Five Lessons From Dave Chappelle

While there are not huge differences between Stratechery Weekly Articles and subscriber-only Daily Updates, I do spend more time on the Weekly Articles trying to craft an overarching narrative; Weekly Articles, by virtue of being free, are better suited to sharing, and humans like stories, not just analysis.

However, the first lesson from Dave Chappelle’s latest release on Instagram, Unforgiven, is that one best not compete with Chappelle when it comes to story-telling; the way in which the comedian weaves together multiple stories from his childhood on up to the present to make his argument about why he should be paid for the rights to stream Chappelle’s Show is truly extraordinary.

To that end, I thought a more prosaic approach might be in order: Chappelle’s 18-minute special, which I highly suggest you watch in full, is chock-full of insights about how the Internet has transformed the entertainment industry specifically, and business broadly; my goal is to, in my own clumsy way, highlight and expand on those insights. That I ought to make a simple list and not compete on story-telling is one lesson down; four to go.

Lesson Two: Talent in an Analog World

This lesson is exposed in two parts; first, Chappelle on his precociousness as a child comedian:

A few minutes later, though, Chappelle admits that fourteen years after he started as a standup comedian he signed a deal to make Chappelle’s Show under some amount of financial duress:

Chappelle may have been preternaturally gifted, but that wasn’t enough to avoid being broke in the early 2000s when he signed that contract with Comedy Central. Granted, Chappelle was almost certainly scratching out a living doing standup, but to truly make it big meant signing up with a network (or, in the case of music, a label), because they controlled distribution at scale.

That’s the big difference between stand-up and something like Chappelle’s Show: when it comes to the former your income is directly tied to your output; if you do a live show, you get paid, and if you don’t, you don’t. A TV show or record, on the other hand, only needs to be made once, at which point it can not only be shown across the country or across the world, but can also be shown again and again.

It’s the latter that is the key to getting rich as a creator, but in the analog world there were two big obstacles facing creators: first, the cost of creating a show or record was very high, and second, it was impossible to get said show or record distributed even if you managed to get it made. The networks and labels were the ones that had actual access to customers, whether that be via theaters, cable TV, record stores, or whatever physical channel existed.

Over the last two decades, though, technology has demolished both obstacles: anyone with access to a computer has access to the tools necessary to create compelling content, and, more importantly, the Internet has made distribution free. Of course the Internet did exist when Chappelle signed that contract, but there are two further differences: first, the advent of broadband, which makes far richer content accessible, and second, social networks, which provide far more reach than traditional channels, for free. Today it is far more viable for talent to not only create content and distribute it, but also promote it in a way that has tangible economic benefits.

Lesson Three: The House Wins

What is noteworthy about Chappelle’s argument is that he is quite ready to admit that everyone involved is acting legally:

From the perspective of 2020, and Chappelle’s overall point about how he feels his content was taken from him, this seems blatantly unfair. At the same time, from a network’s perspective, Chappelle’s success pays for all of the other shows that failed. It’s the same idea as the music industry: yes, record companies claim rights to your recordings forever, but for the vast majority of artists those rights are worthless. In fact, for that vast majority of artists, they represent a loss, because the money the network or label spent on making the show or record, promoting it, and distributing it, is gone forever.

There is an analogy to venture capital here, which I made five years ago in the context of Tidal:

This is why, by the way, I’m generally quite unsympathetic to artists belly-aching about how unfair their labels are. Is it unfair that all of the artists who don’t break through are not compelled to repay the labels the money that was invested in them? No one begrudges venture capitalists for profiting when a startup IPOs, because that return pays for all the other startups in the portfolio that failed.

It’s not a perfect analogy, in part because the output is very different: a founder will typically only ever have one company, so of course they retain a much more meaningful ownership stake from the beginning; an artist, on the other hand, will hopefully produce new art, which they will be in a much stronger position to monetize if their initial efforts are successful. Chappelle, for example, earns around $20 million per stand-up special on Netflix; Taylor Swift, another artist embroiled in an ongoing controversy around rights to her original work, fully owns the rights for her two most recent records.

