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Competition and Cooperation in a Networked World

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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
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
I. The Behavior of Network Goods
  • 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
ii competition and co opitition among networks
II. Competition and Co-opitition Among Networks
  • 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
Benefits + Network Size Loss

> 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
Case Study: iTunes
  • 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
content and distributors are compliments
Music Dist. - Physical

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
what it means for big media who commoditizes who
What It Means for Big Media: Who Commoditizes Who?

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
what it means for big media who commoditizes who9
What It Means for Big Media: Who Commoditizes Who?

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
what it means for big media the grey zone
What it Means for Big Media: The Grey Zone
  • 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
what it means for big media the yellow zone
What it Means for Big Media: The Yellow Zone
  • 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”

what it means for big media the green zone
What it Means for Big Media: The Green Zone
  • 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
what it means for big media the embattled red zone
What it Means for Big Media: The Embattled Red Zone
  • 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
in summary
In Summary
  • 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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