As I mentioned earlier, I wanted to know how artistic industries make money because I thought that lessons from one artistic industry could be applied to another.
This is what I found.
Most artists don’t earn a livable wage by selling artwork to consumers.
But that’s were it gets interesting, and complex.
I’ll let you know right now that the Internet and marketing play a big role in this.
We’ll look at how artistic industries make money.
But first, I should explain the basic mechanics of an economy.
Let’s look at food as an example.
People need food. Our bodies are designed to function continually and to repair themselves. Old cells die and the body replaces them with new cells. Our bodies need specific nutrients. Those nutrients are found in food. There is a limited selection of basic foods that farmers can provide as human food. Farmers grow food and sell it to consumers. Consumers work to earn money so that they are able to buy food.
Farmers know that people get nutrients from a limited selection of food, so farmers can produce a large quantity of functionally-identical copies of food (such as a basket of apples. Each apple is basically functionally identical and they serve the same purpose equally well). People need food on a regular basis. People can consume a limited selection of food throughout their entire life.
That’s the basis of an economy: People need more of the same thing (or a better thing) on a regular basis.
Our minds function different compared to our bodies. Our minds hunger for information, but ‘more of the same thing’ can be boring. That’s because our minds store information. We don’t need ‘more of the same’ information if we already have that information. We hunger for things that can build us up and teach us new things. That means that we need something new fairly often. Our minds need variety.
That’s why our minds don’t consume information the same way that our bodies consume food. Our minds need food, but who would choose to feed their mind instead of their body? Our bodies need physical food. Our minds need information. We can get information for free from the environment that we’re in, and we can analyze the information that we already have and derive new information from it. We don’t need to buy food to feed our minds. There may be some cases in which a person chooses to feed their mind instead of their body, but most people would choose to feed their body because they need their body to stay alive.
So, most people spend money on personal development and entertainment after they’ve paid their living expenses.
Artistic industries face a few challenges. Everyone can create art because everyone consumes artistic information. Many people desire to work in an artistic industry because making art is fun. Which means that there’s a lot of competition to work in artistic industries, great uncertainty (because many people don’t know what specific pieces of art the consumer market will desire) and not enough money in the consumer market to support everyone’s artistic business ventures.
That means that artistic endeavors usually need extra money to flow in from other sources.
Television, Movies and Actors
Many television shows air commercials during episodes. Sometimes commercial products are used in episodes as a form of advertising. Some people pay a fee to have access to television service. Some people pay a high price for cable channels to watch original television shows without commercials. Some people pay for subscriptions to services such as NetFlix.
Movies make money through ticket sales and by advertising products in the movies. Some movies also earn money through tie-in merchandise sales.
Sometimes actors make money from endorsement deals and they act in commercials.
Some companies see television, movies and actors as ‘shelf space’ that they can use to advertise their products. The goal behind using television, movies and actor endorsements is that companies want to try to transfer some of the emotional attachment, that people feel to stories and actors, to products that the company desires to sell.
If some company can get you to look at their new car and create an emotional attachment to it through seeing it used in a television show or movie, the company may let the show’s production studio borrow that car to use in the TV show and might fund part of the show’s production.
If a company can get more sales of a sports product by hiring an athlete to say good things about that sports product, the company may hire an athlete to say good things so that the company can generate more sales.
Speaking of which, racecar driver suits and racecars themselves typically have the names of companies on them. That’s a good example of using something or someone as ‘shelf space.’
If you see an athlete endorse one product, but then the athlete wears some other product in every picture or video that you see of the athlete in everyday life, you could feel like you’ve been lied to.
That’s why people started preferring product reviews on sites like YouTube – They thought that an average person would be more honest than an actor in a commercial or a marketing piece written by the company that is trying to sell the product. That’s why some YouTubers have been having a hard time. People who want to work on their YouTube channel full-time need to earn money. Sometimes the amount of money that they earn from YouTube ad revenue is not enough to cover their expenses. Some people earn money by endorsing products in some of their YouTube videos, but sometimes they lost subscribers when their subscribers find out that the product review was a paid endorsement. That’s why some YouTubers have a side job while trying to run their full-time YouTube channels, and/or they advertise their own products and/or services through YouTube and other social media platforms. There are also YouTubers who use Patreon so that fans can support them directly with money.
In the past, books and magazines were sold to consumers in bookstores, or on spinner racks, etc. Some magazines had ads in them. Books were usually sold as products (without ads in them, unless the ads were advertising other books by the same author or from the same publisher).
Now, some bookstores also sell digital versions of their books, and sometimes sell exclusively-digital copies of some books.
Some bookstores also charge a ‘Slotting Fee.’
Some Retail stores see their shelf space as ‘advertising space’ and charge retailers a fee to advertise on specific shelf space. This is called ‘slotting‘ and there are practical business reasons and marketing reasons behind it.
Book stores have been using slotting for more than 10 years. You can read this article from 1996 to see what conditions were like back then, and can read more about slotting here. The market has changed a bit since then, with Amazon and other businesses offering self-publishing services, but I think that slotting is still used in physical bookstores today.
The idea behind slotting (in grocery stores, etc.) is that too many new products were being created and stores didn’t have enough shelf space for all of them. Stores didn’t want to take a risk on new products, 80% ~ 90% of which fail (according to an article on the topic).
Stores needed a way of prioritizing which products would get put on store shelves. This led to store shelves being seen as ‘valuable advertising’ spaces and retailers trying to identify how valuable each location of shelf space was. Marketers wanted to know how to maximize the effectiveness of shelf space to generate a higher R.O.I. (Return on Investment). That’s when the science and psychology of marketing and store layouts comes into the picture.
