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
  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

• 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
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 theres 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
Co-opitition Among Network Competitors

• The leaders 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
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?

• 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

Leverage Map
Network Distributors Leverage Weak
(Fewer Competitors, Zero-Sum) Strong

• Web Video Games

• ABC

• ESPN

• NBC

• MTV

• CBS

• Local News

• BBC

• WSJ

Content Owners 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?

• 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

Leverage Map
Network Distributors Leverage Weak
(Fewer Competitors, Zero-Sum) Strong

• Web Video Games

• ABC

• ESPN

• NBC

• MTV

• CBS

• Local News

• BBC

• WSJ

Content Owners 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
• 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 Bruce.benson_at_fticonsulting.com 203.606.
3854