Could your sales drop suddenly and surprise you?
Multiple-technology substitution (MTS) provides a new way of losing or growing revenues

Alistair Davidson is a strategy marketing and technology consultant, former CEO of several high tech startups, and author of three books and numerous articles on technology and strategy. He has worked with telecom service providers, communications equipment vendors, software and media companies.

Copyright Alistair Davidson, 2009 as an unpublished work.
E-mail: alistair@eclicktick.com,
Phone: +1-650-450-9011

Executive Summary
Having your strategy be disrupted by a single inexpensive lesser performing product represents one type of disruption risk that has been frequently written about in the past decade. [1] A second type of disruption, Multiple Technology Substitution (MTS) is based on a collection of products or services that, in combination, compensate for individual weaknesses of the complementary technologies. The complementary nature of the collection of offerings – a “synthetic” product offering -- can compensate for individual low levels of performance, surprising established competitors which sell more capable product offerings.

During a period of initial customer experimentation, market growth due to the disruptive products/services maybe misinterpreted as a long term trend towards an increase in category use and/or spending. Marketers may overestimate market growth and fail to anticipate a sudden drop in users’ category spending. A 3-stage cycle of (1) increased spending due to experimentation, (2) learning how to use the inexpensive products, and (3) consolidation of usage is likely as users gain experience in assembling and optimizing solutions.

Adding to the impact of MTS is the idea of MTS amplification, or products/services that amplify the effectiveness of the MTS combination. MTS Amplifiers may present ways of changing customer relationships and represent opportunities both for competitors competing on a different basis than traditional competitors and for existing players defending their markets.

Introduction
There is nothing worse for a career than a nasty sales surprise. In the case of a small business case, the resulting cash flow problems can kill the business. In a larger business, it can kill your career.

For some industries, multiple technological substitution (MTS) presents an unperceived and hence unmanaged risk -- one that may be invisible to managers without new kinds of user research. Many markets demonstrate MTS – software companies facing open source solutions; hardware vendors facing open source software replacement; cable companies facing Internet-based video competition; to name just a few.

For a more detailed look at the phenomena, consider the specific situation of fixed line voice service providers (recognizing that telcos exist in various formats: fixed line, mobile only, integrated with both fixed and mobile, and virtual operators leasing capacity from companies with actual networks). [2]


Globally, there were 4 billion mobile cell phone contracts as of the end of 2008 [3]. As mobile phones have become more popular, fixed line telephone company executives in developed economies have worried about the substitution of mobile phone for the combination of mobile plus fixed services (FMS), Such replacement would cause them to lose highly profitable fixed line voice customers. And the data for telcos suggests that FMS has been occurring on a large scale as consumers cancel their traditional fixed phone lines.

If you are student, living at home in summers and on-campus during the school year, a mobile phone makes perfect sense for a transient live. Demographically, one would expect to see younger telephone users more likely to be mobile-only customers but the trend towards increased mobile usage is actually quite broad. Research on phone use shows that people will use their mobile phones in the workplace and at home for reasons of convenience and in order to always be reachable. Roughly 50% of mobile usage occurs in situations where a fixed line is likely to be also available.

But there is a more insidious danger for telephone companies, one that is less obvious. It comes in the form of a collection of voice communication services delivered over the Internet. Voice services like Gizmo, Yahoo Messenger with Voice, Microsoft Live Messenger with Voice MagicJack or Skype cost nothing or next to nothing to purchase. Skype accounts for 8% of world international call minutes according to the company fact sheet [4]. Like many disruptive technologies, the services can have unpredictable or lesser quality. MagicJack works well on a fast machine, and not very well on a slow machine. Skype works better with a Skype “box” attached to the router than it does on a personal computer. VoIP (Internet based voice calling) over WiFi on a WiFi enabled unlocked cell phone is sometimes difficult to set up and can be unreliable.

Sidebar: Internet Based Telephony Data Show That Low Cost Services Are Significant

Number of Magic Jack customers: > 2 million as of January, 2009. [5]
Number of Skype user accounts: 405 million as of Q4, 2008 [6]

Skype was reported as delivering 20.5 billion Skype to Skype minutes in Q4 of 2008 and 65.3 billion minutes for the full year. Skype calls to regular phones cost money: $2.6B of paid calls for SkypeOut minutes were used for calls to regular phone numbers. 33.4 million users were active in Q3.

To date, the unpredictable and lower quality of these Internet-based services (relative to the gold standards of the traditional fixed line or the higher quality of cable VoIP voice services) has been a disadvantage for these Internet IP-based voice providers. Voice quality is an important service attribute. It has represented a barrier to further market expansion by these free or low cost services. The need for some technology knowledge to figure out the best way of using the services makes them a poor choice for those unwilling to experiment. As a result, usage is often low and adoption has been limited to the tech-savvy.

The Risk of Synergistic Substitutes
But synergy between a mobile phone and an Internet IP-based phone service changes the value proposition significantly. If the IP-service does not work, you can always use your cell phone. If the mobile carrier is charging a higher rate for roaming or international long distance, the cost conscious user can use the Internet IP-based services. Skype additionally permits allows cell phone users to dial a local number in order to access Skype’s international rates, which are typically lower than cell phone international rates. One CEO of my acquaintance came back from S. Korea with a $500 roaming bill. The next day, he put in place a policy of using Skype when travelling internationally and calling home.

There is a general pattern here. When you have an established product/service category (e.g. fixed line phone service), and you are competing with multiple disruptive services (e.g. the available but slightly less reliable mobile service as well as a more unreliable Internet-based voice services), user behavior may become harder to predict. Users will initially try substitutable services; as they gain experience with the substitutable services, they may become decide that they have sufficient redundancy in their two or more new services; this insight means that they can drop their less used and now perceived to be redundant traditional (fixed line) service.

As validation for this insight, consider the following question: “How many people would give up their cell phone to retain their fixed line?” One could only imagine this choice occurring if the customer were using the fixed line for both dial-up Internet access and voice, a decreasingly common usage pattern. For most users, if they have to choose, a broadband connection ranks higher in importance than a fixed voice line. And of course, if you have a broadband connection, you can use it for voice calling so it acts as a strategic amplifier.

In the early stages of a new disruptive technology, reliability and ease of use may be poor, but over time, failed experiences may be replaced by more successful experiences as the technologies improve.

When consumers are financially flush, they are likely to try out new and potentially substitutable services in addition to “trusted” services or products. Total spending in the category goes up until the consumer becomes so comfortable with the cheaper technologies that they decide to drop the traditional service. Consumer cutback due to job loss or income reduction may trigger the decision even faster.

The implications for managers facing substitution is that past market spending and trends are likely to be misleading. The 3-stage cycle of trial, learning, and product/services consolidation means revenue growth can be followed by a sudden drop to a new and lower revenue level. This process of overestimation parallels the problem of pipeline fill in distribution organizations where initial demand for product inventory in the pipeline causes overestimation of end-user demand. The difference here is that the disruptive products are inexpensive so they don’t increase revenues proportionately as much as they increase usage, but when the traditional product or service is dropped, the revenue effect is dramatic. Free or low cost replaces traditionally priced products.

Amplifying MTS Disruption
For the example of fixed line telephone companies, the challenges don’t stop with the double substitution of mobile and Internet voice services for fixed lines. There exist “amplifying” products and services that make the substitution more effective. They improve benefits, lower risk and cost. These amplifying services may sometimes move the locus of account control to third parties which are using the benefit of the amplifying service as a novel way of building relationships with customers often by deploying different business models.

The combination of on-line advertising-supported video programming at sites such as Hulu.com or Joost.com offers another amplification example. TV and movie video content has only recently become legitimately available on the Internet. Here the amplifier is called “media extenders” or technologies for connecting the Internet-sourced video to the TV. Media extenders – typically a WiFi-based specialized set top box -- are a new phenomenon, so retail availability and consumer understanding have both been limited, and adoption has not yet been large. As the availability of devices for linking the Internet to TVs is adopted, the acceptability of the Internet for sourcing video content improves dramatically. Netflix’s download services which are free if you subscribe to the core product of unlimited TV rental also amplify any decision to eliminate cable subscriptions.