Slotting started being used to manage the symptoms of two problems: 1) too many products were being made, and 2) 80% ~ 90% of new products failed. Suppliers were making more products than retail stores could bear and they were asking retailers to make risky decisions that could have been financially damaging.
If a retail store stocks new products and most of the new products fail, that could be a huge financial loss for the store. If a store continues doing that, the financial losses could put the store out of business. A store can’t reasonably be asked to take such a risk, but that’s the risk that some companies were asking stores to take. Some companies were asking stores to be their ‘market testers’ instead of testing the viability of their new products themselves before asking stores to put those products on the shelves.
It’s important to note that not all retail stores charge a slotting fee. But large chain stores do tend to use store plans of some kind to encourage (or manipulate) consumer behaviour.
Artists perform music and sometimes sell albums. They also earned money by doing live performances. Their recognition may have helped them get jobs as entertainers in other industries (acting in television and movies, product endorsements, etc.). But I didn’t know much about the music industry, nor how much it sucks an artist dry, until I read a few posts by Kpopalypse.
In recent history, artists in the music industry have been seen as shelf space. ‘Music is not the business anymore. Music is the business card.’ Music is used as a vehicle to establish a brand – a brand that people recognize and that advertisers can use when they sign singers for endorsements.
Some artists can support themselves through music sales alone, but many can’t. The costs of producing music, paying staff, putting on performances, etc. are so high that artists would need a lot of money through sales to be able to pay their expenses through music sales alone. Kpopalypse has a breakdown of the cost to produce a physical album, for illustrative purposes. Many costs were left out of that breakdown, as Kpopalypse says in his article, but that illustrates roughly how much it costs to produce an album for a small group and a popular group (less economies of scale = more expensive per unit to produce). (Kpopalypse uses course language and is not a Christian website. You are forewarned.)
Kpopalypse’s figures do not include all the costs, but it’s useful to understand some of the costs that go directly into producing a physical album.
“We’ll start with the physical package, using industry-standard price ratios. SM’s terms may vary from these but because I don’t know exactly what they are, I’ll go with what I do know from working with businesses of a comparable size with similar product in the west…” (Quoted from Kpopalypse’s article.)
The article breakdown shows that 90.5% of an album’s gross revenue could go toward paying album production and distribution costs and the cut that goes to retailers and the artist’s agency. (‘Gross revenue’ is the total amount in sales revenue before costs are subtracted. ‘Sales revenue’ is the money that flows into a business when a customer pays for a product.) The songwriter and producer would get paid out of the 9.5% of the revenue that’s left (They may get as much as 50%, if the singer didn’t write and produce the song themself). Recording costs and the cost of music video production are subtracted from what’s left before the singer gets his or her share of the revenue (if there’s any money left). The money that is left would be split among the members of the group / band if there’s more than one member. If the cost exceeds the revenue, someone’s indebted.
So, if a singer is a soloist, that singer may be getting roughly $1 in revenue from every $20 album that’s sold (not counting recording costs and music video costs). Recording costs could be $50,000 and a music video cost could be $300,000 (or more).
If that singer wants to earn $50,000 a year, the singer would need 50,000 album sales + 50,000 album sales to cover recording costs ( + 300,000 album sales, or more, if there’s a music video). That’s if the album’s price is $20 and the costs in Kpopalypse’s breakdown are the only costs. The price of albums in the real world, and the costs to produce them, may vary.
And the singer may have to pay income tax on the $50,000 that the singer earns, which could leave the singer with $36,000 ~ $42,000, for example (the amount that the singer would have to pay would be based on what the tax rate is in the country, or countries, that the singer would have to pay income tax to).
And if there are 4 members in the band, there would need to be 4 times as much sales revenue for each member to earn a decent living.
When you divide that by 12, you can see how that compares to a monthly wage.
$42,000/year across 12 months averages $3,500 a month. That’s a decent livable income, but it’s not the millions that people expect singers to earn. And singers usually don’t get paid in steady monthly amounts.
Singers tend to get paid sometime after sales revenue comes in. Contracts between companies may state that a retailer has to pay the artist’s label within ‘x number of days’ after sales revenue comes in, or has to pay the label on a regular basis according to a timetable schedule or some other agreement.
And businesses often try to pay their expenses as late as possible so that they have money (liquid assets) to work with.
If a business pay their bills early and something unexpected happens, they may not have money in-hand to deal with short-term expenses. So artists tend to see money from album sales long after consumers paid for those albums.
The costs of digital songs is about the same as the cost of physical albums. Online distributors (such as iTunes, etc.) charge a high distribution fee that is approximately equal (maybe a little more or a little less) to the combined total cost of physical album production, physical distribution, and the retailer’s cut of the money. So if a digital version of a song costs $1.00 and the singer / band is getting approximately 5% of that, the singer / band would be getting about $0.05 per sale of that song.
Musical Theatre is a performance art. Musicals make most of their money through ticket sales. Investors help musicals pay the costs of production before the musical sees its ticket sales earnings. Sometimes musicals make a huge profit. Other times, they don’t make enough money to pay their expenses. It’s a highly risky business. You can read more about it here, here (and also the PDF at the bottom of that page) and here.
Fashion is also art. Often times, it’s art that is also a product and can have mainstream success. A fashion design can be mass-produced by machines (or/and people) and sold as a product. Car designs, architecture, etc. also falls into the category of ‘art in product design.’ The art is incorporated into a product that will, or can, be mass-produced and sold the same way as other commercial products.
Craftspeople make physical products. Those products may be pieces of art (tables, chairs, etc.) and may be in high demand or low demand, depending on what is being made and who is demanding it. Some physical art is intended to be bought once and kept in good condition for a long time (such as art pieces to display). Other art is intended to be used and may need to be replaced or repaired (such as historical armor in movies and TV shows, costumes, and any other art that gets worn down by use).
