Lion of the Blogosphere

The whale economy

Nick Bilton writes at the NY Times Bits blog:

I was tallying my spending of the last year, and much to my surprise, I spent $2,403 in one category. No, that wasn’t on clothes. It wasn’t on my most recent vacation, either. And it wasn’t the total of all my parking tickets (though that did feel as if it came close).

The $2,403 is what I spent on digital media.

But wait, people are spending money online? On media? Didn’t music industry executives declare, “People won’t pay for things online!”? Yes, as did movie industry executives. TV, radio, book, newspaper and magazine bigwigs, too, have all made similar claims over the last decade.

Well, those apocalyptic predictions turn out to be wrong.

Actually, Nick is only half right. What is happening is that the digital world is moving to a whale economy in which most people are cheapskates who hardly pay anything, but the industry is supported by a small number of whales who spend thousands of dollars.

I previously wrote about Clash of Clans, the top-Grossing iOS app that perhaps 95% play for free, but the remaining 5% spend tens, hundreds, and even thousands of dollars on these games in order to move up in the virtual pecking order. Companies adhering to the old pricing model of charging upfront for their software are losing out to apps like Clash of Clans.

The difference between traditional Hollywood content sellers and Supercell, the company behind Clash of Clans, is that Supercell embraces the whale economy. They know that 95% of the people playing their game aren’t going to pay anything, and they don’t care, because they also know they are needed as a base to give the whales a reason to spend money.

Hollywood, on the other hand, is moving into this new business model kicking and screaming, insisting that those people downloading stuff from Pirates Bay are criminal scum and parasites.

Earlier today, I asked why Adobe is giving away Photoshop CS2 for free. The question is now answered. They are embracing the whale model. In fact, Adobe always sort of used this approach, selling Photoshop Elements for one-seventh the price of the full version of Photoshop. Adobe is simply moving this to the next level by just giving away a less useful version of Photoshop for free.

Written by Lion of the Blogosphere

January 21, 2013 at 5:52 PM

Posted in Economics, Technology

18 Responses

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  1. Pareto principle: http://en.m.wikipedia.org/wiki/Pareto_principle

    Nothing new about this.

    DaveinHackensack

    January 21, 2013 at 6:18 PM

  2. Isn’t this the old rule that you make 80% of your profits from 20% of your customers. I would assume that Amazon makes most its profits from a small group of customers. The same with hotel guests or even restaurants. The problem that music and movie makers have is that they cannot upsell anyone at the theater to make more money.

    superdestroyer

    January 21, 2013 at 6:35 PM

  3. Isn’t this the old rule that you make 80% of your profits from 20% of your customers.

    Yes but this is more extreme because 95% of users pay nothing rather than 80% paying something. Only the most loyal 5% will fork over any dough. This may be a viable option for software companies but not Hollywood with its much larger operating costs.

    Hollywood, on the other hand, is moving into this new business model kicking and screaming, insisting that those people downloading stuff from Pirates Bay are criminal scum and parasites.

    That cat’s already out of the bag. It’s too easy to pirate anonymously and too many millions of people are engaging in it for there to be any realistic enforcement mechanism to stop file sharing.

    The Undiscovered Jew

    January 21, 2013 at 7:27 PM

  4. The bigger question I have is if the same people are “whales” across all things, or if people become domain-specific whales.

    I buy maybe $2k/yr of books, and probably $500-1000/yr on software, and $2-3k/yr on online services, but haven’t paid for music or movies since the RIAA/MPAA went to war with humanity in the late 1990s.

    Ryan Lackey

    January 21, 2013 at 8:23 PM

  5. Related to economic issues, the SWPLs are encountering health care problems thanks to Obamacare. Adjunct professors may lose their health care because of the ACA. Colleges are asking to be exempted from the health law. And the uber-SWPL CEO of Whole Foods just called Obamacare fascism.

    Ironically, it’s SWPLs in Big Business that are more likely to get hammered by Obamacare than small businesses because small businesses can avoid most of the law as long as they keep their number of full time employees below 50.