In the telecom sphere, Google’s GrandCentral service is a strategic amplifier. It is a free unified communications (UC) services with the feature of single number ring. UC single ring is actually simple in concept. You give out a new phone number to your contacts. The new phone number is controlled by the user via a web page and automatically rings all the phone numbers the user has specified. So, if a user doesn’t trust the reliability of his Internet based phone services, he can introduce redundancy by having more than one service and having his cell phone also ring. With a close to zero-cost Internet telephone service, users can rethink the nature of their communications services. And each time they chose to pick up their Internet phone (instead of their mobile phone), they avoid using their ‘basket’ of mobile minutes.

Many telephone companies have not picked up on unified communications with single ring for consumers -- perhaps for fear of loss of revenues to Internet services. Google’s service forces consumers to have yet another phone number. Mobile telephone companies already have assigned the consumer a telephone number so less work is required for the consumer if single number ring is accessed through a call to the mobile number. A wireless provider launching this product as first mover is likely to gain advantage and reinforce the primacy of its relationship with consumers who dislike changing phone numbers.

The results of these three overlapping technologies (mobile, Internet-voice and unified communications) is that a US consumer now has the opportunity of reducing his communications cost by $700-1000 per person per year. In other international markets where the cost of mobile minutes is higher than in the US, the savings might be even greater. From the carrier perspective, customers switching to an MTS solution represent a significant drop in market size. For the consumer, such a savings is significant in a normal economy and more so in a recession. It represents a savings in excess of that being claimed by online insurance companies for switching automobile insurance and therefore, is likely to be adopted. These technologies can also spread easily via word of mouth, corporate policy changes, and marketing to mavens and experts. [7]

Technology Amplifiers take a substitution problem and increase the effectiveness and perceived usefulness of the new substitute technologies. Just as importantly, Amplifiers can trigger permanently reduced spending on the product category. When Amplifiers are owned by different competitors, a non-amplifying company may be perceived as offering less value than previously.



Implications
The implications of Multiple Technology Substitution and Amplifiers is that competitive risks can, in some markets, become more complex to analyze, more difficult to anticipate. While some disruptive competitors may have a deliberate installed base strategy of pursuing users of the higher performing product, other may not. MTS introduces new accidental groupings of competitors, that pursuing their own narrow objectives, constitute a functional or virtual competitor. Traditional competitive analysis and extrapolation is insufficient to predict such emerging coalitions of use. Scenarios and forecasts need to be considered for these synthesized virtual competitors that could emerge and accidentally combine in almost biological way. For vendors launching a disruptive product, a failure to consider how complementary disruptive product can assist in a launch will lead to missed opportunities.

Understanding why customers are not buying is important in a downturn. MTS implies that it is just as important to investigate consumer patterns of usage and experimentation. Attitudinal research and the rate of change of attitudes towards potential substitute products should be tracked. If you understand where customers are experimenting with products and services, you may be able to anticipate the consolidation risk. In some cases, you can forestall consolidation through pricing and product changes. In other cases, the reasons for the exit may force you to change your business strategy and operations.

Telephone companies are being forced to face these new technologies. Not surprisingly, their reaction depends upon whether they see these new services as threats or opportunities. For mobile operator T-Mobile USA these disruptive technologies allow them to expand their service beyond their narrow product offering of cell phone services. T-Mobile USA now offers three kinds of phone service: (1) cell phone service, (2) WiFi-based phone services if you have a dual mode WiFi capable cell phone, where you trade off a fixed monthly fee for unlimited voice over WiFi services, and (3) a $10 a month fixed line service that runs over the home fixed broadband connection.

T-Mobile is attempting to displace the traditional phone company relationship for both fixed and mobile voice services without having to build an expensive fixed line network. It is changing the rules of the game by dramatically reducing the cost of a fixed line to reflect its dramatically lower cost of providing an Internet-based phone services.

As a side benefit, T-Mobile’s strategies also reduce the cost of delivering mobile services by converting regulated bandwidth-consuming cell phone calls to unregulated free WiFi which is then, in turn, transmitted over the consumer’s fixed broadband connection back to the operator’s backbone.

For marketers, understanding how different buyers see and are using your and MTS products may allow new segmentation, pricing, delivery and value propositions. Strategic costing studies often suggest that a small portion of customers are particularly profitable. Rules of thumb in activity based modeling suggest that roughly 10-30% of customers account for more than 100% of the profits of the organization in any given year. Understanding who is profitable is important. Losing the most profitable customers can be devastating. Equally as importantly, making explicit decisions about the life cycle profitability of customers may salvage a business in trouble or provide new growth opportunities than can grow sales and higher profit relationships. Some telephone companies are attempting to use femtocells, or small cellular base stations located within the home or office to improve their value propositions and capture a higher share of customer telecom spending.

The Amazon Kindle electronic book reader provides another example of an amplifying technology that preserves and grows market share for Amazon, but also offers significant opportunities for content that were previously uneconomic. The obvious benefit to Amazon is that Kindle owners are often frequent book buyers who have decided that they buy enough books that the breakeven on the Kindle will be achieved quickly. Travelers and readers with two homes will appreciate not having to carry piles of books. But non-Amazon entities such as authors and publishers can now can skip the traditional printing and distribution process. Perhaps more importantly they avoid the pervasive and costly problem that books are a returnable product, additionally lowering the cost of distribution.

Example Reconfiguring of Products for a New MTS Environments
Digital content is an example of a market where product reconfiguration is required in response to MTS. In digital environments there is often more opportunity for product reconfiguration that managers realize. Content companies will have to manage a more complex portfolio of business models and develop more sophisticated ways of integrating their view of individual consumers and their usage.. There are five basic forms of revenue models that will emerge or which can be bundled together:

1. Traditional advertising based models. (Examples: classic network or cable TV)

2. Fee-based models for one time viewing or viewing for a period of time, unbundled from subscriptions. (Examples: video on demand, Pay-TV, single viewing downloads, downloads valid for a narrow viewing time slot.)

3. Subscription models analogous to current cable or satellite tiered services. (Examples: premium cable subscriptions, satellite subscriptions, Netflix, music subscription services)

4. Product placement, sponsorship and brand integration models sometimes combined with other economic models. (Examples: various soap operas or drams financed by e.g. Procter and Gamble or Hallmark, combination network TV shows financed by product placement and advertising.)

5. Purchase models which include a variety of portability, versioning and resale rights. (DVD purchase, download purchases.)

These revenues models can more broadly be thought as a collection of pricing models, rights granted to consumers and services around the purchase, use, storage and management of the rights. Rights represent a new frontier in content marketing and can include:

1. Right to view on one or more devices
2. Right to save
3. Right to redownload to one or more devices
4. Right to transfer ownership
5. Right to share with a designated group e.g. a family
6. Right to upgrade to a new technology or quality
7. Right to resell
8. Right to receive a commission on referral leading to resale

The marketing of content with attached rights management is likely to be controversial among consumers accustomed to the current simpler legal environment.

It’s likely that as users become educated about the rights bundles attached to different ways of acquiring media, different consumers will evolve different buying patterns. For example, less technologically sophisticated users and audiophiles both still prefer to buy music and video on optical data media such as CDs and DVDs. Slightly more sophisticated technology users may find the integration of a music/video downloading service and device more attractive until they get annoyed at the difficulty of moving content or the lower quality of many digital media. More sophisticated digital downloaders will discriminate on the basis of absence of rights restrictions and higher quality. For example, Amazon’s MP3 music offering initially offered both a DRM and a price advantage over the brand leader, the iTunes Store. Apple finally responded by offering unrestricted music files, but at a higher cost.

Confusingly, while consumers may evolve their preferences over time, they will likely to continue to trade off rights against price inconsistently, based upon their involvement or interest in specific content.

Researching and Anticipating a Sudden Market Decline
Without research or deep interactions with customers, companies will have difficulty predicting customer exits or the extent to which they are progressing through the three stages of MTS model. As a result, they will find it difficult to figure out how best to reconfigure their offering.

These conclusions suggest three simple potential customer exit models. A step model (Type 1), a straight line decline (Type 2) and rapid initial decline with a long period of low usage (Type 3). Type 1 exits are the most dangerous because the drop in purchase rate is sudden and unpredicted and may be disguised by a period of higher spending before the sudden drop. Type 2 exits are predictable and therefore, easier to manage as long as you can distinguish between Type 2 and 3 exits. Type 3 exits may create a category of lingering but possibly unprofitable customers.

The most general prescription here is not to accept decline, but rather to actively manage the process. These steps should include the following elements:

Research and stratify your customers to determine to what degree they are at risk for exit. Understanding their testing and competence with the various disruptive technologies is crucial knowledge.