Digital art (digital drawings, software, video games, etc.) is art that exists in a digital form. Some art, such as video games, only exists in digital form. There are many forms of art that can exist both digitally and physically. The marketing and distribution of each of those art forms, and the niches within each of those art forms, may be different compared to one another.
Video games have two main veins: Console Games and Computer Games (I’ll simplify it by using only those two categories).
Console games may be ‘buy it once’ games or online games that you pay a subscription fee to access. Some console games have additional add-ins that you can buy to complete the in-game story or add to the game. Console games, and their add-ins, are generally expensive. They also take a long time, and cost a lot of money, to produce because of the high graphic quality in some of those games and the amount of people involved in making those games.
Some computer games may be of a similar quality to console games, but many computer games are of a lower graphic quality and cost less money to produce.
Social games (such as Farmville) are set in an ‘ongoing’ game world that depends on user actions and may not have a game storyline. Social games, and mobile app games, tend to offer players the option of buying items within the games to enhance the gaming experience. The in-game items are usually low-cost, limited-use items that a player can use up and then the player may want to buy a replacement.
Console games, and any sort of computer games, may sell ‘upsells’ that have a limited lifespan, that a player may want to replace, because that copies the behaviour of the physical-world economy.
There’s a problem, though…
Illegal Distribution / Piracy
Many types of art can be stored and distributed digitally. That’s great because it can reduce production and distribution costs. It’s also great for pirates because a book, movie, video game, etc. can be copied in a few seconds (or a few hours).
Copyright infringement is a real problem in many industries.
Copyright infringement is when someone illegally copies work – that can include illegal distribution. Basically, ‘copyright infringement’ is when someone makes a copy of the work that you hold the copyright of and/or give such copies away to other people.
Piracy is when someone sells illegal copies of work.
There are many reasons why people might do that, and there are some artists who encourage it as a form of word-of-mouth marketing, but it has created many problems. One problem is the perception that some people have that ‘it’s okay to download a copy without paying for it because the work hasn’t been stolen.’
This is where I should explain what ‘Opportunity cost’ is.
‘Opportunity cost’ is a concept. It’s not a real cost because you’re not paying for anything. ‘Opportunity cost’ is a way of calculating what you could lose (or gain) by taking one action instead of another.
For example, let’s say you had a choice:
You need shampoo. You could spend $5 on a bottle of shampoo now, or you could wait one week and spend $5 on a ‘2 for the price of 1’ sale.
If you buy a $5 bottle of shampoo now, you only get one bottle of shampoo for $5, but you get it now.
If you buy two bottles of shampoo one week from now, you get two bottles of shampoo, but you don’t have shampoo for a week.
That’s opportunity cost. You can either give up on the opportunity of getting two bottles of shampoo for $5 or you can decide to not use shampoo for a week.
You can add factors to that example, like being able to borrow shampoo from a friend during that week, or not being able to use any shampoo and having to go to a job interview before the ‘2 for 1’ sales begins, but that example is enough to illustrate the point.
How does ‘opportunity cost’ apply to business?
If you illegally download a copy of a song, the business isn’t losing money, but the business also isn’t making money.
Production has costs. It costs time and money. There is also an opportunity cost: a person could spend their time working at a job that pays money instead of spending time making art.
If a business or person spends time and money creating something, it can be disheartening to see 100,000 copies of their art being illegally downloaded when they don’t make enough money from sales revenue to pay their bills. They could feel like their time and effort has been stolen by people who simply made a quick copy of their work.
If you have to make, or remake, something from scratch, the same way that the artist made it, you may appreciate the amount of work that the artist put into it.
The bottom line is: If you like something, support the people who made it, or are making it. Financial support is needed. Likes, comments and compliments are good, but people need money to buy food. Making art is expensive and people need to be able to pay their living expenses along with the cost of producing the art (supplies, business services, etc. cost money).
But what if you can’t afford to pay for it? The business wouldn’t be making a sale anyway.
While it’s true that a business wouldn’t be making a sale (and the business wouldn’t be losing anything if you make a copy of their digital product), you would still be benefiting from their work without paying them.
The answer to that question, though, is that it’s up to the copyright holder to decide what the copyright holder will allow you to do.
Some businesses and artists allow illegal distribution (or at least, don’t sue people who do it) because they think that it’ll result in word-of-mouth marketing that could generate more sales. If you share or lend something to your friend, that friend may like it and want to buy more. That could result in a sale for that artist or maybe for another artist.
Some copyright holders allow, or even encourage, people to download illegal copies of their product, when they can’t afford to buy it, and simply say that whomever downloads it illegally should pay for it when they can.
In both cases, illegal downloads of a product could lead to word-of-mouth marketing. That, in turn, could lead to customers paying for the product.
But the choice of whether or not to allow illegal downloads (or whether or not to take legal action) belongs to the copyright holder.
What if you don’t have access to buy a legal version of the product?
That’s an interesting question.
The answer, again, is that it’s the copyright holder’s choice to make.
There may be situations in which you live in a country that doesn’t recognize another country’s copyright laws and you also can’t legally buy a product that is available in that other country.
In such a case, it’s a moral question.
Should you take a copy of something that you’re not compensating the copyright holder for?
As an example of the challenges that an artistic industry faces and the possible effects of copyright infringement, let’s look at the Anime industry.
‘Anime’ is the Japanese word for ‘cartoon’ and specifically refers to Japanese cartoons (and could refer to cartoons that are inspired by Japanese animation or/and storytelling styles). ‘Manga’ is a Japanese word for ‘comic’ (such as the stories found in comic books).
