“Where’s Papa going with that axe?”
E.B. White, Charlotte’s Web
Something’s crushing the middle. For the past month, I’ve been talking to people about it and what it means. But it’s not the middle you’re thinking of. Not the one politicians pander to. Not the one that built the US into the envy of the industrialized world and not the class of people that’s emerging with a vengeance in China, India, Brazil, and a dozen other places.
Instead, I’m referring to the middle of the publishing industry, the middle of the movie business, the middle tier of music companies, the middle of the banking industry (over 520 failed banks since January 2008 according to the FDIC), the middle of the ad business, and the middle of the post-secondary education industry. I’m thinking about several other industries where technological change punched the middle right in the gut, doubled it over and knocked it to its knees. This is the place where mid-sized firms once thrived but are now disappearing, along with the creative people who previously supported their success.
An offhand conversation started the whole thing. As I rode on yet another United flight without WiFi or TV screens (how can this still be possible; Virgin America’s had them both for 4 YEARS!) a stately and erudite book agent in the next seat lamented the situation faeed by many of her authors. From Denver to Boston, she regaled me with stories of one author after another who once had fine careers writing a new book every other year and selling 8 to 10 thousand copies at a time. They weren’t rich, but they flourished in a way, with consistent sales, speaking opportunities and reliable income. No longer. With online sales eliminating bricks and mortar booksellers, and virtually no margin left in moderately successful hardcover titles, many middle-tier publishers and modest selling authors are being pushed to the poles.
Instead, they face stark choices. They can go big and try to write blockbuster genre books targeting hot sectors with multimedia potential (e.g., Young Adult) or catalyze themselves into new era writers: those peripatetic self-publishing promotion machines, relying on Amazon reviews, social media, and their own hustle to build an audience. Confronted with these choices, many simply cannot transition and have left the literary world and moved to previously safer places like academia.
Unfortunately, established fields like Education are no better off. The Wall Street Journal recently wrote about Thunderbird’s decision to add a for-profit division. A historically respected and stable MBA program with an international bent, recent demand has plummeted. The reasons are straightforward: Thunderbird is neither ranked in the top tier, nor more operationally efficient and therefore cheaper than its peers. The school is stuck in the middle. With a over-sized cost structure, much cheaper alternatives resulting from technological change, a relentlessly weak economy, and no historical reputation to fall back on, prospective students simply decided the ride wasn’t worth the climb. Thunderbird may be the first but will definitely not be the last to face this fate.
Then there’s the demise of the music business, which has been well-chronicled. Once iTunes killed CD’s as the form factor of choice, middle-tiered bands with a few good songs, the record companies that supported them, and the retailers who distributed them no longer had a functional business model. In order to compete for fans, bands either need to already be really big (U2, the Stones), relying on pre-awareness to sell new music and an established fan base to tour at scale, or be really small and nimble, building word of mouth for gigs via social media, YouTube, or, if they’re especially fortunate, by getting on TV. Would a band like Maroon 5 have never broken out without the support of Adam Levine’s work on The Voice? Once again, unless you’re lucky or particularly clever, there’s no longer room in the middle.
The ad business is not immune to these technology changes either. Programmatic ad buying is upsetting the balance of power and creating a new challenge to agencies that lack scale or speed. As recently as yesterday the Wall Street Journal noted the risk to the middle of the ad industry resulting from the Omnicom/Publicis merger:
“Others say the mid-sized ad firms get stuck in the middle.
“I think clients will either go to the big ones for the scale or to the small start-ups for fresh creative ideas,” said Richard Pinder, a former CEO of Publicis’ Publicis ad agency, who left the French company in 2011 and now heads up his own small agency. ”It could raise some issues for the mid-sized players like Havas, Dentsu. They are neither big nor small in this world.’”
And the of course there’s my new favorite industry passion, feature films. The well-known producer Lynda Obst (Sleepless in Seattle, How to Lose a Guy in 10 Days, The Invention of Lying) recently published Sleepless in Hollywood, a sobering look at the hollowing out of the middle tier of the movie business. As technology killed the DVD market, the basic model of moderately priced movies targeted particularly at adults has been gutted. Previously, a mid-sized ($20M – $40M) movie could do okay at the box office, but recoup its costs plus a return in video sales. But now the “Walk and Talk” movies we all used to love must either be made for $3 million or less, attract a gigantic star that will guarantee foreign sales and a strong opening, or become “explode and talk” movies with special effects and a farcical grandiosity that somehow appeals to teenage boys, at least one additional audience quadrant, and attracts complimentary international box office.
For the creatives who provide the lifeblood to these industries, the effects can be devastating. Just as there will likely to be stranded copywriters as result of the ad industry consolidation, screenwriters have been feeling the pinch. Thoughtfully chronicled in the wonderful Scriptnotes podcast by John August and Craig Maizen, the number of working writers and their income has remained flat or down for several years now. Those who haven’t transitioned to tentpole movies or what Obst calls Tadpoles have simply been left flat footed, wallowing up to their hips in beautifully written screenplays that will never get made.
Finally, all this change is having a second order effect in my own business. Here again, the middle is disappearing. At its core, what venture investors do is fund creativity. Whether it’s in salesforce automation, enterprise security, mobile applications, or medical devices, our business exists exclusively to provide fuel to human creative expression. When the economic foundation of those energies is no longer viable, the creators and the facilitators either need to change—just like the extraordinary list of feature filmmakers who now make TV shows did—or leave the playing field. The unfortunate fact is that fewer entrepreneurs need fewer VC firms, and the middle tier ones that can’t adapt won’t survive.
The big firms will hold on fine, able to consistently attract capital in all cycles. Small angel-oriented firms that have manageable infrastructure costs and offer a unique place for individual investors to play in the venture game will carry on. But its a rough ride for the $100-$250 million funds that don’t have a sugar daddy LP or two. Those firms are fading away and are unlikely to return. In my home market of DC, nearly half of the prior decade’s most active firms have either contracted to a fraction of their prior size or shut down entirely. A firm that was once over-subscribed at $150 million now struggles to hit $50 million in commitments. So the new normal in the venture industry for the time being will operate the same way as the others mentioned above: without a middle.