The lesson to be learned, though, is that for many years venture capitalists, networks, and record labels could ensure that the expected value of their bets was firmly in their favor. There were more entrepreneurs that wanted to start companies, more comedians that wanted to make TV shows, and more musicians that wanted to make records than there was money to fund them, which meant the house always came out ahead: sure, money was lost on companies, comedians, and musicians that failed, but the upside earned by those that succeeded more than made up for it.

Over the last two decades venture has been flooded with new sources of capital, resulting in far more founder-friendly terms than before; comedy, meanwhile, has been a particularly notable beneficiary of the podcast boom, as more and more artists create shows that are inexpensive to produce yet extremely lucrative for the artist. Music has seen its own independent artists emerge, although the labels, thanks in part to the power of their back catalogs, have retained their power longer than many expected. Still, the inevitable outcome of Lesson Two is that Lesson Three is shakier than ever.

Lesson Four: Aggregators and the Individual

The one company that comes out looking great is Netflix:

Technically speaking, Netflix did exist when Chappelle negotiated that contract with Comedy Central, but the company was a DVD-by-mail service; the streaming iteration that Chappelle is referring to wasn’t viable back then. Indeed, the entire premise of the streaming company is that it takes advantage of the changes wrought by the Internet to achieve distribution that is not simply equivalent to a TV network, but actually superior, both in terms of reaching the entire world and also in digitizing time. On Netflix, everything is available at anytime anywhere, because of the Internet.

Netflix’s integration of distribution and production also means that they are incentivized to care more about the perspective of an individual artist than a network; that is the optimal point of modularity for the streaming company. At the same time, it is worth noting that Netflix is actually claiming even more rights for their original content than networks ever did, in exchange for larger up-front payments. This makes sense given Netflix’s model, which is even more deeply predicated on leveraging fixed cost investments in content than networks ever were, not simply to retain users but also to decrease the cost of acquiring new ones.

At the same time, Aggregators (even weak ones like Netflix), are inherently a better bet for the individual creator than middlemen like the networks ever were. On Netflix, every show is equally accessible relative to every other show; there is no fighting for prime time slots or seasons. It’s the same dynamic on Google or Facebook: all content is treated the same, which is absolutely a problem for companies that used to rule the roost when physical distribution mattered, and nothing but upside for individual creators that only exist because of the Internet.

And, by extension, a company like Netflix is far more sensitive to the needs of the creators that its audience actually care about. The fact the company has twice extended Chappelle’s stand-up special deal is all of the evidence you need that that $20/million per show is money well spent, not because Netflix made people watch, but because people sought it out, and the reality of Aggregators is that they win by making users happy in a world where competition is only a click away, not by denying them choice by virtue of controlling physical distribution.

Lesson Five: The Real Boss

Chappelle made this point explicitly in his call to action:

This is the most important lesson of the Internet: the consumer is the ultimate boss. In markets without any sort of additional friction, like website or social media, this means that power accrues almost completely to Aggregators, with creators able to connect with consumers as secondary beneficiaries. Look no further than the fact that this special was posted on Instagram: Chappelle has the platform to appeal directly to his fans that his predecessors, all of whom despised the networks and labels and their contracts just as much if not more than he does, lacked. That Chappelle’s Instagram post is no different in format from one posted by you or me is a feature, not a bug.

Of course not everything is as clear cut as the open web, or user-generated content. In other markets, with legacy friction from analog business models, or legal friction like copyright, power is more disbursed, which is why it is not certain that Chappelle’s power play will succeed; the fact of the matter is that he did sign a contract, which absolutely gives Comedy Central the rights to stream Chappelle’s Show on HBO Max, CBS All Access, and anywhere else they please, and customers may very well choose to ignore Chappelle’s plea. After all, they are the boss.

What is just as clear, though, is that networks and anyone else dependent on physical distribution are on the retreat. Contracts and copyright may secure their place for longer than seems earned, but there is a reason this fight is about content made twenty years ago, while Chappelle is very content with the status of content made today. The Internet favors creators and Aggregators, while everyone in the middle of the smiling curve — where power used to be centered — is increasingly of little value.