The History of Anime in North America
A long time ago, people in North America generally didn’t know what ‘manga’ and ‘anime’ were, nor did they have access to buy them (unless they took a trip to Japan or bought manga or anime in its original Japanese language from an online store).
Anime was available on VHS videocassette and manga was available as physical books. Fans would make copies of the VHS videos, and add subtitles to them, and send those copies to other fans. Fans who received the subtitled videos sometimes made copies of those and sent them to other fans, and so on.
The problem was that a VHS video’s quality degrades the more you play the tape. And when you copy a VHS video, the copy usually doesn’t have the same quality as the original. So there were physical limits to how many times an anime could be copied on VHS tape before the copies became unwatchable…
Manga fans translated manga issues and gave, or lent, the manga to other fans. The translation may have been on separate sheets of paper or written in the manga itself. In some cases, some fans may have used white-out to cover the Japanese words on the manga pages and write the English translation over them: some fans may have photocopied such mangas and distributed them to other fans.
That grassroots fan movement, which sometimes involved illegal distribution and that was paid for out of the fans’ own pockets, or through donations, or through piracy (VHS tapes and photocopies cost money), helped create an anime and manga fanbase in North America.
Some people wanted to license animes and mangas from Japan and distribute them legally, in English, in the U.S.
However, they wanted anime to appeal to a larger audience.
And then there was Robotech.
Since then, anime became more prominent and fan groups started translating more anime and manga. DVDs and the Internet made it possible for fans to get high-quality anime videos and scan manga pages. Fans could add subtitles to digital video and distribute high-quality fansubbed anime online. Fans could scan the pages of manga titles, edit them in photo-editing applications to remove the Japanese language text and replace it with a translation, and distribute the ‘scanlated’ (meaning ‘scanned and translated’) issues through the Internet.
The market for anime and manga is bigger in Japan than it is in the U.S. and many Japanese fans make extra effort to support animes, mangas, and the people who were involved in their production. The amount of manga that Japan produced (and produces) is far more than what the U.S. market can bear. Anime licensing companies often licensed the best titles for distribution into foreign markets.
Some fansub groups started fansubbing some anime titles soon after they premiered and anime distribution companies couldn’t afford to license the titles at that time or didn’t know whether they would be popular. The same thing happened with manga titles and scanlations. When a licensing company did license a title, sometimes it was months or years after the title’s initial release. Some fansub groups stopped fansubbing a title when it become licensed. Other fansub groups didn’t want to wait for months or years for officially licensed episodes to catch up to the latest fansubbed episode and they decided to continue fansubbing some titles.
Other groups made copies of licensed DVDs, which included subbed and/or dubbed episodes, and distributed them online.
U.S. companies had trouble trying to keep up with fansubbed releases because fansub groups could make a fansubbed episode available online within hours after it aired in Japan. Manga scanlation groups could make scanlated manga available soon after their publication in Japan and U.S. manga licensors didn’t have a competitive advantage against them, such as being able to release a ‘dubbed’ (referring to voice acting) version of a manga, because manga licensors were releasing basically the same product as the scanlators were, but with the significant disadvantage of how long it takes to make a printed book and to make it available for consumers to purchase.
Fansub and scanlation groups were (or are) making so many titles available online that anyone who doesn’t want to buy licensed anime / manga, or doesn’t want to watch / read the licensed titles that are available, can easily find fansubbed anime and scanlated manga titles online.
At one point, some licensing companies looked at which fansubbed and scanlated titles were popular and licensed them.
Some fans felt the licensing companies who licensed titles based on pre-existing popularity were exploiting the fansubbers by using them as ‘free marketing.’
Some fans felt that the licensing companies were trying to milk fans by expecting them to buy licensed products that were being released far behind the Japanese releases and that may never catch up to the Japanese releases.
While consuming fansubbed releases, some fans started buying the original products from Japan to support the Japanese artists and production companies.
At some point, though, people discovered that many fansubbed series’ were being downloaded in Japan!
Some Japanese fans were downloading fansubbed anime, which still contained the original Japanese audio. Japanese companies felt that fansubbed anime was cutting into their earnings potential.
Manga publishers also faced the question of how much money they would make by licensing a title that has already been scanlated.
Japanese manga publishers could have seen that as ‘potentially lost’ revenue because people won’t always pay for a licensed copy of a manga when they already had a scanlated one.
So the fansubbing and manga translating that once helped build the demand for anime and manga in those markets then started causing a reduced revenue potential for publishers in those markets, which could be limiting the amount of money that businesses can make with which to produce, license and distribute more anime and manga.
And that’s a problem because making an anime is expensive.
This is quoted from Part 1 of that article series:
“The truth is, producing an anime is a herculean task: a gigantic amount of money and manpower get poured into every production well behind the scenes, before a single drawing is even created. The stakes are huge for every company involved, and every season will have a number of winners and losers.
Who decides to make a show? Usually it’s a producer at a company that already has a production office. Most of the bigger manga publishers have one of these, as do several specialty companies like Bandai Visual or Media Factory. And usually the idea isn’t necessarily to make a great, stand-alone TV series, it’s more about building a marketing opportunity.
And the ways a producer can build opportunities like this can be myriad. The vast majority of anime is not an original story, but is based off of another art form: manga, PC games, or light novels. With an anime on TV, even in a late-night time slot, the increased visibility can really give sales of those original works a boost.
In other cases, a media company will set about creating a new original work that can potentially make money in any number of ways: a popular show can be used to sell toys and model kits, or perhaps the company is really trying to sell a card game (like with Yu-Gi-Oh!). More often, their goal is to simply sell as many DVDs as possible.
