXECUTIVE INSIGHTS VOLUME XV, ISSUE 15

The People Are Speaking with Millions of Dollars: How Media and Entertainment Companies Can Thrive in a Direct-to-Consumer Age

Who knew that big media companies could raise big bucks curiosity but a powerful commercial trend. Warner Bros, which direct from consumers while developing new launch platforms originally produced the “” series, had been for content? In March 2013, Rob Thomas, the creator of a unconvinced that it warranted a major movie. But the enthusi- defunct TV series called “Veronica Mars,” launched a historic asm shown by fans on persuaded the company to funding campaign. His goal was to raise $2 million in 30 days greenlight the film. on Kickstarter, an increasingly popular online platform for financing creative projects. Thomas hoped that fans of his The dynamics of financing, sales, and distribution of media and detective show might contribute enough money to help finance entertainment are changing in ways that savvy companies can a movie adaption. Potential donors were offered rewards that no longer afford to ignore. Once no more than an intriguing included a limited edition T-shirt (for a $25 pledge), two tickets Internet sideshow, direct-to-consumer campaigns are now going to a “red carpet” movie premiere ($1,000), and even a one-line mainstream and triggering concerns that traditional purveyors speaking part in the film ($10,000). It took just 12 hours for of creative products will be threatened by disintermediation. the online fundraising campaign to reach its $2 million target. But we do not believe that the traditional players are trend- Within 30 days, 91,585 fans from 21 countries had pledged ing toward irrelevance. Far from it. If they seize the moment, more than $5.7 million. traditional media and entertainment companies will find that the direct-to-consumer revolution presents them with considerable Is this a one-off or part of an emerging pattern of success? We opportunities — including new and powerful ways to identify show the pattern of emerging success and give nine rules for talent, connect with customers, and unlock previously hidden winning the game. value in mass and niche markets alike.

Since its launch in 2009, Kickstarter says it has raised $650 mil- Fan-Funding Takes Off lion to fund more than 43,000 creative projects ranging from movies to music, dance to design. But the runaway success of Websites like Kickstarter have, for the first time, made it feasible the “Veronica Mars” campaign was a watershed, demonstrat- for artists to reach out to fans on a massive scale to fund their ing that the phenomenon of “crowd-funding” is not just a content creation. Indeed, “Veronica Mars” is just the tip of the

The People Are Speaking with Millions of Dollars: How Media and Entertainment Companies Can Thrive in a Direct-to-Consumer Age was written by Dan Schechter, Managing Director and Head of L.E.K.’s Global Media, Entertainment & Technology Practice.

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fan-funding iceberg. In April, Zach Braff — star of the sitcom Even the Pulitzer Prize-winning writer David Mamet recently an- “Scrubs” and director of “Garden State” — began a Kickstarter nouncedNine that Rules he would for self-publish Successful his next book — a sign that campaign to fund a movie called “Wish I was Here.” He hit his respectedDirect-to-Consumer writers are increasingly willingFundraising to decamp from tradi- $2 million target in just four days. Charlie Kaufman, the writer tionaland publishing Distribution houses and take their loyal readers with them.. of “Being John Malkovich” and “Eternal Sunshine of the Spot- Even more striking, in 2011, it took just 12 days for Louis C.K. 1. Be transparent with your customers in your less Mind,” raised $406,000 on Kickstarter for “Anomalisa,” an to sell 200,000 downloads of his comedy performance “Live at fundraising and self-distribution animated featurette about “a man crippled by the mundanity of the Beacon Theater” for $5 apiece. He made almost a million • Customers appreciate a detailed breakdown of his life.” In February, a documentary called “Inocente” became dollars for a single night of work. Then, in 2012, he cut out the where funds are going and what they will be used the first Kickstarter-financed film to win an Oscar. middleman for (includingagain, bypassing funds forticket self-distributed agencies to hawkproducts) $6 million worth of tour tickets in one week directly to his fans. It isn’t just filmmakers who have benefited from this new source 2. Consider donating a percentage of raised funds to of financing. Last year, spurned her charity and set out instead to finance her new , “,” • This will increase the "feel good" concept and via Kickstarter; her fans ultimately pledged nearly $1.2 million. encourage more fans to fund Meanwhile, the developer of the video game “Wasteland 2” bagged $2.93 million on Kickstarter from 61,290 backers. And 3. Work toward long-term relationships with your while Kickstarter leads the pack, it’s hardly alone. Crowd-fund- customers, so that they will trust your brand as long as ing platforms are proliferating, including industry-agnostic play- high quality, content and products are delivered ers such as Indiegogo and niche specialists like PledgeMusic. • Louis C.K. did this by releasing a "heart-felt" thank you note to his fans after the wild success of ‘Live at the Beacon Theater’ Direct-to-Consumer Distribution From The Artists: Are Big Media Companies 4. Build relationships with customers using an approach ‘Dead Men Walking’? that is engaging, personal and honest

