I frequently get inquiries from companies in the digital media industry about the implications of a particular new technology on their business. Far too often, these companies perceive the new technology as a threat and feel the need to rush out and introduce a competing product or service. This is a big mistake. True, new technologies do change the competitive dynamics between carriers, distributors, vendors, and networks in the internet entertainment marketplace, but, if a company is secure in their positioning, new technologies neednt be a threat.
So, for the sake of efficiency, and to quell panic when new technologies emerge, its useful for everyone with an interest in online entertainment to understand a little bit about the digital entertainment value chain. The value chain is a subject of great interest or should be – to companies looking to secure their strategic position in the digital media marketplace.
Six components of the online entertainment value chain
A value chain is simply a set of categories that group the players by the role they play. Within a category, companies compete; between categories, the relationships are usually synergistic. The online entertainment value chain has six major categories:
1. Content Producers organize talent and resources to create the actual entertainment. The major studios (i.e., Columbia, Universal, Warner Bros., etc.) used to be the primary content producers, but anti-trust legislation broke up their vertical integration, leading to the rise of independent production companies and small studios. (Example: Steven Spielberg and DreamWorks).
2. Content Distributors focus on aggregating multiple productions and matching them with channels of distribution and marketing. Although studios used to participate more in content production, they increasingly limit themselves to financing, marketing and pure distribution. In tangible goods, distributors are usually wholesalers, working with retailers to access the end customer, but on the internet, the content distributor usually sells direct to the end user. (Example: Apple iTunes, WalMart, Amazon, Real).
3. Content Distribution Networks (CDNs) comprise the Internets logistics companies. Just like trucking companies, or FedEX, CDNs assure a reliable transfer of the product from the distributor to the end user. (Example: Akamai and Itiva).
4. Backbone Vendors are certain large telcos and specialist vendors who rent access to very high capacity optical cables, which are the roads that interconnect the various parts of the Internet, to Internet Service Providers (ISPs). However, unlike the ISPs, backbone suppliers do not provide a connection to the end users computer. Both ISPs and CDNs buy commodity bandwidth from backbone vendors. (Example: Level Three Communications and AT&T).
5. Internet Service Providers (ISPs) connect the Internet to end users computers, usually for a fixed fee per month that varies depending on the speed of service purchased. (Example: Earthlink, cable companies, telcos).
6. End Users are content consumers. In traditional value chains, the end user is a pure consumer. However, there is an increasing trend toward end users also becoming significant as content producers in social networks such as YouTube and MySpace.
Within each general category in the value chain, there are multiple sub-categories, which I wont delve into in this article. Its also worth noting that the boundaries in the value chain do not necessarily form at the boundaries of different organizations, but at the boundaries of different activities. The key to understanding how digital entertainment value chain boundaries are formed is in looking at the end product or service and evaluating what features the end-user values.
Competitor or Collaborator?
However, if you understand the high-level categories you should be able to determine who is naturally competitive or collaborative in the market. In fact, understanding the value chain will bolster your interpretive powers in surprising ways.
For example, suppose you read a press release announcing that a company in one value chain category is introducing a product in another category. This can be interpreted in one of two ways, depending on whether the announcement comes from a small or large company.
Coming from a large company, this announcement indicates that the company is probably reaching the limits of growth and declining margins in their core value category and wants room to expand or revive margins. This can be good news to investors if management is flexible enough to excel in a different category. However, it can also be an indicator that the de-focusing will be followed up the road with a back-to-basics retrenchment.
This same announcement from a small company is almost always a sign that the company has failed in its business and is scrambling to find another option before investors pull the plug. Or, it can indicate that the company simply doesnt know where to position itself and is trying on multiple identities in the hope that a strategy will emerge.
When you understand the value chain, news becomes more illuminating and your competitive challenges become more distinct so that you can more effectively position yourself in your particular segment of the industry. If youre having trouble determining your place in the value chain or which strategies you should be using, give me a call Ill be glad to talk it over with you.