Anime production is an extremely labor-intensive proposition, employing the services of up to 2,000 people per episode around the world. Most of the grunt work is now done in third world countries across Asia, and the use of digital technology has reduced costs across the board. Anime production is now as efficient as it’s ever been.
That said, a single anime episode costs about US$100,000-300,000 per episode, according to various producers we’ve talked to. That might seem like a lot, but in reality it’s pretty cheap, about on par with an American deep-cable TV show. (An American prime-time TV show can cost well into the millions.) But multiplied across 13 episodes, that nonetheless turns into a total budget of US$2-4 million.
That’s a lot of money. Few companies are rich enough to invest that much in a single show. If it tanked and they lost all that money, most would never be able to recover.
So let’s say a manga publisher is trying to get their hottest series animated. Maybe they can get a DVD publisher to chip in. Maybe a video game company could throw in a few bucks, or an ad agency who could sell product placement in the show, or a record label that wants to promote a new artist in the opening and ending. After a lot of meetings and a whole lot of Powerpoint presentations, eventually four or five companies sign up as investors, and the production is a go. This is actually very similar to how independent films get made.”
You can read Part 1, Part 2 and Part 3 of that article series on the AnimeNewsNetwork website. There is also a more recent article which says that most animes don’t generate enough revenue through disc sales alone to recover the production costs and that the anime industry relies on the financial success of “a few big hits.” And some of the biggest hits sell merchandise (like Gundam).
Quoted from Part 2 of that article series:
“For some anime, typically the ones aimed at kids, selling merchandise is the most important way to recoup that investment. But most anime, especially the majority of it that now airs late at night, don’t last long enough or don’t appeal to enough people for merchandise to be all that useful. These anime must make back their costs almost entirely through DVD sales.
DVDs, like any physical product, are a complicated business. The money a customer pays for a single disc has to go towards a number of costs, get split up among a bunch of different companies, and generally maneuver its way around a fairly complex system. But for making back the money of a production, there’s simply nothing else like it. That’s especially true in Japan.
To a Westerner, the Japanese DVD market seems horribly overpriced. With the average disc running over ¥7,000 (US$92) and only containing 2-4 episodes of a series, the cost of collecting a single show can easily run several hundred dollars — more than many American fans spend in a single year.
The prices actually stem from a business practice we used to have in America, too: rental pricing. Basically, back in the dawn of the home video business, the industry was constructed in a way where “niche” releases were only meant to sell a few thousand copies, mostly to video rental shops. Prices were high (typically $89.95 in America), but video shops benefited from having a wide and semi-exclusive selection of movies that normal people would never pay for. At those prices, only a few thousand sales could mean over a million dollars of revenue. Initially, video industry people didn’t think there was much of a market in selling to collectors.
But the fans proved them wrong. Otaku of all kinds (not just anime fans) started buying the videotapes and laserdiscs, and they bought them at those high prices that were intended just for video stores. There was no reason to lower it. In fact, there were a few experiments to drop the price to a more affordable amount, but that usually resulted in a slight increase in sales — not enough to make up for the drop in revenue.
When you think about it, that makes sense. Most Japanese people live in much smaller homes, and with many more people than their Western counterparts. In most cases, it simply doesn’t make sense for Japanese consumers to build a big home media library. Only the hardcore fans of a particular product will usually want to bother owning a tape or DVD, and everyone else relies on rental shops. Media is a specialty market, not a mass-market one, so prices have stayed astronomically high.
The Japanese Otaku’s desire to own anime even at high prices had an unexpected effect: as the rest of the economy tanked and video stores stopped buying every new video release, the otaku kept buying pretty much everything that got released. Before long, the few thousand fans that bought anime DVDs were supporting nearly the entire budget of a show. Even as the rest of the Japanese home video industry lowered their prices to varying degrees, anime stayed at the same high price. It’s simply the only way most shows can ever make a profit.
Before we begin, a caveat: all of this information applies almost entirely to late-night TV series, which make up the majority of anime being made today. TV shows that air in the evening hours that are aimed at kids are almost entirely intended to sell toys and video games; determining how successful they are is impossible without getting deep into each product line and knowing the royalty splits — which is not possible. So for the sake of simplicity, we’ll leave those out of the equation for now.”
Quoted from Part 3:
“Last but not least, piracy is still a huge problem. These days the fansubs themselves aren’t as big a deal as they used to be — streaming has made them less relevant, and torrent traffic is down significantly. The far bigger problem is with illegal streaming sites, the ones that will take fansubs and DVD rips and stream them without permission. These sites are everywhere, and are often way more prominent than the legal options. Just google “streaming anime”, and you’ll get a huge list of websites offering instant access to the latest shows. Almost all of them are illegal. In recent months, Funimation has filed paperwork with Google to have them removed from search results, with some success.
With ad-supported streaming being a barely-profitable venture at best, it’s hard to argue, based on money alone, that suing each of these websites out of existence is worth the time and money. The people using them are probably not going to pay for a subscription, and the lost revenue from ads is negligible. The real damage they do is more subtle: they allow unsuspecting and uneducated fans to consume anime outside the system, never engaging, never seeing an opportunity to give back. It’s a loss of something even less tangible than a potential sale: it’s the loss of mindshare.
If the internet and the impact of piracy has taught us anything over the last few years, it’s that consumers have choices, and don’t need DVDs or legal websites to watch the shows they want. Not everyone will want to contribute to the shows they love, but many people have that sense of goodwill. That goodwill is very fragile. It’s based on a sense of trust that, if they do contribute, their money will be well used.
Which is to say, the future of the anime market, and the entertainment market in general, is in building a relationship with fans, an emotional connection that they get something out of. That relationship gives them every opportunity to be a part of the shows they love, through collecting DVDs or merchandise, or taking part in a community, or some other means.