1. Estimate the potential revenue lost by customer profile.
2. Model the impact of customer loss using an activity based costing model.
3. Evaluate different pricing and business models targeted for different customers.
4. Identify the gateway products which maintain account control. In the telecom space, video services, fixed broadband and converged fixed/wireless services with unified communications all represent potential gateway products or bundles. In contrast, traditional fixed line services are essentially commoditized.
5. Reconfigure the marketing program. For some customers, ease of use will be a critical element in retaining customers. For other customers, launching disruptive collections of services, but making them easier to tie together will be a necessary strategy.
6. Reconfigure the value chain activities where required to be able to compete with the disruptive competitors, e.g. T-Mobile’s low cost fixed line service at $10 per month.
7. In many cases, integration and improved user interface design are required for the traditional offerings. Integrated telcos with WiFi hotspot, fixed and wireless operations are now introducing services that take advantage of their multiple networks. Less integrated operators are pursuing partnerships to enable the same capabilities.

Customer can be categorized into different groups. Examples might include:

Profitable customers, where the goal is increased usage.
Profitable customers, where the goal is retention.
Profitable customers where pricing, business model or value chain reconfiguration is required to preserve the relationship.
Marginal customers where different business models and value chains are required to make them profitable.
Marginal customers where cross selling is required to make the customer profitable, requiring e.g. bundled pricing.
Unprofitable customers that should be “fired”.

In actual practice, most enterprises have little ability to perform such analysis. Overstressed and matrixed product managers may be put under pressure to focus on existing and obvious competitors rather than emerging threats. And when the more difficult analysis of potential virtual competitor combinations is performed, it is done infrequently and often too late. The experience of the music industry demonstrates the cost of not adapting quickly to the disruptive effect of networking, peer to peer file exchange, software for ripping MP3s, digital music players and pervasive computer use.

In contrast, Adobe, which has increasingly been moving up-market with its successful suites of imaging products (containing well known products such Photoshop, Acrobat and Illustrator) is faced with an expanding and improving collection of free imaging products such as Google’s Picassa, the open source products, GIMP and Artweaver (to name just three of many) all which are increasing in capabilities. Adobe’s historical segmentation had been to provide lower cost versions of their software such as Photoshop Lightroom and Photoshop Elements for its consumer and hobbyist niches. Directly targeting the free software tools, Adobe has also set up a free online service, photoshop.com: it provides limited photography editing and 2 gigabyte of storage for storing and sharing photos and videos. Integration and ease of use provides some initial defense against MTS as does the additional value added of free storage.

Summary
The 2008 recession presents businesses with a significant challenge. The deflation of the speculative bubble in the US is likely to take many years to unwind. Consumer spending is no longer financed by increasing real estate prices. Many markets may not recover in ways that businesses and consumers hope for. The consequence will be permanent customer spending declines in many product categories.

Customers, seeking to reduce their spending, will increasingly use low cost MTS and amplifying products to save money. Companies that fail to research their users and markets may over-estimate the recovery of revenues due a failure to anticipate the permanence of the switch to collections of disruptive technologies as customers consolidate their spending and arbitrage their suppliers. Clever strategists can participate in and use MTS value chains to create new relationships with customers and win relationships at low costs.

References:

[1] Christensen, Clayton: The Innovator’s Dilemma, Collins, 2003

[2] Fixed Mobile Convergence for Integrated Service Providers, Cisco White Paper, 2008 https://www.cisco.com/en/US/solutions/collateral/ns341/ns523/ns519/white_paper_c11-480809.html

[3] Trends in Telecommunications, ITU, 2008, http://www.itu.int/itunews/manager/display.asp?lang=en&year=2008&issue=10&ipage=30&ext=html

[4] Preliminary data, TeleGeography Research, 2008. quoted in Skype corporate fact sheet, Feb. 12, 2009

[5] TelephonyOnline http://www.telephonyonline.com/residential_services/news/magicjack-two-million-customers-0106/index1.html

[6] Wikipedia, Feb. 12, 2008, http://en.wikipedia.org/wiki/Skype and corporate fact sheet.

[7] Davidson, Alistair, and Copulsky, Jonathan: “Managing Mavens: relationships with sophisticated customers via the Internet can transform marketing and speed innovation.” Strategy and Leadership, Vol. 34, No. 3. 2006 also available at http://www.deloitte.com/dtt/cda/doc/content/us_tmt_ManagingWebmavens_Article_022206.pdf

[8] Keith Nissen, Keith: “The Media Phone Has Arrived”, In-Stat, Document IN0904563RC

Trademarks referenced in the article are owned by the providing companies.

When to toss shareholder value out of the window.

Alistair Davidson, alistair@eclicktick.com

Pity the poor CEO. Everyone comes to him/her for decisions. Specialists like the CFO look for a simple system for allocating scarce capital. Financial analysis such as net present value or shareholder value is positioned as providing the answer. But does it? Here are ten examples of where superficial financial analysis can drive your decision the wrong way.

1. The Big Picture

The claim: We need to invest in our core business(es) to maximize shareholder value.

Counterclaims: 1. Disruptive businesses may represent the long term future of the business. 2. Selective extravagance with some critical part of the business may have dramatic pay off.

Example of underinvestment in non-core businesses: IBM’s mainframe business was more attractive than the PC business. Microsoft was late to market on Internet advertising and advertising supported applications.

Example of selective strategic extravagance: Google’s commitment to offering the broadest, deepest and most up to date surveying of the Internet is core to their business model and an area in which they are strategically extravagant.

Prescription 1a: Keep disruptive businesses autonomous. Bear in mind that it takes as much as five years for a disruptive business to become economic. [1]

Prescription 1b: Most business planning can be summarized as “We are the best. Customers love us. We are going to more of everything and diversify and it will cost less to do so.” Instead, identify areas of critical importance in your business and overinvest in them. Overinvestment will ensure commitment and may also deter competitors from imitating your strategy. [2]

2. Planning Processes

The claim: Good planning and detailed budgeting will bring discipline to the organization and improve financial performance.

Counterclaim: The more lines in your budget, the more likely that you will have variances to explain. Unfortunately, the variances will be smaller and have less meaning

Example of wasted budgeting effort: Every business with an overly detailed budgeting system.

Prescription 2: Simplify budgeting and give more autonomy to line managers. Don’t insist on the same degree of detail every year. Consider having “heavy planning years” with more elaborate planning processes and light planning years where the planning exercise is incremental. Use scenario analysis to consider different environments for a given strategy.

3. Managers

The claim: We hire the best, pay them more and get more value for money by working them harder. We are an 80 hour a week shop.

Counterclaim: Working smarter is better than working harder.

Examples of not working too hard: How many times have your solved a problem in the shower or by putting it aside and letting it develop in your subconscious? Netflix is an example where a new business model, or working smarter, completely upset the strategy of traditional retail movie rental operations.

Prescription 3: Don’t measure people by effort. Measure them by quality of thinking and execution. Reward “lazy managers” who come up with more effective solutions.

4. Innovation

The claim: We focus our innovation efforts. We don’t want to waste money.

Counterclaim: The creativity of unleashed managers working in a group can be orders of magnitude higher than bureaucratic innovation processes.

Examples of wildly creative organizations: Nathan Myhrvold’s Intellectual Ventures is in the business of creating and patenting numerous innovations. Like many firms, they have discovered that the quantity of innovation is important in creating value.

Prescription 4: Encourage innovation throughout the organization. Set goals for the percent of revenues and profits that should come from new products. [3]

5. Management

The claim: We are a goal oriented company. Our resources are devoted to achieving our goals so that we can maximize return on capital.

Counterclaim: Innovation occurs in many places. Some companies free up 20% of managers’ time to encourage innovation.

Examples of decentralized innovation: Google encourages self directed innovation; 3M not only allow freedom to managers to develop new products, it sets goals requiring a certain percentage of revenue to come from new products.

Prescription 5: Pay people for useful creativity. Don’t let politics and authority kill off new ideas. Research suggests senior management approval of an idea has little correlation with new product success. Seek researchers and innovation outside the four walls of your organization among researchers, customers, distributors and suppliers. [4]

6. Customers

The claim: We are a marketing and sales company. We design and sell products and obtain premium prices because of the superiority of our offering.

The counterclaim: Designing a culture where companies create, marketing, sell and support products and services on behalf of their customers can create strong loyalty. Loyalty in turn reduces marketing and sales costs and increases word of mouth. The perception that a corporation will reliably offer superior value and support its customers may lower the cost of launching new products and services.

