Why the Content Market is becoming Perfectly Competitive

Social media draws upon many disciplines—marketing, design, communications—but to me the most interesting part is where it overlaps with economics.  The last five years have seen a spike in available content that is clearly unparalleled in human history.  And this has changed the economics of content.

I spent a long time in the Media & Entertainment business, and one thing that was clear was that while there were hundreds of entrants, it was an Oligopoly.  A few players—the movie studios, the major record labels, the cable operators, the major television channels in each territory—had the power to shape the market.  Star Wars was worth more than Weekend at Bernie’sCheers was worth more than My Two Dads.  Paramount had more power than a small producer.  Market inefficiencies were exploited, barriers to entry were high, collusion was a fact of life, and the biggest players in general made most of the profits.  That’s what Oligopoly looks like.

But unlimited content production tools (Blogger, iPhones, WordPress) and practically free global distribution (Twitter, Facebook, Youtube, et al.) have caused not only the supply of content to go up, but the supply of suppliers to go up.  Everyone is their own content brand.  There is considerable overlap—when I see a New York Times article by Sam Sifton shared by a friend on Facebook, there are at least four content brands involved. (Sifton the author, nytimes.com the aggregator, Facebook another aggregator, and my friend the curator). And if the story refers to another source, or the story was shared in a Facebook group, the chain continues.  Every one of these content brands can have a relationship with the reader.  And if one of them goes away, they can be quickly replaced.  That looks like something very different, something which until now has been a theoretical concept—perfect competition.

We’re not there yet, but it is where we’re going.  In Economic Terms, Perfect Competition has the following characteristics:

  • Infinite buyers and sellers – An infinite number of consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price.
  • No barriers of entry and exit – No entry and exit barriers makes it extremely easy to enter or exit a perfectly competitive market.
  • Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing free long-term adjustments to changing market conditions.
  • Perfect information – All consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products.
  • Zero transaction costs – Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
  • Profit maximization – Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated.
  • Homogenous products – The qualities and characteristics of a market good or service do not vary between different suppliers.
  • Non-increasing returns to scale – The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient number of firms in the industry.
  • Property rights – Well-defined property rights determine what may be sold, as well as what rights are conferred on the buyer.
  • Rational buyers – buyers capable of making rational purchases based on information given
  • No externalities – costs or benefits of an activity do not affect third parties

Not all of these conditions are strictly met, but it’s close enough that we need to adjust our content strategies.  We certainly have de facto unlimited buyers and sellers, no barriers to entry or exit, perfect factor mobility (bloggers can freely move from brand to brand or set up their own), and perfect information (Google).

So what?  Hasn’t it always been this way?  Yes and no.  There have always been many places to get your news, but your local paper or the New York Times or the AP always had huge advantages from scale.  Those advantages are melting. Scale still matters a little, but not enough to ensure success (ask CNN).

So what can brands do to win in this perfectly competitive world?  One level, a perfectly competitive market should behave like a commodity market (e.g., Corn & Soybeans), where everything is perfectly substitutable for each other.  Or maybe the airline market (with no barriers to exit).  We’re not there yet—ESPN, Perez Hilton, and The Motley Fool are not perfectly substitutable goods.  But readers do have a fixed time budget.  Even if the time allocation for digital media continues to increase, at some point people will have maxed out on consuming content.  And if ESPN is good enough, and soaks up a lot of time, maybe the Motley Fool doesn’t get looked at.  Even though they are not in the same niche, they both are fighting for the same fixed supply of attention.  But within each market niche (news, sports, entertainment news), we are in many cases at de facto perfect competition.

This has big implications for all of us.  We’re already there in many categories, and yours is probably next.  No matter how obscure your niche, there’s someone who can enter at any time and take away your audience.  It’s going to be a bumpy ride.

Photo Credit: x-ray delta one via Flickr

Adrian Blake has worked with Saturday Night Live, McKinsey & Co., and Progressive Farmer and is a founder of a Social Media agency.

Adrian Blake.  Strategy.  Social Media.