However well this works, and what formula will eventually shake out, remains to be seen. But one thing is certain: in the future, some fans will spend more than their share, others will mooch everything for free. And somehow, the artists will figure out how to pay their bills and make more stuff, though sometimes making ends meet will get a little scary.
And when you think about how entertainment has worked over the years, and even over the centuries, that’s pretty much always been the case.”
Which basically means that the anime industry is not in healthy shape.
If you read all three Parts of that article series, you can get a good feel for how an artistic industry works and what challenges it faces.
The bottom line seems to be: Artistic industry products need to make money through direct sales of the products, or through sale of merchandise, or through ad revenue. And as we’ve seen in that article series, ad revenue doesn’t bring much money in.
So what does that mean for small business and independent creators?
How can we make money to remain profitable?
That article series talks about ‘relationship marketing’ near the end of Part 3.
I wrote about Relationship marketing in my book, How to Craft a Story … maybe I’ll quote part of my book later in this article.
Ryan Holmes, the Founder and CEO of Hootsuite, said something interesting recently in a LinkedIn post:
“I used to own a pizza restaurant. Each week, the same people would come in. We’d talk about friends, weather, politics. I got to know their likes and dislikes—who wanted extra pepperoni and who hated onions. Even though I made a pretty decent Hawaiian pie, I’m convinced I made a lot of sales just by listening and talking.
Now, I sell software, not pizza. Hootsuite—we’re a social relationship platform—has 15 million users around the world, including 800 of the Fortune 1000 companies. The art of selling has undergone a technological revolution in the decades since my pizza days. It’s possible to blast out a “personalized” email campaign to thousands of prospects with a few clicks. AI-powered chatbots have taken the place of small talk.
It’s easy to laugh at the cliche of the old-school sales guy—Rolodex crammed with notes on everything from clients’ birthdays and job promotions to their kids’ names. But there was something to the personalization and attention behind that approach—something that digital brute force, volume and automation alone just can’t match.
This is where social selling comes into the picture. By now, social selling—using social media to find leads, build an actual (human) dialogue and make sales—is already approaching buzzword status. But what all this buzz misses (and hides) is the fact that social selling isn’t anything new. If fact, it represents a movement back to a simpler, more human way of closing deals.
I don’t think there’s any great mystery behind these results. Whether it’s pizza or cloud software, people like to buy from people. They appreciate human interaction and genuine attention. They recognize when a salesperson has gone to the effort of doing her homework and building a relationship … rather than just cramming another automated drip email into their inbox. Trust, accessibility and accountability all translate to more sales.
The ultimate goal with any sales relationship—in 1917 or 2017—is to build trust overtime: to toe that fine line between friend, trusted advisor and business associate. Social selling takes commitment and a willingness to take the long view. One thing’s for sure: plastering sales pitches across your Facebook news stream is the surest way to fail at social selling. Mining strangers’ personal feeds for sales fodder is as likely to end in public embarrassment as it is a sale.
Social selling also takes something that may be hard for a generation reared on impersonal digital sales tools to swallow—a willingness to put yourself out there and actually care about people, one customer at a time. Chatbots may be timesavers, but we all know they’re fake. Ultimately, great technology paves the way for interaction to be more human, not less.”
You can read the whole LinkedIn post here.
But there’s more…
One common rule in business is the ’80/20′ rule, meaning that 80% of a company’s revenue comes from 20% of its customers. 20% of customers will buy almost everything that a company produces or will buy in high enough quantities, or buy big ticket items, that their sales make 80% of the company’s revenue.
Which also means that 80% of a company’s customers will provide 20% of the company’s revenue.
The ’80/20′ rule is a guideline (because not all companies fit that rule).
Another statistic that I heard somewhere is that ‘only about 1% or 2% of social media followers will actually buy something that the person makes.’
Let’s do the math. 1,000 is 1% of 100,000. (They say that if 1,000 people are willing to buy everything you produce, you can make a living wage.) That means that you may need 100,000 followers, or 100,000 ‘people who are interested,’ to be able to sell something to 1,000 of them on a regular basis.
What kind of price would you need to charge?
Let’s do more math…
Say that you need $30,000 per year in gross revenue.
And 80% of your revenue comes from 20% of your customers:
$30,000 x 80% = $24,000
$24,000 comes from 20% of your customers, and 20% of 1,000 customers is 200 customers.
$24,000 ÷ 200 customers = $120 /customer per year.
So each of the customers in the ‘20%’ bracket would have to spend $120/year, and the other 80% of your customers would have to spend $7.50 a year, on average, for you to earn $30,000 /year in gross revenue.
Gross revenue doesn’t include any costs. Costs are paid out of gross revenue. After costs are paid, you’re left with net revenue. And you may also have to pay income tax.
Those statistics may not be accurate, but it’s an interesting mental exercise none the less.
A more realistic way of using those statistics may be to use 1% ~ 2% of your follows as a conservative estimate and figure out how many paying customers you would need based on the prices of the products and services you’re offering.
Another marketing practice, that seems to be a marketing norm, is the use of ‘upsells’ and funnels.
An ‘upsell’ is a product or service that you offer to a customer after the customer has bought something from you. An upsell is generally seen as something that can ‘add value’ for the customer based on what the customer already purchased.
Usually, an upsell is a higher-priced product or/and a tie-in product (do you remember what I said about video games and add-ins earlier in this article? Those add-ins are a form of ‘upsells’).
But you still need to find a way to advertise your products, or create brand awareness, so that you can attract new customer attention.
Let’s look at the History of Marketing.