Examples of acting on behalf of customers: credit unions, REI, Eastern Mountain Coop, Netflix, Virgin.

Prescription 6: Focus the organization on customer satisfaction and Net Recommender Scores. Reward employees for accepting and solving customer problems. Let front line employees initiate service and product improvement suggestions and projects. [5]

7. Customer Service

The claim: We run a cost effective customer support operation. Our cost per service call is the best in the industry. We have moved aggressively to outsource to India and to provide self service solutions.

Counterclaim: Customer service centers are opportunities to improve the reputation of your brand, identify problems that need to be solved and sell new services. Most customers are exceptionally annoyed by script-driven customer service reps that simulate the experience of talking to a robot. They are even more annoyed when a legitimate suggestion for product or service improvement disappears down a black hole.

Example of good customer service: American Express offers superb customer service. One of the key reasons is that senior management actually listens in on calls on a regular basis.

Prescription 7: Try using your own product or service anonymously. Try the competitors’ products too. Create a culture where borrowing good ideas from competitors is not seen as betrayal.

8. Suppliers

The claim: We aggressively forced down the costs of our suppliers. We get the best prices in the industry.

Counterclaim: It does your organization little good if you put your supplier out of business or if their margins are so low they cannot innovate and seek dramatic improvement in costs from new technology.

Examples of helping suppliers: Toyota, Xerox, Walmart

Prescription 8: Work with suppliers to understand how what you do increases their costs. Seek opportunities for synergy by changing the way you inform, contract, deliver and support products and services. Reduce the premium for uncertainty built into their price by lowering supplier risks. If one of you has a lower cost of capital than the other, take advantage of this capacity.

9. Shareholders

The claim: We can’t disclose what is really happening in our business. If we aggregate our data, the investors won’t be able to figure out the problems we have and our shareholder value will drop.

Counterclaim: Research suggests that disclosing strategic performance drivers reduces investor uncertainty and increases the valuation of public companies.

Prescription 9: Interview investors to understand what they understand, misunderstand and don’t know about your business. Communicate key performance drivers and track investor understanding of your strategy. [6]

10. Proprietary Information

The claim: Proprietary information is valuable, creates shareholder value, and we should guard it. We should not let our competitors get their hands on it.

Counterclaim: Sharing information with your ecosystem may improve your brand and accelerate learning within the ecosystem. Some proprietary information has a short shelf life, so the challenge is capturing value from it before it becomes obsolete.

Examples: One major consulting firm has opened up its knowledge of ERP and shared it with customers. It has become a way of promoting their brand and building a relationship with key prospects and customers. [7] IBM now actively licenses its technology to competitors in order to capture value in the window of usage. [4]

Prescription 10: Have a third party document and assess your intellectual property and other assets. Develop a strategy for technology licensing, sale and spin off and value the results. Determine whether you are missing opportunities to capture value from unused or underused assets.

Building Platforms and Capabilities

What many of these prescriptions share is building capabilities, customer relationships,

processes, cultures and capabilities that set the stage for growth. Platform improvement strategies are more difficult to evaluate than incremental product development. Platform strategies sometimes involve “bet the firm” strategies whose shareholder outcomes are potentially highly variable. IBM’s development of the system 360, the first family of compatible computers is an example from the 1960s that clearly established IBM’s dominance for 20-30 years. Google’s focus on search before there was an economic model to monetize search is another example of betting on uncertain capabilities.

This theme of building capabilities is by no means a new one for CEOs, but three examples of competitive strategies that might be filtered out by overly aggressive shareholder value models include:

• Losing money in order to build a superior cost position. This is a classic strategy in electronics markets with experience curves. You price based on where your costs are going to be rather on where your costs are today. If you price on where you are going to be on the learning curve, your volume increases and volume increases drive down per unit costs – you reach and descend beyond your initial cost.
• Sell capabilities not products. Google is a rare but superb example of this strategy. Google’s dominance in search and rapid growth in the new market of paid search caused to gain higher brand recognition than Overture (purchased later by Yahoo). This brand equity translated into a major IPO and the ability to fund rapid growth with simultaneous diversification. The low cost of capital due to “sexiness” has provided a significant competitive advantage to Google, allowing to experiment with numerous high risk pieces of functionality that might extend its brand and customer relationships.
• Build superior infrastructure. Amazon is an example of infrastructure development that is widely misunderstood. Amazon, like Google, rode the dotcom boom to be able to build infrastructure that is compellingly better than its slower moving competitors. But Amazon resells access to its e-commerce and cloud infrastructure in order to accelerate its growth and create difficult to match capabilities.

References:

[1] Christensen, Clayton and Raynor, Michael: The Innovator’s Solution, HBS Press, 2005

[2] Bonoma, Thomas: The Marketing Edge, Making Strategies Work, Free Press, 1985

[3] Varchaver, Nicholas: “Who’s afraid of Nathan Myhrvold?” Fortune, June 26^th, 2008.

[4] Chesbrough, Henry: “Open Innovation”, Harvard Business Press, 2006

[5] Reicheld, Fred: The Ultimate Question, Harvard Business Press, 2006

[6] Eccles, Robert; Herz, Robert; Keegan, Mary; and Phillips, David: The

Value Reporting Revolution.Moving Beyond the Earnings Games, Wiley, 2000).

[7] Li, Charlene and Bernoff, Josh: Groundswell: Winning in a World Transformed by Social Technologies, Harvard Business School Press, 2008

White Paper Development Strategies
How to speed up the development cycle and make thought leadership more useful
Author: Alistair Davidson,
Contact Information:
E:mail: alistair@eclicktick.com
Phone: 650-450-9011

Contents
White Paper Development Strategies
How to speed up the development cycle and make thought leadership more useful.
Five Key Take-Aways
Introduction: why it’s difficult getting an effective white paper
Why Content Matters
The Content Development Process
Levels of Involvement
Level 1 Development
Level 2 Development
Level 3 Development
Rapid Content Development Based Upon Business and Technology Knowledge

Six Key Take-Aways
1. Many white papers are like highly processed white bread. You eat them and they are not very satisfying. Good white papers should seek to have high impact. They should be designed to be memorable, leaving behind a story, a key number, and a graphic that the reader will remember and be able to summarize or use. Ideally, they should be based upon the right combination of customer knowledge, market research and vision for the use of the technology, solution or consulting approach.

2. White papers take too long to create. Their value decreases if the production cycle time is too long. Most projects fail to begin with a messaging objective and a target audience. Without a clear messaging objective, the time and budget required for development and approval becomes large.

3. Bad white papers often represent a “regurgitation” of what an overly technical content expert thinks is important. Most white papers overemphasize the features of the technology, and are not sufficiently focused on the ROI and business decision of why to use a technology or business consulting approach.

4. Consulting firm white papers often have difficulty establishing credibility because they make unsubstantiated claims or propose models without sufficient business examples, cases and research. Even worse, consulting firms often don’t take the time and trouble to document their successes.

5. Many technology and consulting organizations don’t do enough cases to illustrate the value of their technology or consulting approach. Often concerned about the willingness of customers to cooperate, they don’t develop disguised cases, nor do they commission cases with non-clients to illustrate problems that their consulting or technology could solve.

6. White papers can not only create new sales, they can reduce the cost of sales particularly for hard-to-launch new products and services. The content around a product or service contributes to the brand value and may increase opportunities for premium pricing by establishing the value of an unfamiliar product or service.


Introduction: why it’s difficult getting an effective white paper
If you are already using white papers, you probably have a nagging suspicion that your white papers and cases aren’t working as well as they should. They seem to lack a hook and not very memorable. They don’t present a substantial ROI or present benefits from an end user perspective.

A successful white paper needs both technology and business analysis. It should be developed quickly by a skilled writer who knows the needs of the audience. Speed is important in competitive markets where staking a claim to technological and thought leadership is part of the branding process.

Most skilled writers are journalists with little understanding or experience of technology, business, consulting and finance. They are rarely state of the art in business theory and practice. They almost always lack business development and sales experience. They rarely have done business teaching or executive development. And it is extremely unlikely that they understand finance, spreadsheets and ROI.

And many good writers are high maintenance. Their work needs many revisions and multiple layers of review because they do not understand that publishing a white paper is always an art – revealing what may be revealed without incurring legal problems, upsetting clients or internal power brokers.

Why Content Matters
Good articles create customer interest. Good white papers simplify and clarify prospects’ decision making. Cases support white papers and can demonstrate quantified benefits for a particular company. Newsletters represent a useful way around the delays in getting articles published and provide a more focused marketing tool.

