Competition and Cooperation in a Networked World

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 • The behavior of network goods • Competition vs Co-opitition • Who Commoditizes Who? • 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 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

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 • 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

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 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

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 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

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 Bruce.benson@fticonsulting.com 203.606.3854