Here is an interesting infographic on the history of marketing. It shows that marketing remained mostly the same until 1450, when Johannes Gutenberg popularized the use of moveable type on a printing press (Gutenberg didn’t invent moveable type nor the first printing press. Bì Shēng (畢昇), a Chinese inventor, is credited as an inventor of the printing press and moveable type during the Song Dynasty in 1041 – 1048).
After that, magazines (1730s), posters (1839) and billboards (1867) became widely-used. That didn’t change until the 1920s when televisions and radio shows were invented and when the use of telephones became wide-spread in the U.S., but that’s only part of the story.
Things got interesting in 1913 when the Ford Motor Company first used an assembly line. That began the wide-spread use of ‘mass production.’ Mass production was used during World War 1 (1914 – 1918) and the U.S. economy grew until it was booming in the 1920s.
In 1924, when the U.S. automotive industry was reaching its peak, the head of General Motors (Alfred P. Sloan Jr.) suggested that GM cars should be remodeled once a year to try to convince consumers that they need to buy a new car. Sloan’s plan worked for GM, but other car companies wouldn’t change their car designs every year because they felt that there was no engineering reason to do so. Some smaller car manufacturers couldn’t change their designs that often because it was too expensive for them to do it.
The U.S. economy crashed in 1929, leading into the Great Depression. In some countries, the Great Depression stayed until 1939, around the start of World War 2 (1939 – 1945). Bernard London, a real-estate broker, issued a pamphlet in 1932 titled Ending the Depression Through Planned Obsolescence.
The idea of ‘planned obsolescence’ was to make things that were designed to break after a specific period of time so that consumers would have to buy a replacement. (Have you ever noticed that some things break the day after the warranty expires? Sometimes it’s designed to do just that. Companies know how long their products would last because they designed and tested them).
Manufacturing companies know what percentage of consumers will buy an extended warranty, know how much it would cost to repair or replace an item that’s under warranty, and know what percentage of their products could break during the warranty period. So manufacturers choose an extended warranty price that will allow them to cover the cost of repairing/replacing the product and also make a profit.
Companies know that 30% of customers will usually buy an extended warranty, so they set the prices of extended warranties so that they will still make a profit after covering costs.
There was interest in television in the 1920s and 1930s that led to the creation of electronic television sets. Broadcasting standards were agreed upon in the U.S. in 1941, and the Federal Trade Commission allowed broadcasters to air commercials in the same year, but the War Production Board stopped the manufacture of television sets from 1942 until 1945. By the mid-1950s, more than half of U.S. households had a television set. By the late 1960s, most of the households in the U.S. and Britain had a television set, and colour television had become widespread.
Nielsen Media Research revealed their first ratings for radio programs in 1947. They developed a television program rating system in 1950 based on their radio program rating system. Their rating system focused on a statistical measure of how many people were watching television programs so that they could determine the ‘market share’ of each television program. More people watching a TV show meant that more people could view commercials during that TV show and television networks could charge (or negotiate) a higher price to air commercials during highly-rated television air time.
In the 1990s, personal computers and mobile phones became more widespread.
In 2000, ‘pay-per-click’ advertising and Google Adwords existed. The point of ‘pay-per-click’ advertising is that the advertiser would only have to pay for the ads that consumers directly respond to (by clicking on them).
The old way of advertising was that commercial ads (television commercials, billboard signs, etc.) would be shown to an audience and marketers would hope that some of those people would respond to the ads. Marketers didn’t have much data about how effective their advertising was being, the return on their advertising investment, and whether the money that they spent on marketing was well-spent.
Google Adwords was (and still is) like the ‘Nielsen rating system’ for internet keywords; they rate keywords based on traffic and determine how much a search term is worth. (Unlike Nielsen, Google also owns the most widely used search engine in most of the world, and YouTube, and offers advertising services. Google controls platforms through which it advertises to consumers. Two of those platforms, Google Search and YouTube, are market leaders.)
The Internet also exposed users to a wide variety of ads. Spam emails, deceptive Internet ads, links to malicious websites, etc. led to ‘advertising overload’ and even a fear of clicking on some ads because computer users didn’t know where those ads would take them. The Internet is the ‘great equalizer,’ but that means that everybody has an opportunity to reach a wide audience.
At some point, people became resistant to advertising.
So many ads were trying to sell something to people that some people started blocking out ads mentally, others ignored ads intentionally, and others started blocking ads physically (with Internet browser ad blockers).
The same thing happened on TV where people switched channels when a commercial started playing, ignored ads when they were shown, or recorded TV shows to watch later and fast-forwarded over commercials (or used technology to not record commercials automatically).
At some point, television networks and advertising agencies started to base price negotiations on ‘commercial ad engagement’ (a measure of how long viewers watched a commercial instead of switching to a different channel) and marketers wondered how they could get viewers to watch commercials more.
Further research indicated that viewers were watching commercials (and not channel-flipping), but they prefer watching ads that are relevant to them.
So how do companies encourage consumers to pay attention to advertising?
One way is to make advertising that appeals to a specific target market.
Another way is to engage with customers (through social media, fan events, trade shows, in-store, and a variety of other ways). A positive customer experience may lead to word-of-mouth advertising (which is the most effective form of advertising).
Another way is by controlling the distribution system.
Another way is by using manipulative and/or deceptive marketing.
Let’s look at the last two.
NetFlix distributes movies and TV shows, but NetFlix realized that it didn’t have much of a competitive advantage over other companies who also distributed movies and TV shows. NetFlix decided to create ‘NetFlix Originals,’ original programming that people would have to come to NetFlix to watch. NetFlix is a distributor that also became a content producer.
Google started out as a search engine, but the company wanted to monetize their search engine in some way. As a result, Google became a marketing company that analyzes search results and acts as an advertisement distributor.