Good content generates sales, speed up sales process, short circuits (in a good way) long approval cycles, and can accelerate repeat purchase and increased usage. Even better, if done well, they will be forwarded by one client to another in a viral way. Brilliant white papers and articles can become classics that continue to generate business year after year.

Marketing materials must also be designed to be effective with spiders sent out by search engines. A good article or white paper should be written and accessible on the web so that it is easily findable – able to scoop in prospects and decision makers a company may not be in touch with through traditional sales methods.

How white papers or articles simplify or clarify depends upon what you are selling, but complicated or novel products, services or consulting approaches need to be explained before they can be sold. The process of selecting, deploying and using the product or service needs to be explained. The evolution of a technology often needs to be projected to reassure customers and prospects. And because there is always competition for resources, business cases are needed to help the client justify why a project should be highly ranked.

Loosely speaking, we distinguish between two types of content:

1. Push, where the business problem is that potential customers don’t have experience with a new technology or consulting approach. They need it explained, its implications mapped out, the likely benefits extrapolated.
2. Pull, where the technology is relatively well understood, but the justifications of why one vendor or technology is preferable to another.

Good content represents an investment that will reduce the cost of sales and increase sales volume. When used as part of an integrated launch strategy, good content becomes part of the brand attribute and increased pricing opportunities, particularly where the product has optional service or solution trade-ups.

The Content Development Process
An explicit process and set of review points speeds up content development, improves targeting and makes sure that maximum value for money is obtained. With a systematic approach, time can be reduced in both content development and review. A rough rule of thumb is that for ever day of content development large organizations will require 3-5 days of elapsed time for approval. But it’s worth pointing out that engaging a professional can speed up overall processes by up to 10X over internal development. Most managers are not naturally good writers. Even when they are, they are distracted by their ongoing activities.

Stage Initial discussion of needs
Activity Content and research availability is also reviewed.
Benefit Fact based marketing and message development is more effective

Discussion with content expert or customers
Activity: Optional
Benefit: Validation of initial discussion

Messaging strategy development
Activity: Required
Benefit: Build consensus among stakeholders

Content outline
Activity: Provides review point
Benefit: Reduces number of rework loops

First draft delivery
Activity: Can be provided rapidly
Benefit: Uncertainty about what is being delivered should have been reduced by now

Editing and review
Activity: Often longer than writing stage due to number of reviewers
Benefit: In some cases, the act of delivering the white paper will alter the strategy of the group

Levels of Involvement
Generally speaking, there are three levels of project involvement:

Level 1 Development
Here the goal is simple. Take several different sets of material as source material and weave them into a white paper, article, or set of newsletters. The key requirement here is the ability to digest, structure and write clear content. An outsider can often help the sponsor of the content to sharpen the material and make it more appropriate and relevant to the reader. Simplifying graphics are often missing and can increase the impact of the piece.

Typical time: 1-2 days
Involvement of sponsoring company staff: low

Level 2 Development
The sponsoring company provides background research on the industry and users. Judgments need to be made about the messaging strategy, segmentation decisions, number of pieces to be developed, types of pieces and publishing strategy. Multiple white papers, articles, internal and external cases, ROI and financial analysis are developed as part of an integrated marketing or launch program.

Typical time: 4-8 weeks
Involvement of sponsoring company staff: medium

Level 3 Development
Facilitation services are provided to create consensus within the team. Market research may be optionally commission if the sessions suggest that data or insights are missing. Judgments need to be made about the messaging strategy, segmentation decisions, number of pieces of content to be developed, types of pieces. Multiple white papers, articles, internal and external cases, ROI and financial analysis is provided as part of an integrated marketing or launch program.

Typical time: 8-12 weeks
Involvement of sponsoring company staff: high

Rapid Content Development Based Upon Business and Technology Knowledge

Alistair Davidson provides companies with needed capabilities for high quality thought leadership and content development. Alistair Davidson, managing partner provides the following capabilities:


1. Deep understanding of many technologies from running three software companies, a high tech incubator and consulting to over 60 Silicon Valley firms, both startups and major players. He has personally been involved in software, hardware, services and solutions development and promotion.

2. State-of-the-art in business knowledge with leadership experience, consulting experience, startup and turnaround experience. He has a strong background in finance and modeling, marketing and sales. In addition he is a trained strategic facilitator and a certified Myers-Briggs administrator who has run many strategic consulting processes for international companies large and small.


He is a skilled and rapid writer. His third book which has 110 pages was written in three days. The total publishing cycle for the book from start date to publication was four weeks. He has been published by a major publisher, HarperCollins Canada. Some of his content based marketing programs have produced ROIs of in excess of 1200%. His recent thought leadership clients have included multiple publications for Cisco, HP, Deloitte Consulting and Cushman & Wakefield.

Recent topics have included sustainability, risk management, succession planning, investing in China, refinancing real estate, IFRS, fixed mobile convergence market evolution, video services, new media advertising models, wireless services and fixed mobile convergence dual mode services.


Appendix 1: Alistair Davidson Background
Alistair Davidson is a former CEO of four high tech firms, a Harvard MBA, author of three books on strategy and technology, and several dozen articles, interviews and book reviews. As a contributing editor to Strategy and Leadership magazine, he is continually involved in assessing the latest ideas and research in strategic management. Occasionally, he writes books reviews of significant books. He is frequently involved with interviews with major thinkers, e.g. an interview with HBS professor Michael Porter and Elizabeth Olmstead Teisberg on reforming healthcare.

Business Experience: He has raised angel and venture capital for startups in two countries, been hired to turn around startups, has improved companies’ performance, has had full life cycle responsibility for over a dozen high tech and consulting products, and has hands on experience in all aspects of starting up and growing both high tech and consulting businesses including developing all the written materials.

Consulting Experience: he has worked with a wide variety of industries including major international and boutique consulting firms, real estate, telecom, semiconductor, communications equipment and solutions, financial services, pharmaceutical, military and government organizations. He has been involved in developing new consulting tools, simulations, executive leadership programs, IT strategy, IT portfolio management and staffing, launch strategies, syndicated consulting projects, budgeting systems, planning systems, artificial intelligence based strategy assessment, new product success prediction models, new product gating models and expert systems, process management and improvement, strategic facilitation and competitive analysis, organizational development, pricing strategy and execution, diversification and prediction of market and technology evolution.

Product Management, Marketing, Sales and Business Development Experience: he has a full range of business development experience including developing consulting projects, developing new product requirements, setting up distribution, training sales staff, web-site marketing and ranking improvement, press release, sales literature, newsletter, blog and thought leadership development. He has been involved in closing over 300 companies internationally and has sold products and services to major companies and organizations internationally.


Appendix 2: Alistair Davidson Recent Projects
Recent projects have included:

Deloitte Consulting, Technology Media and Telecom Practice
- IT portfolio management and strategy
- Strategy for outsourcing technologies as product categories mature
- Retail strategy for high tech products
- Pricing strategy and execution management
Visioning exercise for a major storage company
- Pricing strategy for a major security vendor company


Cisco
- Various cases on deployment of fixed mobile convergence solutions for consumer, enterprise and video solutions including financial analysis of benefits of technology solutions
- White paper on FMC for integrated service providers
- White paper on FMC for cable service providers
- White paper on FMC for fixed line service providers
- White paper on FMC for mobile service providers
- White paper on FMC for mobile virtual network operators
-
Cushman and Wakefield Real Estate Consulting
- International location decisions
- Investing in China
- The impact of the introduction of IFRS (International Financial Reporting Standard) to Canada and US
- Succession planning
- CFO as change agent
- Green strategies
- Risk management

HP
- development of ROI models for telecom solutions


VideoAnalytica LLC
- White paper on real time dynamic product placement in video streaming



Appendix 3: Sample Articles and White Papers
Example Book Review
Porter and Teasberg: On Reforming Healthcare
http://www.eclicktick.com/DavidsonReviewofPorterTeisbergRedefiningHealthcareFinal.pdf


Example Deloitte Articles
Managing Web Mavens
http://www.deloitte.com/dtt/article/0,1002,sid%253D2245%2526cid%253D112087,00.html

Pricing Execution and Strategy
http://www.deloitte.com/dtt/cda/doc/content/us_consulting_so_customermarketinsights_issue9_220806.pdf

Example Cisco White Papers
White papers on fixed mobile convergence service providers
In publication

Example VideoAnalytica LLC White Paper
White paper on dynamic product placement
http://www.videoanalytica.com/VideoAnalytica%20White%20Paper%20Targeted%20Product%20Placement.pdf (document address likely to change after May 6, 2008)

The Future of Video Content Delivery

Copyright Alistair Davidson 2006

Contact Information alistair@eclicktick.com

Phone: +1-650-298-9077

Executive Summary

A revolution is under way in media. Traditional assumptions about broadcasting are forcing content owners and media content distributors to experiment. Innovations in business models, pricing and the packaging of content with different permissible rights represents a new frontier in marketing. While it’s not possible to predict with 100% certainty the shape of the future media industry, it is certain that companies will increasingly use multiple approaches to reach different consumers and expand the alternative ways of acquiring contents.

