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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.

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Joseph Esposito

Joseph Esposito

Joe Esposito is a management consultant for the publishing and digital services industries. Joe focuses on organizational strategy and new business development. He is active in both the for-profit and not-for-profit areas.


7 Thoughts on "Vestron's Law: The Propensity for Rights to Revert to the Original Publisher"

I think a lot of this sort of licensing is done as an inexpensive form of R&D. Every journal publishing platform is inundated with requests from startups who want to use the high value online content generated by academic publishers in some new way. Most of these are non-starters, poor proposals, schemes that are either ill-suited for the audience or in direct conflict with the best interests of the publishers, so they are quickly dismissed.

But others may have some merit, some chance at becoming useful business models. Rather than spend the money to build the infrastructure and do the market-building themselves, publishers seem willing to license their content to the startup, letting them take all the financial risks in creating a new market. Should the business actual prove viable, rights can be revoked, and the same sort of functionality replicated by the publishers themselves. Should the business fail, the publisher does not lose anything.

Ventures like DeepDyve and PubGet came to mind reading your posting today. If they really catch on, then expect to see rights yanked and their functionality usurped by the publishers themselves.

I would add to David’s point that some publishers simply don’t have the capital necessary to build platforms themselves that can enable them to exploit their own content digitally as direct suppliers, or they may not have enough content of a certain type to justify the expense involved anyway. Thus, when I was at Penn State, the press could not have sold its books or journals electronically for lack of investment capital, and we only published a dozen journals, not enough of a critical mass to attract library subscribers. So we licensed the content to netLibrary, on the book side, and Project Muse, on the journals side, and added a nice income stream that we could not have generated on our own. It took $100 million, after all, to get netLibrary off the ground, and Project Muse got substantial startup funding from the Mellon Foundation. Your example, Duke U.P., reached a critical mass threshold of book and journal content where it felt it could make the investment pay off. So, perhaps there is a Duke’s Law corollary to Vestron’s Law?

The wisdom of the principles of reversion in this article are those that have applied in other commercial industries for some time.
Licensing is a way to enter other promising but specialist markets without investment or capital. Licensing is based on performance and always includes provisions to revert after a period or if performance is not delivered.

In my view the rational and thinking behind this article is a wake up call to writers. Writers in 2011 need to be far far more engaged in the contracts they are signing with their publishers if they are not going to self publish. There are many new issues they need to be considering but one of them is performance. if the publisher does not achieve an agreed level of performance then the rights need to revert to the writer. Rights should also revert after a set period of perhaps 5 years.

We use Knovel for our chemistry classes, but will end up discontinuing our subscription due to the loss of the McGraw Hill content. What I want to point out however is that our McGraw Hill rep told us that Knovel was putting McGraw Hill content into the Knovel platform without their consent and that is why it was being withdrawn. Which is a different kettle of fish.

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