Now, video producers, music artists, writers and craftspeople have more distribution options and low-cost tools with which to make art (lower barriers to market entry, realistically), but a lot more competition too. The Internet is the ‘great equalizer.’ Websites and online distribution services allow more artistic product to reach a wider audience, but consumers are faced with more choices now.
That can lead to ‘choice overload’ – when too many options are presented, people choose none.
Or sometimes, people have a hard time finding what they want because there are so many options to look through.
In the past, physical stores didn’t have enough space to stock all the new products that suppliers were making (80% ~ 90% of which failed to become commercially viable).
Now products of questionable quality can be made available to customers and there are more suppliers because the barriers to entry have become so low.
That creates a problem ‘choice overload.’
Consumers used a market’s ‘barriers to entry’ as a sort of filter to limit choices and to provide quality content options for consumers to choose between when purchasing a product.
Barriers to entry meant that not everyone could enter a market. Manufacturers who did enter a market would want to make a profit in that market, which meant that they would have to sell products that consumers were willing to pay for.
Now, customers need to navigate the variety of choices on their own. ‘How good is this product? Is it worth buying?’ Those are questions that consumers might ask.
And they try to narrow down the answers by looking at product reviews and/or asking their friends, and trusted people, for recommendations.
A company can engage with consumers to build trust or goodwill. People connect with faces. People build relationships with other people.
A consumer should assume that a produce or service may not always be ‘as advertised’ because there are some scammers. Companies want to make a sale, so they may not present an unbiased view in their advertising. Consumers need to find what’s truth so that they can make decisions based on good information.
That’s where relationship comes in. Word-of-mouth marketing is still the best form of marketing, but it’s better to trust the producer and not to trust simply the quality of individual products.
That’s where small business and small-time creators have an advantage.
People know that small businesses need customers in order to survive. Regular customers who buy from a small business are precious because they might make the difference between the business living and dying.
Of course, customers should try to be pleasant, and so should business workers. It’s always nice dealing with nice people instead of nasty ones.
(‘The customer is king’ was never a good practice. There should always be mutual respect and civil behaviour between a business and its customers and also between people who work at businesses and also respect between customers.)
A small-time business owner may be able to build a relationship with his/her customers because the business owner can be seen as more accessible. Most people cannot walk into the office of the CEO of a big business, and some people may feel that big corporations are somewhat detached from lives and the concerns of the people who buy their products. It’s nice to be able to talk to someone and know that they care about you because they care about the products and/or services that they’re offering to you, and that they have the power to solve problems if a problem comes up.
That’s the defining advantage of relationship marketing: Being able to talk to someone who cares about you and the products and services they’re offering to you, and who won’t try to cheat you to get money.
Here’s a quote from my book, How To Craft a Story, Chapter 8, ‘Shock and Sex Appeal.’
What is ‘relationship marketing’?
Relationship marketing is when a person or company forms a relationship with consumers and customers. Relationship marketing can help a person or company build a good rapport with consumers and customers. A good rapport can lead to customer loyalty. When a business listens to consumers to find out what consumers want and what problems consumers have, and the business makes an effort to address and resolve those problems as soon as possible, that can help the business increase customer satisfaction and it might also help the business gain a competitive edge in the market. Business is about solving problems and making money. If you know what problems consumers have and if you can provide a solution before your competitors do, that can be good for your business.
Let’s look at what should be done to have a healthy relationship.
Relationships require good communication. I say ‘good communication’ because the communication should be effective. It should allow two people to learn more about each other. It should allow people to solve problems efficiently. It should let people convey what they mean without meaning being lost during communication.
Bad communication can cause a relationship to break. Sometimes the break can be so bad that the relationship cannot be repaired.
If you want to communicate with someone, you need to learn to be patient and you need to resolve conflicts in a manner that is healthy.
What else is necessary in a good relationship?
Learn how to value things that belong to another person.
If something is important to someone else, even if it’s not important to you, you should respect that it’s important to that person. Don’t try to diminish the importance that the person places on it.
When something is important to someone else, and you treat that thing as being as valuable to you as the other person thinks it is, you’re sending a message to that person. You’re saying, ‘This is as important to me as it is to you because you are important to me. I am making this important to me because I value you.’
Of course, there may be some things that go against your beliefs or that grate against you as a person. You may not want to value some things which are important to someone else.
The word ‘relationship’ comes from the word ‘relate.’ ‘Relate’ means ‘to carry back.’ It means that there is an active, ongoing connection between things which relate to each other or between people who relate to each other.
A ‘relationship’ means that the people who are in a relationship with each other are connected together somehow.
Connections in a relationship should not be one-way. When you try to connect to a person, that person has to accept your connection otherwise that connection is not a ‘relationship’ connection.
A ‘relationship connection’ requires two-way communication through that connection. It requires both people in the relationship to acknowledge that connection and maintain that connection. Two-way communication should take place through a connection often to maintain that connection.
A relationship connection is like a muscle. If you exercise it often, it can become stronger. If you don’t exercise it for a period of time, it can become weaker.
That having been said, the strength of the connection depends on how strong each person who is part of that connection believes it to be.
Let’s say that two people form a strong relationship connection and then they don’t communicate with each other for a few years. Then they communicate again and their relationship is the same strength as it was a few years earlier when they stopped communicating.
That happens when each person in the relationship still places the same value on that relationship connection and believes that the other person also still places the same value on that relationship connection. When both people continue placing the same value on a relationship connection and they believe that the other person is doing the same, that relationship connection can be inactive without becoming weaker.
If a relationship connection is not weakened, even while it is being tested, that is ‘loyalty.’
Thank you for reading this article!
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