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Competition and Cooperation in a Networked World.

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Presentation on theme: "Competition and Cooperation in a Networked World."— Presentation transcript:

1 Competition and Cooperation in a Networked World

2 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 I.The behavior of network goods II.Competition vs Co-opitition III.Who Commoditizes Who? IV.Strategies for Content Owners

3 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 doesnt mean its 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

4 II. Competition and Co-opitition Among Networks 1.Consumers are compelled to use the biggest network 2.First-to-market is an even bigger advantage in many- to-many networks 3.In zero-sum networks, the winner enjoys a positive tipping point, the loser a negative one 4.The bigger the network the greater the lock-in

5 Switching Consumers 5.To switch consumers from the market leader, the upstart needs to exceed their benefits while min- imizing price & switching costs 6.Since theres no price or switching costs, benefits of the upstart > network size loss 7.For some many-to-many networks the market only wants one Benefits + Network Size Loss > Price + Switching Costs Benefits > Network Size Loss Basic switching Benefits > price + Switching costs Network Switching Benefits + network size gain/loss > price + switching costs

6 Co-opitition Among Network Competitors 8.The leaders size advantage is neutralized and consumer utility increases when services become compatible 9.Incompatibility is more expensive than compatibility Maintaining your own compliments Price wars Marketing costs to tout advantages of proprietary standards Lower market share 10.Once the market leader has gotten his market share under incompatibility, they often switch to compatibility 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 dont iTunes has the option of licensing Fairplay DRM, if music companies agree to mandate it.

7 Content and Distributors Are Compliments 11.Complimentary partners in a network will attempt to commoditize each other 12.While content owners strive to commoditize distributors, large distributors try to do the same to content owners 13.Distribution networks only exist (legally) when the partners business models are aligned Best BuyWal-MartBorders. Music Label Consumer Music Dist. - Physical iTunes Music Label Digital Music Dist. Consumers 90% (Content isnt king)

8 What It Means for Big Media: Who Commoditizes Who? 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 Content Owners Leverage Weak (Brand Strength, Unique Content) Strong Network Distributors Leverage Weak (Fewer Competitors, Zero-Sum) Strong WSJ NY Times Reuters Music Labels NBC Movie Studios CBS ABC Web Video Games Oxygen Media MTV FT Leverage Map Associated Press Book publishers Amateur Video Local News ESPN BBC

9 What It Means for Big Media: Who Commoditizes Who? 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 Greys Anatomy and ABC or WSJ have strong leverage Strong brands are not so reliant on aggregators Content Owners Leverage Weak (Brand Strength, Unique Content) Strong Network Distributors Leverage Weak (Fewer Competitors, Zero-Sum) Strong WSJ NY Times Reuters Music Labels NBC Movie Studios CBS ABC Web Video Games Oxygen Media MTV FT Leverage Map Associated Press Book publishers Amateur Video Local News ESPN BBC

10 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 Youll still have your own websites, but you wont 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

11 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

12 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 arent 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

13 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 dont 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

14 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 203.606.3854

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