It’s part II of access models: to read our first post on the fundamentals of access models, check it out HERE. And check out our post on Audience models here.

To recap our first piece on access models: access models are what every creative business wants to be when they grow up, because instead of monetizing attention, they monetize a customer’s willingness to pay. But one of the key considerations in the access model business is how the customer actually finds, experiences and pays for your output: and that is the crucial role of distribution. The changing nature of distribution, and of consumption itself, also has put downward pressure on margins, increasing the importance of cost.

The physicality of distribution has been largely disintermediated by the internet - we can all pipe 4K video into our homes now at the touch of a button - but the noise of the “content everywhere” era has meant that distributors have taken a larger role in marketing and discovery. Therefore we can think of wide adoption of consumer internet as being the dividing line between the “physical” era of distribution (before) and the “awareness” era of distribution (after). In the awareness era, distribution is capturing more value than ever. 

At first, the promise of direct distribution was attractive, as it increased margins by removing intermediaries. In practice, most companies discovered how difficult it is to build and maintain a direct relationship with consumers. What makers also found was that their distribution layer had actually disrupted the customer’s perception of the value of the content itself.

Distribution exists on a spectrum of “thickness” (thiccness if you will).  On the thin end are enablement layers — payments, delivery, conversion. On the thick end are bundlers, who aggregate content and own the customer relationship. The thicker the distribution layer, the more it owns the customer relationship — and the more it shapes perceived value.

The best example of bundling is the traditional cable business (if you think I like Barry Diller, don’t even get me started on John Malone!). These “bundles” were originally built on the physical constraints of distribution; It would have been impossible to distribute 1000s of cable channels one-by-one into each person's home.

However, bundling destroys the consumer perception of pricing and value; when cable channels realized the bundle was breaking and tried to launch standalone apps, most flopped. Customers did not have a strong perception of the “value” of most of the individual cable brands. What worked was the big tents, who re-bundled huge content libraries from multiple previous “brands” into one app. Netflix itself was originally simply a bundler, a delivery mechanism for thousands of hours of library content (often the same library content being shown by the lazy 3rd and 4th tier cable networks) wrapped in fancy branding. In the same vein, once spotify introduced bottomless streaming for $9.99 / month, customers were loath to shell out .99c for an individual song.

The internet also created the explosion of the audience model and social platforms. As a result, people’s attention is more divided than ever. Content makers therefore face a bit of a Sophie’s Choice when it comes to their distribution. On the one hand - self-distribution is now possible, and the act of distribution itself is comparatively “cheap”.  But that cost is offset by the huge awareness campaign you must wage to launch new brands and creative concepts into a world where there is so much noise. Distributors, who already have access to a consumer’s attention and credit card, are the easiest way in. You can see this across the ecosystem as makers either link with larger platforms for distribution (i.e. the large business Amazon Prime has built by being a distribution layer for smaller streaming services) or lean on existing IP for new concepts. 

Therefore, the key consideration for makers when deciding to distribute or not distribute is their existing relevance amongst consumers. If they have known resonance and IP with consumers, they might risk directly distributing. If they are still working to build that resonance, distributing via a content bundler or existing platform would likely be a better option until the brand resonance is there. A famous example here is Quibi, which tried to launch a new platform and format directly to consumers - might they not have had more success building their business on the back of Youtube subscriptions instead of a standalone app? We’ll never know.

Distributors have almost obliviated the relationship of the maker to the original content (we don’t have cable channels or record labels anymore; we have netflix, spotify, amazon prime).  We see the distribution value changing in real time, as “light” enablement layers build themselves out more robustly as platforms. Substack was originally a way for smaller creators to establish a direct monetization layer with their audience. However, as the space of “cool people from Brooklyn monetizing their clout” has gotten more and more crowded, it has morphed into a much “thicker” platform for discovery (plus: “Twitter with fewer Nazis”), for both independent creators and media brands. 

One thing is true: distributors are capturing more value today than ever before. Cable channels were captive to the distributor because there was no other pipe. Content makers today are captive to the distributor because there is no better way to reach the audience at scale.

All of these changes: collapsing windows, increasing distribution power, increasing costs of discovery - have put significant margin pressure on makers and on the portfolio model more broadly, even as some of the conglomerates have benefitted from self distribution. Since access businesses require more upfront risk than audience businesses, costs should be more carefully managed and tracked (spoiler alert…). But historical precedent, plus antiquated systems put the same constraints on access model businesses as on audience businesses when it comes to understanding true profitability. 

There are a number of different metrics in access models: movie studios tend to track cash on cash (a measure of ROI), while subscription models track things like LTV/CAC (a measure of how efficiently you can acquire customers). But fundamentally,  access models have three major cost layers. The first cost is development / creation: the cost of the creative itself, which can be considered two ways:

In ROI cost structures, creative development cost is one of the thorniest questions to solve. “Development” of ideas can sometimes take years, as concepts and ideas work their way through multiple versions and owners. But when measuring ROI, the typical calculation tends to only contemplate the spend expenses - how much was spent on acquiring the core IP, paying agencies to make trailers, etc. But this cost does not represent the true investment in the project unless you’re also considering time, i.e. the time of the expensive development executive that’s spending half of their time on the product. 

To give an example: a friend worked at a production company whose head of documentaries spent a whole year developing a project to sell. If the documentary cost $60k out of pocket to develop, and was sold to Netflix for $200k, that’s a win, right? But what if the development executive costs $250k per year? The long-tail monetization from the documentary now has a much higher hurdle to hit in order to show positive ROI. This same cost understanding is  essential for pricing your product. In this same example, the production company also should have priced the content at a higher point to fully reflect those development costs. 

And in operational content structures, as with audience models, it is important to be able to understand, at the most granular level possible, what content is driving subscriptions and the cost of that content. Spotify made a huge push into podcasts because it thought exclusive podcasts would drive subscribers; once it realized that developing podcast audiences was harder than it seemed, it dialed back that investment to match the ROI. The NYTimes made a bet on cooking content, and it was so successful that it was able to spin that out into a separate subscription product. 

The biggest growing cost to access models, however, is the marketing and distribution costs. Driving consumers to output, and convincing them it is worth paying, often outstrips the cost of making the thing itself, particularly in companies that self-distribute. 

Despite these challenges, access businesses are more popular than ever - almost as a backlash to the great free content glut, paid substacks and walled subscription models are flourishing. The average household is probably paying more these days in their subscription bundle and internet access than they ever were for the comcast triple play. The cable companies that once delivered video were happy to charge people 60% of their previous bill for internet alone. 

However, there are some warning signs: rebundling is happening amongst the streamers. Distribution layers are getting thicc again. The coming glut of AI content will again test the value proposition of access models: traditionally, access models could charge for content because the content was of higher quality, and cost more to produce. But if AI can bring up the perceived value of free content - how will that affect the customer willingness to pay, especially when the warning signs point to subscription fatigue? (If I get asked to subscribe to one more substack to read a linkedin post, I am gonna scream). 

Access businesses will remain sexy, and will remain sexy to investors. But the “moat” access makers will have to prove in the future is not their ability to make great content - I can point you to 100 great films made in the past 10 years that not make a dime at the box office. Instead, their value will be in their ability to make sure that content gets seen - otherwise, you’re just screaming into an (expensive) void.