• by Dave Morgan , Featured Contributor, February 28, 2008

I spent a good chunk of yesterday in Cambridge, Mass. at the Harvard Business School's "2008 Entertainment and Media Conference." I was on an ad panel -- "Advertising: Is (R)evolution at Hand for the Industry?" -- which was a lot of fun since we had some very good folks on the panel and some great questions.

However, we weren't the most interesting session. Not by far. Jeff Zucker, CEO and President of NBC Universal, opened up the conference with a keynote and, after some amusing Harvardesque anecdotes, he spent the rest of his time answering a number of very substantive and pointed questions from the students about the future of the entertainment industry generally and NBCU specifically. Surprisingly, he ducked nothing and was not afraid to give some very specific answers.

Of all of the issues that he talked about, one really stuck with me. He answered a question about the long-term impact of the writers' strike by describing how NBCU is changing its strategy when it comes to funding television pilots. Maybe it's because I am an ad person, not a production person, or maybe it's because I live in a world of digital production cost structures, not analog cost structures, but I was amazed to learn that it's quite typical for television networks to spend $10 million per pilot on shows that will ultimately cost only $1.5 million per episode to produce if they are purchased by the network.

Yes. It costs six times as much to produce a test as the real thing! Those of you that are in the television business are chuckling, I'm sure, at my naiveté, but I really didn't know that before. And since, of course, many, many more pilots are funded and produced than are actually purchased as full series, this means an absolutely extraordinary amount of television production money flows to shows that will never see the light of day. Wow. No wonder television networks have pushed so hard to grow their CPMs so much over the past decade as their ratings have declined. They have an enormous nut to cover!

Does it have to be this way? It seems not. The networks have clearly used this past strike as a chance to reexamine their business models -- and the pilot model is one that may go away. As Zucker mentioned in his talk, they don't do the same thing at the movie studios. They don't do expensive, fully produced 30-minute film pilots to see if they want to produce the full two hours. They do all of the normal upfront work and then trust their analysis and gut.

So, what does all of this mean for the digital marketing world? A lot, I think. One of the great advantages that digital media offers is our ability to start things small, test them, optimize them, and then scale them according to consumer demand and the value that they create.

Google is masterful at this. Just look at how the company works with new products or applications or interfaces. It publishes them and lets its users take control. Google strategists watch new products, analyze them, adjust and tweak the features as necessary. And then they either kill the new features or products, or invest in them and take them to full scale. Gut is a great place to start, but it is quickly complemented by real data and real user reaction. We can adjust and innovate and don't always need to invent and re-invent. We can "pilot" our media with incremental investments, not just massive upfront investments as in the television world.

Yesterday's entertainment and media production economics are going to be significantly disrupted by digital, and not just by the lower cost of tools or distribution or the better monetization through targeted ads. Digital business and research & development models, and processes that develop in businesses that operate with a digital DNA, may very likely displace analog business on that alone. It will be interesting to watch. What do you think?

Dave