Restructuring of the media industry and its traditional distribution channels (“conduits”) will require the development of new infrastructure, new business intelligence capabilities and new integrated marketing approaches. A new key skill for media companies will be the collection, management and development of data and services for individual consumers. Today, most media companies separate the roles of production, DVD retail distribution, Internet distribution, and network syndication. These siloed approaches to managing the life cycle of content value capture are likely to be replaced by more integrated management processes design to maximize both the capture of value from consumers and the collection/use of customer interactions, ratings and involvement.

Three basic scenarios are suggested for the changing relationships between content owners, conduits and aggregators:

1. Forward Integration. In this scenario, large dominant media companies use their control of content to capture value that previously accrued to content aggregators and conduits.
2. Balanced World. In this scenario, aggregators are successful in creating sticky sites by developing capabilities and skills that are difficult for content owners to match. With control over eyeballs, aggregators remain successful and profitable conduits for content owners. The negotiating power of conduits and aggregators is lower because media companies have more choice in distribution (their own, aggregators or conduits).
3. Churning World. Decreased technology costs permit the continual emergence of new high quality content developers that can, as a group, challenge the traditional content developers. New content creating entities emerge. Some make the transition to major status. Some are acquired by traditional content firms and others by aggregators seeking to develop their own content and improve their negotiating ability with traditional content owners. Aggregators, content developers and conduits continue to merge and divest activities, but increasingly look similar in their portfolios.

Introduction

Technology change can begin in many places -- sometimes as a result of deregulation; sometimes as a result of a technology reaching sufficiently widespread adoption or new price level. Sometimes it is due to demographic and other usage changes.

Today, there are big bets being placed on the future of content and the business models around the creation and distribution of content. It’s a hard area to make predictions about. Not because the trends are hard to see, but rather the structure of the market, technology, networks capacities and the usage pattern of consumers are changing rapidly. And perhaps most importantly, the market is increasingly less homogenous. Different consumers have different appetites for different content and for different ways of accessing, viewing/reading/listening to content. As devices, image quality, prices and availability change, so do the habits of viewers.

This article outlines frameworks and observations for looking at the evolution of aggregator, content and conduit industries. By aggregator, we mean companies that represent points of entry for accessing content. This group includes social sites, search engines and content directories such as AOL, Ask, Facebook, Google, MSN, MySpace and Yahoo. By content, we mean the producers of video, audio, pictorial and written content. Conduits include all the various digital and non-digital methods of connecting with a consumer of content, e.g. satellite, cable, terrestrial broadcast, wireless cellular, wireless broadband (wifi mesh networks, WIMAX), CD, DVD, and Internet downloads.

Within the many ways of bringing content to market, there exist different networking strategies whose importance is likely to evolve over time.

Because the media industry is so large, this article focuses primarily upon video which is the most complicated form of content to transmit and manage. Video files are large and present capacity management challenges; preventing or discouraging theft is an onerous problem; and, new technologies create a threat to advertising based business models.

Media companies wonder today whether the advertising or 30-second spot based business model is sustainable in a world of digital video recorders. DVRs (such as TIVO) have a dramatic effect upon advertising viewing habits. While there is debate about the rate at which DVRs will penetrate the TV viewing population, what is clear is that DVR owners watch fewer ads. Even worse, the longer a DVR is owned, the more ads are skipped by the household.

Sidebar

Key Dates in Digital TV

Date	Digital TV Transition
2007	Digital TV switchovers complete in Luxembourg, Netherlands, Finland and Andorra. Austria, Czech Republic, Germany, Switzerland in process typically with regional roll outs.
2008	US completely digital by Feb. 17, 2009. Beginning of digital TV switchover on a regional basis in UK. South Africa starts three year process.
2009	Denmark terminates analog TV
2010	Spain, Greece terminates analog TV at end of year
2011	Digital TV switchover completed in Canada except in remote locations. Japan terminates analog.
2012	Completion of UK, Hong Kong, Ireland, Slovenia, Italy digital switchover
2013	Beginning of New Zealand switchover to be completed by 2017
2015	Chinese, Kenyan, Malaysia, Philippines, Ukraine digital switchover completed

Sources: Various including Wikipedia, UK Government, FCC, CRTC.

As a result, the impact of digital delivery of media leads to the question of what business models will be most important in the future for content delivery. Our view is that companies will have to manage a more complex portfolio of business models and develop more sophisticated ways of integrating their view of individual consumers. Roughly speaking there are five basic forms of revenue models that will emerge or which can be bundled together:

1. Traditional advertising based models. (Examples: classic network or cable TV)
2. Fee-based models for one time viewing or viewing for a period of time, unbundled from subscriptions. (Examples: video on demand, Pay-TV, single viewing downloads, downloads valid for a narrow viewing time slot.)
3. Subscription models analogous to current cable or satellite tiered services. (Examples: premium cable subscriptions, satellite subscriptions, Netflix, music subscription services)
4. Product placement, sponsorship and brand integration models sometimes combined with other economic models. (Examples: various soap operas or drams financed by e.g. Procter and Gamble or Hallmark, combination network TV shows financed by product placement and advertising.)
5. Purchase models which include a variety of portability, versioning and resale rights. (DVD purchase, download purchases.)

These revenues models can more broadly be thought as a collection of pricing models, rights granted to consumers and services around the purchase, use, storage and management of the rights. Rights represent a new frontier in content marketing and can include:

1. Right to view on one or more devices
2. Right to save
3. Right to redownload to one or more devices
4. Right to transfer ownership
5. Right to share with a designated group e.g. a family
6. Right to upgrade to a new technology or quality
7. Right to resell
8. Right to receive a commission on referral leading to resale

The marketing of content with attached rights management is likely to be controversial among consumers accustomed to the current simpler legal environment.

Examples of Rights Based Marketing Alternatives

	Audio Books, Podcasts	Music	DVD Video
Right to view/listen on one or more devices	Audible.com permits multiple devices and formats	Assumed. Consumers move music from CD/Vinyl to tape/MP3	Consumers can view DVDs on any device that plays DVDs e.g. computers, DVD players, or networking video devices such as Slingshot
Right to save	Part of delivery methods	MP3 can be backed up. CDs can be copied for personal use.	Consumers can back up a copy of a DVD for personal use.
Right to redownload	Audible audiobooks permits redownloading of audio books.	Available on some subscription services. Not availale on iTunes.	Movies on Amazon unBox can be redownloaded.
Right to transfer ownership	Generally not permitted	CDs can be sold. MP3s currently more difficult to sell without owning associated CD.	Generally not permitted
Right to share	Possible by sharing account access. Legality unclear.	Music can be shared with a group of friends in ways that are both legal and illegal.	Copying for friends generally not legal. Lending content provides a low tech way of sharing.
Right to upgrade to new technology or standard	Download options on quality can be reset but there are limitations.	Without a source file e.g. .wav file from a CD, no upgrade is typically possible. The option to upgrade to a higher quality resolution or video standard is normally treated as a separate purchase by content owners e.g. vinyl to CD, CD to MP3. MP3 low quality bit rate to audiophile bit rate.	Generally requires a new purchase. No major current examples of a content upgrade strategy that would parallel software companies offering upgrade pricing.
Right to resell	Not generally permitted.	CDs can be sold. MP3 licenses could permit resale and transfer of ownership.
Right to receive commission on resale or referral	Generally no	Generally no	Generally no

It’s likely that as users become educated about the rights bundles attached to different ways of acquiring media, different consumers will evolve different buying patterns. For example, less technologically sophisticated users and audiophiles still prefer to buy music and video on optical data media such as CDs and DVDs. Slightly more sophisticated technology users may find the integration of a music/video downloading service and device more attractive until they get annoyed at the difficulty of moving content or the lower quality of many digital media. More sophisticated digital downloaders will discriminate on the basis of absence of rights restrictions and higher quality. For example, Amazon’s MP3 music offering offers both a DRM and a price advantage over the brand leader, the iTunes store.