    Health Law Pinches Colleges
    Some Schools Cut Hours of Hard-Pressed Adjuncts to Avoid Rules on Insurance

    http://online.wsj.com/article/SB10001424127887323635504578213502177768898.html

    Whole Foods CEO John Mackey Calls Obamacare ‘Fascism’

    http://www.mediaite.com/online/whole-foods-ceo-john-mackey-calls-obamacare-fascism/

    The Undiscovered Jew

    January 21, 2013 at 10:02 PM

  6. What you’re referring in video games is a bubble created by the novelty of having games selling “success.” I don’t see this as a viable model in movies which are encapsulated narrative experiences, unless they’re going to let you watch the whole thing for free but you need to spend $10 to see the final 10 minutes.

    I also think gamers will, once a critical mass has been reached of games selling “success,” realize that it’s pointless to pay thousands of dollars for success on a game when there are hundreds of thousands of others games that you can achieve success in without spending anything. The whale economy you’re praising is a terrible and exploitative one.

    faffy

    January 21, 2013 at 10:02 PM

  7. “Hollywood, on the other hand, is moving into this new business model kicking and screaming, insisting that those people downloading stuff from Pirates Bay are criminal scum and parasites.”

    The big difference is user experience. In games, whales, by paying large sums of money, have a different user experience over the plebs. There is perceived value in that. For movies and music, a whale doesn’t necessarily have a value-added or better experience.

    In fact, it could be argued that torrent sharers have a much better experience by not having to sit through BS, getting CD/Blu-Ray quality rips, sticking it to the Man in some small way, and feeling a sense of accomplishment of completing a large file download.

    JL

    January 21, 2013 at 11:02 PM

  8. Never thought of this before. I often wondered how certain industries remained alive in spite of their seeming lack of customers. I also thought the increasing income disparity would wipe away many industries. But the few whales will help sustain free or very low-cost stuff. I would like to thank the whales for allowing cheap and free stuff to be accessible to the masses.

    bobo

    January 22, 2013 at 9:26 AM

  9. You’re a little behind the times…Zynga was the champion of this model with games like Farmville, but their stock is in the toilet now.

    Matt

    January 22, 2013 at 10:22 AM

  10. The “whale econ”
    is just a new name for another concept previously much described by economists lonnnnnnng ago.
    I have neither the inclination, nor pretension, to look it up.

    Suffice it to say, anybody who’s bought a $6 cup of java during the past 2 decades should be quite familiar with it in microcosm.

    Get ready fer dose $30,000 4000p LED TV’s
    Go Mets!

    Firepower

    January 22, 2013 at 3:48 PM

  11. This is spot on and also apply to trading card games perfectly: a very small number of whales (also known as the competitive players) waste thousands of dollars while the majority just buys few cards a month. The funny thing is, when asked, the creators sware by god that their focus is the casual player even when it’s damn obvious the best cards are the scarciest. And the nonwhales believe this too! Result: the whales aren’t considered in the slightest but they still buy by the pound. Truly genious overall.

    javhert

    January 22, 2013 at 3:55 PM

  12. […] see that the whale economy applies to camera gear just as it applies to many other consumer goods and services. The majority […]

  13. I thought John Mackey was a libertarian? I think it would come to a surprise to the SWPL who frequent his chain of stores, but he’s spoken about libertarian principles over the years.

    ElectricalEngineer

    January 24, 2013 at 9:22 AM

  14. In a country where the masses have declining purchasing power and the real money is concentrated in fewer and fewer hands, this is to be expected.

    JayMan

    January 24, 2013 at 11:31 AM

  15. I was snooty in thinking I’m not a whale on iTunes before I realized that I’m definitely a whale on Amazon.

    Chris Anderson

    January 24, 2013 at 11:27 PM

  16. Did you make this concept of “whale economy” up, because I was conducting a google search and couldn’t find any thing about it.

    Craig

    January 31, 2013 at 4:24 PM

    • It’s called customer segmentation. But I think that the “whale economy” has a better sound to it, and better explains the pricing model.

      Lion of the Blogosphere

      January 31, 2013 at 5:42 PM

      • But I think that the “whale economy” has a better sound to it,

        And if it sounds better it is also more likely to gain widespread acceptance and earn the inventor of the term higher social status. Eliteness Uber Alles!

        The Undiscovered Jew

        January 31, 2013 at 9:49 PM


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