The Evolution of Entertainment
Second Edition
Hi Friends!
Thanks for the support on the first edition of my newsletter last week.
Here's a link to the article for all new subscribers who didn’t get the chance to read it.
Chit Chat is done. Let’s dive into the subject right away.
The Early Days
Entertainment can be defined as a form of activity that aims to capture and retain the interest of an audience. It satisfies the core human need to feel pleasure, gratification, or delight. The category has existed for centuries, through several different forms such as storytelling, music, drama, dance, and sports. Once praised by the royal court, entertainment developed into sophisticated forms. Over time, it was made available to the general public and became widespread among the world population with many leisure activities such as reading books, visiting museums and cultural sites, practicing sports, and traveling becoming common societal standards.
To get to where it is now, entertainment has changed countless times over the years. Not only did the content produced and what became popular change depending on people’s taste and sense of what was acceptable, technological developments have also helped to make the industry more affordable, accessible, and comfortable over time.
VCs often say that the entertainment market is always a few years ahead in terms of innovation, and they are not wrong.
The Last Decades
The rise of the internet in the late 1990s has played a significant role in shaping the entertainment industry of today. Indeed, it changed the way that entertainment is viewed, consumed, and received. Here’s my attempt at simplifying the impact of this breakthrough technology on the industry:
Visibility: The internet has millions (if not billions) of users searching for both information and entertainment on a daily basis. There is an overload of content available for them to consume because of how easy it is to upload and share it. Entertainment used to be something that could only be shared in person or by word of mouth. Now it can be consumed by people all over the world because the internet has no barriers.
Accessibility: The distribution of entertainment has drastically changed. The internet revolutionized the way that all physical media is sold and distributed to the consumer. All forms of entertainment can utilize the internet to bring their product to the public in a faster, more efficient, and cost-effective way. As >50% of the world’s population is said to now use the web (thanks to the rise in mobile phones), this means that the majority of the citizens of the globe are now able to experience a variety of cultures from the comfort of their own homes.
Diversity: The internet has made entertainment more diverse. For example, soccer is no longer limited to a stadium and a TV broadcast. It can now be watched online, seen in clips on social media, or played on a FIFA video game. All of these forms of media can be targeted at various audiences, which helps expand the reach of the overall industry. Moreover, with the internet, every consumer has the outlet to become a movie expert through RottenTomatoes or a music genius through Album of the Year. As a result, the reception/commercial success of any form of entertainment becomes a make-or-break. In theory, this should lead the entertainment producers to produce higher quality products as they will likely yield better returns.
The last few years will be remembered for the fast digitalization of entertainment. We have seen steady growth in streaming services, gaming, and user-generated content. This came at the expense of traditional TV, movie theaters, newspapers, magazines, and books. This major shift is not only a result of the web, but also of the rise of smartphones, advanced sound systems, high-speed computers, AI, and digital advertising. This macro trend toward digital content consumption was accelerated even further by the COVID-19 pandemic. While experts expect some kind of a return to normal, many consumer habits should become embedded.
The Future of Entertainment
Today, the global entertainment market amounts to $2.3T. Over the next few years, it is expected to grow at a CAGR of 5%, reaching $2.8T in 2025. Within the industry, the areas with the fastest projected growth are OTT video (streaming), video games, internet advertising, and virtual reality. Here are a few projections:
Traditional TV/home video should remain one of the largest consumer segment at $219bn, but will continue to shrink at a -1.2% CAGR over the next five years.
Fun fact: According to the A.C. Nielson Co., the average American watches more than 4 hours of TV each day, which represents 2 months of non-stop TV-watching per year.
Video streaming boomed in 2020 and its growth trajectory should continue. Streaming video-on-demand (SVOD) is projected to grow at a 10.6% CAGR until 2025, making it an >$80bn industry. Meanwhile, movie theatres’ revenues are not projected to recover to pre-pandemic levels until at least 2024.
Video game and esports revenues reached $178bn in 2021. The category should continue its rapid ascent, and become a $240bn business by 2025 (representing a CAGR of >10%).
Music is poised for robust growth following a massive 74.4% slump in live music revenues in 2020. Total music revenues are expected to grow at an 8.5% CAGR until 2025, fueled by digital streaming and the return of live shows.
Not surprisingly, many younger consumers have little awareness/interest in traditional media channels. When asked to choose their favorite entertainment activity, the top response among Generation Z was gaming (26%), followed by music (14%), and browsing the Internet (12%). Gaming is central to these digital natives and is becoming a significant driver of data consumption. As the future of entertainment will be built towards younger users, media companies should aim at developing user-friendly, end-to-end entertainment hubs. For example, video streaming brands could start to integrate other media growth engines such as games, e-books, and podcasts.
Web3 Has the Potential to Completely Transform the Market
The digitalization of entertainment helped to 1) place content at the fingertips of the audience, 2) remove the distance between creators and fans, and 3) sow seeds for disintermediated creation/consumption of media. Despite these positive developments, middlemen (legacy institutions and billion-dollar monopolistic tech companies) have siphoned all the value created by this internet revolution.
At first, these platforms do everything they can to recruit users, creators, developers, and businesses to strengthen their network effect. Then, as their product move up the adoption S-curve, they start gaining power over their users/partners. When they reach a plateau, the relationship with their stakeholders switches from a positive-sum to a zero-sum game. To continue growing, they start extracting data from their users, competing with their partners, and increasing their take rates to creators.
Facebook/Instagram/Twitter/TikTok: 100% take rate
YouTube: 45% take rate
Apple: 30% take rate on their App Store & in-app purchases
Spotify/Labels: $0.004 per stream (<15% of music revenues go back to artists)
Web3 promises to be a game-changer in the evolution of the internet. At its core, Web3 is a vision for a more open, decentralized, and secure internet, enabled by advances in technologies such as blockchain and ML. With Web3, the hope is that ownership will shift from the platform giants to creators. Although the extent of Web3’s impact on the future of entertainment is yet to be seen, it is poised to critically alter several key aspects of the industry:
Web3 gives birth to new incentive structures for entertainers and their supporters. True fans are now able to purchase an NFT from their favorite artists and get rewarded over time if the entertainer gains in popularity. For creators, NFTs enable them to get fairly compensated for their craft, eliminate the need for greedy intermediaries, and give them the opportunity to reward their early followers.
Web3 enables a world where artists do not have to fight to secure power and ownership rights over their work. Had Web3 been around when Taylor Swift first recorded her music, she would have been able to safeguard her ownership over it. In leveraging NFTs, she could have created a verifiable record of ownership over content that would be perpetually traced back to her.
Here are three examples of Web3 companies aiming to tackle the entertainment market:
SingularDTV is building a decentralized entertainment ecosystem, a network of interlinking apps and platforms like Tokit that enable filmmakers and musicians alike to crowdfund their work via tokenization, create their work embedded with immutable and programmable intellectual property protocols, and publish their work on platforms that distribute all of the revenue directly to the artist.
Audius offers an emerging streaming platform on which artists get 90% of the sales revenue back in their pockets. They can also choose how they will monetize their content, with options ranging from streaming fees, one-time payments, to NFT sales (with or without royalties).
Axie Infinity is a blockchain-based game in which players purchase NFTs of monsters that they can use in battles. With this game, players can earn tokens that can be traded for real money on an exchange. This emerging category of games, called Play-to-Earn, enables a degree of personal ownership that hasn't been seen before in gaming.
Thanks for reading through this long article. My DMs are always open for feedback and subject ideas!
Ben