Confusingly, while consumers may evolve their preferences over time, they will likely to continue to trade off rights against price inconsistently, based upon their involvement or interest in the specific content.

Deregulation of Access Increases Consumer Choice

The world of content owners, aggregators and conduits is a complicated one. It’s hard to generalize about an industry that covers movies, videos, TV, DVDs, portals, on-line retailers, auction sites, search engines, DVD rental, cable networks, broadcast and satellite networks, local TV stations, radio stations, satellite radio, personal computers, MP3 players and game machines. A person’s brain quickly starts to hurt with the complexity of all the choices and potential ways in which devices, networks, sites and content might interact.

But one fact sticks out like a sore thumb. The world of content and conduit has changed irrevocably. We have moved from a world where accessing content was difficult and controlled by a small number of highly regulated players to a world in which choice has exploded. Not only is the availability of content greater, there are more ways of accessing and more devices for using the content. And if we can say one thing about the future, it is that the ability to access content will get even easier.

We can call this new deregulated world, the world of Megachoice. Megachoice poses certain obvious problems for content marketers. How do you keep the attention of consumers? How do you brand and differentiate your content? How do you build relationships with consumers to ensure high rates of repeat purchase and cross selling? How do you enlist consumers as sources of referral in a world where the number of solicitations for referral and ratings runs the risk of being as annoying as market researchers on the phone?

Today you can see a movie in a movie theater, be certain that within a short and decreasing period of time you will be able to see the movie again via video on demand (VOD), Internet download or DVD rental or purchase.

You can download music from multiple music sites (e.g., iTunes, Urge, Amazon, eMusic, Rhapsody, Starbucks/Apple, Universal’s planned Total Music, cellular service operator sites or joint ventures) or you can purchase it on DVD from multiple sources (e.g. Amazon, Barnes and Noble), or you can rent music from businesses that offer subscription services e.g. Rhapsody, Urge.

So from a consumer perspective the result is typical of a deregulating market: more choice. And not only can you access more current content, an entire backlist of past content is pretty much guaranteed to be available. Examples of choices that consumers can make today include:

1. See the movie in the first run theater or see it at home via DVD rental or purchase.
2. See the movie at home via video on demand from satellite, cable, telephone company or streaming Internet access.
3. Select a level of quality for viewing a movie e.g. for a mobile video device such as a digital music/video player, on a computer, on a TV with standard definition or on a high definition TV.
4. Rent, purchase new or purchase second hand.
5. Choose a format with varying degrees of portability.
6. Purchase a version with advertising or without.
7. Purchase a version with or without digital rights management.
8. Purchase different rights to multiple downloads to one or more computers.

The inevitable consequence of more choice is that there will be more potential marketing, pricing and digital rights strategies which will have different degrees of appeal to different segments of the market. For example, one recent study by Microsoft and Starcom suggests that 10-15% of adults 17-35 in the US could now be characterized as advertisement avoiders. Clearly, this segment is more predisposed towards non-advertising based versions of content or content where advertising can be skipped (which will presumably in the long run, threaten advertising business models).

Just as in other areas of retailing where consumers will shop at both at high end and discount stores, consumers will likely continue to select media with different economic bases. A low involvement video may be acceptable to a consumer with advertising. A high involvement video may end up being seen in the theater, rented and purchased.

In the music distribution business, we already see price competition emerging between Amazon and iTunes. But there is also business model competition with download models, subscription models and combination device/download or combination device/subscription business models and partnerships emerging. Amazon has considered a cell-phone like MP3 economic model where in return for a two year subscription, consumers would receive a “free” MP3 player.

Another consequence of the increased availability of consequence is likely to be a reduction in average prices in the market. We see some signs of this trend in a number of markets:

1. The average price of movies has dropped significantly as move distribution has moved from videotapes to DVDs to downloads. While downloads tend to be less expensive than the purchase of a DVD, the quality is typically lower. One could also argue that the current slow speed of download also currently detracts from the overall experience, at least in the US where bandwidth speeds lag more developed markets. The niche marketer, Jaman.com which distributes rentable or purchasable international content offers rentable movies at $1.99 and purchased copies at $4.99.
2. The average price of music has also dropped and is likely to continue dropping. In October of 2007, Radiohead received wide publicity for a decision to make its next musical album available at a price determined by the downloader. One could call this “guilt marketing” and draw analogies to public television and public radio fund raising. Or you could see the initial music release as a loss leader to attract listeners to concerts, where they will purchase tickets and physical goods. Enthusiastic audiophile fans may also purchase higher quality versions of the music when released on optical media. In some cases, digital downloads of audio books are less expensive than purchase of actual books on Audible.com, the current major site.

Implications

Branding

In a world of Megachoice, content owners face many of the problems that have been experienced by the book publishing business for years. Do you market an individual book? Do you market an author? Do you market a series of books by an author? Do you market a brand or imprint?

In book publishing, authors tend to be “brands”. Some authors write “series” books with similar formulas and characters. Some author write within genres (mysteries, science fiction, romance). Some authors write series (e.g. Tolkein’s Lord of the Rings in three volumes with The Hobbit as a prequel.)

Very few publishers have been successful in developing brands where the buyer buys the brand rather than the author. Harlequin Romances is one of the few exceptions to the rule. The closest analogy in video are TV series brands which have spawned a series of video offshoots, e.g. CSI in its three versions, Law and Order variants, Star Trek.

In a world of digital video content, branding is likely to take place at multiple levels. There are clear economies of scale and scope from having a successful destination portal. All the major networks are establishing major on-line presences in order to create destination portals e.g. Hulu.com . The high valuation of aggregators such as Google, Yahoo, MySpace or FaceBook makes a media portal look like a low risk way of adding to shareholder value for a media company in addition to increasing the leverage they hold over conduits and aggregators. Many networks have insisted that Google’s YouTube remove their proprietary content in order to force viewers to visit their own network portal sites.

The motivation for content owners to integrate forward and develop their own brand is clear. Branding a portal offers some significant advantages.

· First, it simplifies accessing content for viewers.

· Second, it allows the creation of an advertising driven portal that substitutes for more traditional delivery methods.

· Third, the flexibility of portals provides more opportunity for content experimentation particularly for series content. In many industries increased competition leads to margin erosion and pressure on distributors; similar pressures in media will increases the pressure to eliminate non-value adding layers in the channels of distribution.

But as with most fragmented markets, different content owners may take different distribution strategies. In 2007, CBS has chosen a strategy of distributing contents on over 21 sites. CBS management’s rationale is that they are in the “eyeball business”. The more eyeballs they reach, the more they can charge for advertising. The challenge for an “eyeball” strategy is to be able to manage and report on multi-site campaigns in order to sell to and meet the needs of advertisers. The value added for CBS will come from a mix of content creation, campaign selling and management tools and the development of viewer profiles.

NBC and Viacom have chosen to create a joint site to create a major destination for viewers. Long term, NBC and Viacom may view this portal as a transitional business strategy. Comcast has realized the need to have an Internet presence and is developing a non-cable based content site. And in perhaps the biggest validation of this trend, Time Warner transformed AOL.com from a walled garden, or subscription strategy, to an advertising supported open content site.

Revenue Creation

One obvious economic implication of increased availability of content is that the traditional model of scarcity marketing has gone by the board. The entertainment industry worried a great deal about the cannibalization possibilities of videocassettes until they realized that videocassettes expanded the size of the market for video. The same conclusion was reinforced with change in technology to DVDs. By 2005, DVDs accounted for 59% of movie studio revenues (Edward Epstein, Hollywood’s Death Spiral, August 1, 2005, Slate Magazine)

At least one study has suggested that simultaneous release of DVDs and theatrical releases would increase revenues to content owners by as much as 16%, and drop revenues to theater owners by as much as 40% (Reference: Henrik Sattler, Felix Eggers, and Mark Houston, The Last Picture Show? Timing and Order of Movie Distribution Channels, October, 2007, Journal of Marketing.)

