The recent announcement that McGraw-Hill Professional Publishing is withdrawing its content from Knovel, an aggregator of technical materials, is yet another demonstration that Vestron’s Law is alive and well.
Vestron’s Law, which covers all media types and market segments, states that when publishers or content producers in non-print media license rights to third-parties, over time the pressure builds to revert those rights. McGraw-Hill thus joins other book publishers, journals publishers, Hollywood movie studios, television producers, and newspapers in viewing subsidiary rights licenses as short-term opportunities and long-term obstacles for developing their businesses.
Vestron’s Law takes its name from the now-defunct Vestron Corporation, which had a short but noteworthy career as a home-video distributor. Before there was a Netflix, Vestron served as an intermediary between the producers of video and the large number of independent video stores that sprang up with the advent of the mass-market VCR. Vestron shrewdly licensed the rights to Hollywood movies, repackaged them as videotapes, and sold them to the video stores. But over time, the studios realized that they themselves could do what Vestron was doing and began to distribute their own videos. This forced Vestron to pay more and more to get the rights to desirable programming and ultimately to go into original movie production. Its first movie was the huge success Dirty Dancing, but then the harsh economics of movie production overtook it. Vestron slipped into bankruptcy. For a couple decades following Vestron’s demise, video rights remained with the movie studios, who distributed their own videos to such then-growing chains as Blockbuster and Hollywood Video.
Vestron’s Law cuts across all media types, and examples abound.
In the world of scholarly communications, a few years ago Duke University Press pulled some of its journals out of Project Muse, and Sage Publications announced that it was withdrawing from ProQuest and EBSCO way back in 2002. More dramatic is the way Vestron’s Law is playing out in the high stakes world of entertainment video. See, for example, the strong statements reported in the New York Times by executives at TimeWarner and its HBO division about the growing strength of licensee Netflix. Netflix was just fine when it provided incremental income for the movie studios, but now that it’s substantially enlarging its market share, the studios are objecting to the terms. Netflix is the new Vestron — but there is this important difference: the Netflix CEO operates with the lessons of Vestron’s Law before him.
Vestron’s Law also accounts for many structural changes in the publishing industry. During the 1980s, for example, trade book publishers began to talk of “vertical integration,” by which they meant that a hardcover house, which originated titles, should be aligned with a mass market paperback house, which in those days was the key source of publishing revenue; paperback houses licensed rights from hardcover publishers. Thus Random House bought Fawcett (hardcover house purchasing a paperback company) and New American Library, where I worked at the time, acquired Dutton (paperback publisher acquires a hardcover house). The culmination of this trend came about when Bantam, the leading paperback house, acquired Random House, the leading trade publisher.
While the rationale for such mergers and acquisitions is complex (simple industry consolidation and cost-cutting are part of it), Vestron’s Law plays a large role in that it permits the originating publisher to have unfettered opportunities to exploit copyrights directly. In this regard, we should think of some of EBSCO’s acquisitions in recent years of content companies.
Vestron itself represents a stark and extreme version of the eponymous law. Vestron disappeared, but other licensees for rights chug along nicely. Despite Duke University Press’s defection, Project Muse appears to be doing very well; EBSCO’s strategy (upstream value migration) appears to be paying off; and at least for the moment, it is Netflix, not the Hollywood studios, that appears to have the upper hand. Vestron’s Law is an economic force, but good management builds countervailing plans.
With all this pressure to revert the rights to their content, why do the originating publishers license it in the first place? The primary reason is that nobody can think of everything. Prospective licensees often walk into publishers’ offices with genuinely new ideas for how content can be used and sometimes have ways of reaching new markets that publishers can only dream of.
Many years ago I licensed “The Random House Encyclopedia” to a manufacturer of personal digital assistants, one of the forerunners to such products as the iPod. The PDA manufacturer was working with solid-state memory, which was truly exotic at the time. There was no way Random House could have created that product itself.
Sometimes a prospective licensee has access to less exotic but nonetheless effective technology. This was the case with Recorded Books Inc. (RBI), whose audiobook program began with old-fashioned cassette tapes. Even so, at that time, no book publisher could easily have developed the means to produce high-quality audiobooks and market them effectively. Even today, when many book publishers now do their own audio versions, RBI continues to have a powerful franchise in the public library market, proving that distribution is often more important than technology. And RBI has its own way to get around Vestron’s Law — as much as possible, it tries to license content directly from literary agents, disintermediating the book publishers.
Based as I am on the West Coast, I am frequently asked by technology companies to help them acquire the rights to publishing content. I turn most of them down. In order for a license of this kind to be effective, it has to be a win for both parties; it will not do simply to take print content and digitize it and call it a new business. And it never works when the licensee proposes to approach the same customers that the publisher is already reaching. Successful licensees of content either have technology that is difficult to replicate or access to a market channel that the originating publishers cannot easily get to. But most of all, successful licensees must have imagination that will take them beyond repurposing other companies’ content. Otherwise, in time the originating publishers will become emboldened to enter the licensee’s market directly.
Ongoing imaginative investment is the only effective counterweight to the gravitational pull embodied in Vestron’s Law.