The Kickstarter effect has significant implications for traditional 5. Release free content to convert casual browsers to middlemen, including media conglomerates, movie studios, devoted fans video game giants, record labels and book publishers. These players are simultaneously witnessing a parallel trend in which 6. Provide DRM-free, easy-to-share material more and more creative artists are attempting to sell their own • This creates openness and mutual trust and respect wares directly to consumers. In 2007, Radiohead famously re- with fans leased the album “In Rainbows” on the Internet, allowing fans to pay whatever price they chose. This proved a mixed success, 7. Create a reasonable price with about a third of their buyers apparently paying as little • When the price point is attainable, both fans and people on the fence are willing to pay for the as one cent. Times have changed, and new, more transparent product rather than hunt for a pirated version models are having better success. After her rejection by various

publishing houses, the novelist Amanda Hocking sold over two 8. Offer value that cannot be found elsewhere million books via Amazon and other e-Book websites, generat- • "Veronica Mars" offered red-carpet party attendance ing more than $2.5 million in sales for her paranormal tales of

trolls and vampires. 9. Have fun! • Most successes are underpinned by a sense of humor, which does not always come naturally to big companies

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Making Direct-to-Consumer Work for You and distribution might of a network that has about 30 million U.S. subscribers. Most web-content remains too short, too How worried should traditional media and entertainment weird, or simply not good enough to go mainstream. But these companies be about these new models of funding, sales and examples and others demonstrate that the boundaries between distribution? The first thing to remember is that the direct-to- the traditional and non-traditional sales routes are now begin- consumer boom offers as many opportunities as challenges. ning to blur. One way for traditional businesses to capitalize on the trend is to trawl through this non-traditional realm in search of fresh The New Rules for Success in Direct-to- talent to partner with, treating it in much the same way as a Consumer baseball scout would treat a farm team. In most cases, artists still prefer to follow the traditional path when given the option; Despite all the buzz about the direct-to-consumer model, there they still covet a shot at the major leagues. Indeed, Hocking, is little doubt that the traditional players retain a significant the novelist, eventually decided that the direct-to-consumer competitive advantage, given their financial strength, status, route was too arduous and distracting. In 2011, she signed a expertise and distribution reach. They also provide another $2.1 million deal with St. Martin’s Press to publish her next four value-creating service: editorial oversight. While artists cher- books. Defending her decision in a blog, she confessed to her ish their creative freedom, many also recognize the benefit fans: “I want to be a writer. I do not want to spend 40 hours a of editors, record producers and other overseers who can help week handling emails, formatting covers, finding editors, etc.” separate the wheat from the chaff. The vast majority of con- sumers also value some level of curation; without it, cyberspace Likewise, record labels are also finding ways to profit by signing can feel like a casting room populated by hundreds of millions musicians who have already attracted a devoted following on- of artistic hopefuls all auditioning at once. line, not least on Facebook, and crowd-funding sites. A British band, Scars on 45, raised about $24,000 on Slicethepie, In many ways, “Veronica Mars” offers a fine example of how another fan-funding platform, and then joined a major U.K. well this changing environment can work for successful, estab- label, Atlantic/Chop Shop Records. The band cited the benefits lished companies. Warner sat back and watched the crowd- of teaming up with a company that offered professional exper- funding euphoria unfold on Kickstarter, then shrewdly recog- tise in promotion and marketing, along with industry contacts nized that the fans’ enthusiasm offered commercial ratification that “Slicethepie cannot provide.” Sure enough, a 2011 survey for its project. The company then stepped in to provide the found that 75% of unsigned musicians still want to sign with a financial support required to make it a major movie, along with label — another indication that the traditional model is far from expertise on everything from soundtrack clearances to market- dead.1 ing. Meanwhile, the company is well-positioned to benefit from the seed capital and promotional buzz provided by the project’s The television industry is also embracing this possibility of dis- fan-funding success. covering new content online, then providing a more-prominent launchpad for it. Lisa Kudrow (of “Friends” fame) created an Traditional players can also benefit from the success of the improvised online series, “Web Therapy,” which Showtime sub- direct-to-consumer model by deconstructing how these en- sequently took on, developing it as a TV series that premiered terprising artists have used the Internet to forge strong rela- in 2011. Other artists have found themselves mainstreamed in tionships with consumers. For example, Louis C.K. built trust similar ways: for example, after his successful adventures in the among his fans by providing them with a detailed breakdown world of self-distribution, Louis C.K. signed a deal with HBO to of how he would use the funds he was raising, charging them air his concert special. This enabled him to access the money a reasonable price, donating a substantial portion of his profits

1 Source: ReverbNation and Digital Music News

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to charity, and writing them a heart-felt thank you note for their Seeing the success of trailblazers like Amanda Hocking, Louis support. His economic transparency, generosity and openness C.K. and Amanda Palmer, many other artists will undoubtedly deepened his bond with his fans in an era when many con- follow in this quest for direct-to-consumer riches. For artists sumers crave a more personal, value-driven touch. Similarly, who are sufficiently well-known, it’s a particularly attractive Amanda Palmer’s success stems largely from her gift for using route, since they already have a sizable following with which social media to strengthen her bond with her fans. Indeed, she to connect. In the coming years, this direct-to-consumer model recently boasted having more than 187,000 Facebook "likes." promises to develop into a thriving ecosystem, especially in Companies would do well to deepen their understanding of sectors such as comedy and book publishing where the start-up why such artists resonate so strongly with their followers, and and marketing costs are not as prohibitive as in movies, video how innovatively they use social media to communicate directly games or music. with them. These trends will gather momentum, causing a measure of disruption. But for companies that play their cards right and use the nine rules (see sidebar), this rapidly changing environment will be a great opportunity.

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