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Competition and Cooperation in a Networked World. Couch Potato Famine: Prospering Through an Era of Disruptive Change in Media. Part I: Three Titanic Forces Converge Open Standards cause barriers to entry to fall – lots of new entrants & business models Broadband unleashes video

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Couch potato famine prospering through an era of disruptive change in media l.jpg
Couch Potato Famine: Prospering Through an Era of Disruptive Change in Media

  • Part I: Three Titanic Forces Converge

  • Open Standards cause barriers to entry to fall – lots of new entrants & business models

  • Broadband unleashes video

  • Many-to-many networks causes collaborative distribution

  • Part II: Network Economics

  • The behavior of network goods

  • Competition vs Co-opitition

  • Who Commoditizes Who?

  • Strategies for Content Owners


I the behavior of network goods l.jpg
I. The Behavior of Network Goods Change in Media

  • We are primarily interested in many-to-many networks

  • Characterized by the fact that their usefulness is determined by the number of members

  • YouTube, eBay, Skype, Lime Wire, MySpace, AIM, all P2P networks, fax machines, telephones, etc.

  • Just because it is delivered through a network doesn’t mean it’s a network good.

  • Most content is delivered today on 1-to-many (broadcast) networks

  • These are not network goods even though they are delivered through a network – their usefulness is not dependent on the number of users

  • Yahoo, Television networks, most web sites


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II. Competition and Co-opitition Among Networks Change in Media

  • Consumers are compelled to use the biggest network

  • First-to-market is an even bigger advantage in many-to-many networks

  • In zero-sum networks, the winner enjoys a positive tipping point, the loser a negative one

  • The bigger the network the greater the lock-in


Switching consumers l.jpg

Benefits + Network Size Loss Change in Media

> Price + Switching Costs

Benefits > Network Size Loss

Switching Consumers

Basic switching

Benefits > price + Switching costs

  • To switch consumers from the market leader, the upstart needs to exceed their benefits while min-imizing price & switching costs

  • Since there’s no price or switching costs, benefits of the upstart > network size loss

  • For some many-to-many networks the market only wants one

Network Switching

Benefits + network size gain/loss

>

price + switching costs


Co opitition among network competitors l.jpg

  • Case Study: iTunes Change in Media

  • Steve Jobs writes a letter inviting music companies to abandon DRM (open & compatible)

  • iTunes has 90% share of legal market

  • EMI agrees, most don’t

  • iTunes has the option of licensing Fairplay DRM, if music companies agree to mandate it.

Co-opitition Among Network Competitors

  • The leader’s size advantage is neutralized and consumer utility increases when services become compatible

  • Incompatibility is more expensive than compatibility

    • Maintaining your own compliments

    • Price wars

    • Marketing costs to tout advantages of proprietary standards

    • Lower market share

  • Once the market leader has gotten his market share under incompatibility, they often switch to compatibility


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Music Dist. - Physical Change in Media

Digital Music Dist.

Music Label

Music Label

Best Buy

Wal-Mart

Borders.

iTunes

90%

Consumer

Consumers

(Content isn’t king)

Content and Distributors Are Compliments

  • Complimentary partners in a network will attempt to commoditize each other

  • While content owners strive to commoditize distributors, large distributors try to do the same to content owners

  • Distribution networks only exist (legally) when the partners’ business models are aligned


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What It Means for Big Media: Who Commoditizes Who? Change in Media

Leverage Map

  • We adopt the point of view of media companies because distributors should know their best strategy

  • Leverage means the negotiating power of the two parties, distributors and content owners

  • At the top, network distributors range from weak on the left to strong

  • Distributors are weak when they are non-zero sum and there are several

  • Distributors are strong when they are zero-sum and stronger still when there is only one dominant distributor

Network Distributor’s Leverage

Weak (Fewer Competitors, Zero-Sum) Strong

  • Web Video Games

  • ABC

  • ESPN

  • MTV

  • NBC

  • BBC

  • Local News

  • CBS

  • WSJ

Content Owner’s Leverage

Weak (Brand Strength, Unique Content) Strong

  • FT

  • NY Times

  • Music Labels

  • Movie Studios

  • Oxygen Media

  • Associated Press

  • Book publishers

  • Amateur Video

  • Reuters


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What It Means for Big Media: Who Commoditizes Who? Change in Media

Leverage Map

  • On the left are content owners, ranging from weakest at the bottom to strongest leverage at the top

  • Content owners are weak in this negotiation when they have undifferentiated content or weak brand identity

  • Music labels have weak brand identity with their bands so aggregators are needed

  • Strong brands with highly differentiated content like Grey’s Anatomy and ABC or WSJ have strong leverage

  • Strong brands are not so reliant on aggregators

Network Distributor’s Leverage

Weak (Fewer Competitors, Zero-Sum) Strong

  • Web Video Games

  • ABC

  • ESPN

  • MTV

  • NBC

  • BBC

  • Local News

  • CBS

  • WSJ

Content Owner’s Leverage

Weak (Brand Strength, Unique Content) Strong

  • FT

  • NY Times

  • Music Labels

  • Movie Studios

  • Oxygen Media

  • Associated Press

  • Book publishers

  • Amateur Video

  • Reuters


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What it Means for Big Media: The Grey Zone Change in Media

  • The grey zone is where there is a dominant distributor(s) and your brand or product is undifferentiated

  • In the grey zone, your only choice is to partner, and your partner will set the terms

  • You’ll still have your own websites, but you won’t get much distribution from them

  • To get out of the grey zone, you can either distinguish your product (difficult) or weaken your distributors (shift to compatiabilty)

  • Large distributors keep content owners in the grey zone by remaining strong and zero-sum if possible


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What it Means for Big Media: The Yellow Zone Change in Media

  • Content owners in the yellow zone are not strong, but neither are the distributors

  • Their best deal is to co-exist, meaning they will have their own websites and also have distribution partners

  • Weaker brands will get most distribution from partners, stronger ones (NY Times) from their own sites

  • Their strategic goal is to strengthen brand and content esteem to make it into the green zone

  • Foster many distributors by imposing reasonable terms on start-ups

Widgets may allow a “distributor bypass”


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What it Means for Big Media: The Green Zone Change in Media

  • This is the best place for content owners with strong brands and products and weak distributors

  • There aren’t many companies in the green zone today. Green zone companies will partner on their terms and distribute themselves

  • Their goal is to keep distributors weak and plentiful

  • A special case is massive multiplayer online games, which are their own many-to-many networks

  • Note that with social networking tools a show or news event becomes a mini many-to-many network and a destination


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What it Means for Big Media: The Embattled Red Zone Change in Media

  • The red zone is where both content owners and large distributors are strong

  • Viacom is suing YouTube, CBS, Fox and NBC form a consortium, ABC is going it alone

  • The consortium is really a coexistence strategy. They are engaging multiple distributors (AOL, MySpace, Yahoo) thereby commoditizing them and shifting the consortium into the green zone

  • They are leaving YouTube with amateur video

  • Most are also tepid in their partnership with iTunes because they don’t want to end up in the grey zone like the music companies

  • Hot properties with strong brand associations are different than old shows who need aggregators


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In Summary Change in Media

  • We believe media is only 30% invented

  • We are entering an era driven by the economics of attention

  • Content owners and new distributors will compete over the variables in the switching equation

  • And struggle for leverage to avoid being commoditized

To Learn More, Contact Us:

Bruce Benson

Senior Managing Director

Entertainment & Media

FTI Consulting

[email protected]

203.606.3854


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