How superfans drive the entertainment business.

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How superfans drive the entertainment business.

Posted on: March 19th, 2014 by tommyj

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It’s been a big month for small projects on Kickstarter. First a consortium of musicians and industry veterans, fronted by Neil Young, used the site to launch Pono, a digital music player and download service. Young and his partners set a fundraising goal of $800,000, to be reached within 35 days. Instead, they met that goal in under a day, then broke $2.5 million in their first 60 hours. At the time of this writing, Pono has exceeded $4 million in pledges. (The campaign will run through April 15; Pono is scheduled to launch in October.)

A few days later, Warner Bros. released a Veronica Mars movie in theaters and online. The film grossed $2 million at only 291 theaters worldwide, with a healthy $6,945 per-screen average. The movie owed its existence to Kickstarter—Rob Thomas, creator of the original TV series, raised $5.7 million on Kickstarter last year to fund production of the feature.

These look like banner hits for Kickstarter, and you may be wondering why I’m calling them “small.” They’re big—enormous, even—for crowdfunding campaigns. (According to AlleyWatch, the average successful project on Kickstarter receives just $7,825.) But they’re small in relation to the broader markets for music and movies. Pono’s $4 million comes from a little over 12,000 backers. But Apple sells iPods and iTunes downloads to tens of millions of customers every year. (That’s in addition to 51 million iPhones and 26 million iPads in Q1 of 2014 alone, both of which are iTunes-capable music players in their own right.) Veronica Mars raised its $5.7 million from 91,585 backers—but the show averaged 2.5 million viewers during its 2004–07 run on network television, and today’s hit TV shows can average 10 million viewers or more.

When we analyze the Kickstarter economy from this broader perspective, we don’t see any particular threats to the status quo. The execs at the big TV networks aren’t losing sleep over Veronica Mars. Pono isn’t scaring Bono, much less Tim Cook. In fact, Veronica Mars couldn’t have been produced without a big studio as a silent backer. Rob Thomas courted Warner’s commitment to the movie from the get-go; his $5.7 million served as a market test for production and distribution of the film, combined with a presale drive for digital downloads. Pono’s commitment to richer, high-fidelity sound means that one of its 128GB devices, fully loaded with lossless audio files, will hold about 800 songs. Mainstream consumers, accustomed to tens of thousands of songs on their iPods, will find that limitation a high price for pay for slightly better sound.

But crowdfunding isn’t catering to the mainstream crowd. When 3 million of us pledged $480 million to Kickstarter projects in 2013, we didn’t establish any new industries or shake up any old ones. Instead, we identified ourselves as the early adopters: the hardcores, the überfans. We’re the kind of people who, in absence of Kickstarter, would have bought the special edition of a Veronica Mars DVD or paid extra for better seats at a Neil Young concert. We’re the kind of people who download all the value-added content in our favorite video games. When something’s labeled “collectible,” we’re the ones collecting it.

We’ve always been around, and we’ve always spent big on our favorites. Historically, however, we’ve been hard to find. There’s been no precise means for figuring out how many of us exist for any given show, artist, game, or movie. For years, TV networks, record labels, game publishers, and movie studios have made educated guesses about our size and our spending power. They’ve counted up special-edition sales. They’ve noticed who buys concert merchandise and who doesn’t. They’ve tuned into our message-board debates and Comic-Con meetups. But they haven’t really counted us, so much as they’ve counted on us, as influencers of the broader market—emissaries of geekdom on missions to Middle America.

These days, we are the market. We make up a fraction of the total audience for any title, but we have the potential to account for the bulk of the revenue. We’re the 20 percent who would be happy to buy 80 percent. In some cases, we’re the 10 percent who would buy 90 percent. And when we fund Kickstarter campaigns, we subsidize those products for everyone else.

Kickstarter has been more successful than any other platform in monetizing the gulf between hard-core and fair-weather fans. But the pattern has been playing out for the better part of a decade now. Mass-market consumers are growing accustomed to paying less and less for entertainment, and the hardcore have been picking up the tab. When Radiohead released the album In Rainbows in 2007 through its own website, it offered consumers the ability to pay any price they wanted for the download. ComScore estimated that, of the 1 million or more who downloaded the album in its first few months of release, 62 percent chose to pay nothing at all; the bulk of the rest paid between $0.01 and $4. But in addition to the digital honor system, the band offered a special-edition box set for close to $80. It sold about 100,000 copies of the set, dwarfing the revenues earned from more than a million downloads of the standard album.

In Rainbows wasn’t the first or last time a band made a killing on a collector’s set. But the album’s release was a fascinating experiment in the economics of free choice. When faced with free downloads, most fans will opt for them; the hardcores will pick up the slack, and then some. 

Economics has a phrase for this phenomenon: price discrimination. It means that a distributor offers the same, or similar, goods to different segments of a market at different prices. Price discrimination allows a manufacturer or distributor to capture more value for its product by addressing the fact that not everyone is willing to pay the same. Most people won’t pay more than $9.99 for an album on iTunes (if they’ll pay at all). But a fraction of fans will pay $80 or more for, by and large, the same material in somewhat different packaging. If a brand offers everyone in the market the same good at the same price, it’s leaving a lot of money on the table.

Special-editioning has been a savvy move for content publishers, even though it’s bound and weakened by its reliance on lagging indicators. Kickstarter, on the other hand, shifts things forward. It allows publishers to identify, and sell to, the special-edition set in advance. And it’s no wonder that the dynamics of a successful Kickstarter campaign resemble those of a special-edition presale.

We can think of Kickstarter as a market segmentation vehicle: It enables content creators and distributors to get a lot smarter about identifying—and upselling to—their hard-core fans. At the same time, it allows those fans to buy a sort of emotional fulfillment. The Veronica Mars movie didn’t need to rally all 2.5 million Veronica Mars TV fans to be a success. It just needed to reach the mighty 4 percent who cared the most deeply.

Every project has its 4 percenters, and Kickstarter gives them a voice in the market to match their dedication. Their numbers aren’t legion, but their influence and buying power can’t be denied. So tomorrow’s content creators should get comfortable with thinking small. That’s where they’ll win big.

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