As so often happens in business, we now hear the same concerns about digital downloads of movies. However, it’s reasonable to speculate that:

1. There is an upper limit to the amount of time that individual can devote to entertainment so obtaining viewing is likely to be at least as great a problem as in the past and probably a more difficult task.
2. Introducing digital ownership of content creates a management problem for consumers that is roughly analogous to being a small IT department. When you own lots of content, whether it be books, cassettes, vinyl records, CDs, DVDs or downloaded files, the heaviest content consumers will find that
1. They don’t have enough space to store physical artifacts.
2. Maintaining and backing up downloads can become an enormous chore and the loss of downloaded content can become an expensive event. A family might easily have acquired several hundred DVDs worth $1,000-2,000 at second hand prices of $8 per movie and more if purchased new. And it is not unreasonably for a music enthusiast to have 10,000 pieces of music in his collection, worth about $9,900 at current iTunes pricing and $8,900 at Amazon pricing (as of late 2007)
3. If the price is low enough, consumers will acquire content as insurance against future periods of boredom. Not all of the content will end up being viewed in the same way that all of us have bought books that we intended to read, but never did. Audible.com has a very clever strategy of featuring a book every 2-3 days that is so low priced that a heavy user of audio books is highly incented to purchase and accumulate audio books in advance of need. Audible needs to compete against physical books in its pricing and also to pre-fill MP3 devices to capture spending before the user experiences a book buying opportunity.

One to One Marketing

With the market for content becoming more fragmented, content developers will increasingly want to know more about their consumers. Traditional sampling techniques for measuring audiences will become increasingly less useful. There are at least three economic reasons motivating the desire to develop information repositories at the level of individual consumers:

1. Maximizing the capture of the value created for consumers means reaching consumers when the content has the most value e.g. first release for a movie, or when a piece of music is popular or promotes a concert series. It also means understanding the consumer’s life cycle relationship with the content. A consumer that likes a movie a great deal might want to leave the theater with a DVD or a discount coupon to download a personal copy of the film or a gift certificate for that relative that “has everything”.
2. As in book publishing, repeat sales of a video series (whether movie sequels or a multi-episode format) leads to higher profitability and lower marketing costs. Knowing who saw and enjoyed content creates revenue opportunities for series and sequel selling.
3. Knowing the taste of consumers and the status of their inventory of purchased content makes the development of new material and cross-selling of content more likely to be successful. We already see such exercises being done on an individualized basis by firms such as Amazon and Netflix. Another example of the personalization of content are new classes of smart Internet radio stations such as Pandora.com which will create personalized music streams based upon music similarity.

Repositories

It’s no surprise that the major portals are all attempting to develop repositories of information about their users. Whether you are a retailer like Amazon or Barnes and Noble, a search oriented services such as Ask, MSN, Google or Yahoo, a content aggregation site such as Yahoo or AOL.com, a distribution site such as Netflix, the information you collect about consumers represents an advanced form of profiling that can be used for either for “shameless selling” to consumers or helping consumers find content that they will enjoy, depending upon your mission. What has been less predicted is that conduits such as telephone, satellite and cable companies should be able to develop individual profiles on viewership and preference that is very specific to content viewing habits and taste preferences.

If you consider the rate that viewers change channels, skip or speed through commercials, the amount of data generated will rapidly create some of the largest information warehouses in the world.

Rough estimate of sizing of channel switching behavior database

	US	Total World
Number of TV households	110M	1.1B
Average hours of TV per day	4	4
Shows and ads per hour visited	3 shows, 40 ads and information spots, 40 product placements	3 shows, 40 ads and information spots, 40 product placements
Days per year	365	365
Records collected per year per household	40T	400T
Data collected event	Household identifier Time in Time out Channel Content ID e.g. show number, ad number	Household identifier Time in Time out Channel Content ID
Total data elements	200T	2000T

Note: assume that household identifier does not have to be repeated and ignoring minor data fields such as contact information. Estimate also does not include follow-up click-throughs or related search/behavioral information. (M = million, B = billion or 100 million, T = trillion or 1000 million)

Privacy

An emerging trend in consumer portals is resistance to behavioral tracking and targeting. Search engines have been forced to make more explicit their data retention policies and the topic is unlikely to go away.

Future strategies will likely need to turn tracking into a user-controllable service that is perceived as value creating for consumers and which will encourage opt-in. Such an approach will be less likely to attract the concerns of privacy watchdogs and regulators, particularly in Europe.

Pricing Strategies

Pricing is an area where we predict further innovation. We have identified already that different rights strategies represent a new frontier in marketing. But in addition, successful content owners and distributors need to experiment with more pricing/rights combinations. NetFlix’s launch strategy represented a brilliant example of how changing the economic relationship between consumers and content owners/distributors can create brand new businesses. Fixing the total cost of ownership to the consumer removes an enormous annoyance to consumers; it also represents an effective price reduction to consumers who would otherwise have incurred late fees. Another way of thinking about the problem is that fees paid to a content owner have different degrees of perceived value creation. A rental fee is perceived as fair. A late fee may induce a more emotional reaction. Like many ethical strategies, Netflix increased the perceived value of its service by putting itself in the shoes of its consumers.

In China, media companies have had to deal with pricing issues and piracy. With only the income levels of a developing country, Chinese consumers historically purchased illegal copies of films. By dropping the price and competing on quality, media companies have regained market share against pirated versions.

As bandwidth speeds improve in the US, it is likely that theft will become a larger problem. Response to the transition will likely include:

1. Significantly dropping the price of content in order to gain volume.
2. Selectively lowering the price of content for lower resolution versions of content with more limited rights e.g. standard definition TV resolution with limitations on storage and ownership to target more price sensitive demand.
3. Offering bundled access to content to increase the share of spending and viewing time. This approach offers simplification of purchase and lower average cost and is being used in the music distribution business by firms such as Rhapsody and Napster and device vendor, Nokia.
4. Eliminating layers of distribution in order to minimize margins obtained by non-value adding or non incremental audience creating distribution.
5. Loyalty based pricing where cumulative purchases affect individual content purchase prices.
6. Direct sales models where purchase of content can lead to income from referral and direct sales activities.

Campaign Management

In 2007, major portals such as Google, MSN, and Yahoo have made significant investments in ad server companies such as DoubleClick, eQuantive and Right Media Exchange.

The trend is clear: content based sites with economic models based upon advertising are more complicated than traditional TV advertising and the supporting infrastructure and tools for linking information across different kinds of media and sites will have to be more capable. The ability to target will be increasingly refined and permit micro campaigns. The reduction in cost of micro-campaigns will increase the number of advertisers and advertising campaigns, something we have already seen with paid search marketing (e.g. Google AdWords, Yahoo’s Overture) and with cable companies advertising programs that permit low cost advertising based upon head end household reach.

At the same time, campaign analytics will require more flexibility to analyze vastly more complicated campaigns that stretch across media, web sites and portals.

Technology Implications in the Home – the Terabyte+ Household

From a networking and storage perspective, the most demanding content in the home is video. Video is large. A large music collection of 10,000 songs would run around 100 gigabyte at maximum MP3 encoding level of 320 kilobit per second or roughly the equivalent of 25 standard definition movie files (though an audiophile might well store the actual .wav files, which are typically 4-5X larger).

In contrast, a typical 90 minute film in standard definition runs in the range of 1.2 gigabyte to 4 gigabyte in SD (standard definition) depending upon the target screen size and quality. High definition (HD) video at around 9 gigabyte is so large that it is unlikely that most deployments will permit more than 3-4 simultaneous HD video channels in a home.

The good news is that the size of video files has historically made video piracy more difficult. But in leading edge markets such as Korea or Japan, faster networks are more available and cost significantly less than in the US. So, this temporary bottleneck will not protect content owners in the future.

Just as importantly, it does not take a large movie collection to start filling up a DVR (digital video recorder) or hard drive attached to a media computer/game machine. In effect, households are becoming mini-IT departments with all the resultant problems of access, backup, rights management and content sharing.

These scaling problems represent significant opportunities to increase usability and integration. By providing services around rights management, there are opportunities to graciously transform DRM from a perceived restriction to a service offering, i.e. we will back up or store content to which you have rights, or to put in other words, “You can re-download your content when you need it again, so you don’t need to back it up or fill up your hard drive.”

Content Development Implications

The world of Megachoice suggests one key change will be critical: the importance of quality will increase dramatically. Quality is a loaded term in entertainment programming. One person’s favorite programming is another person’s “junk” TV. So quality is always particular to an individual, their taste, their device, their expectation about resolution, portability and rights. Assumptions about uniformity of taste and expectation are likely to cause content developers, owners and distributors to miss opportunities.

Tools that allow repurposing of content, change in resolution provided or device supported, addition or subtraction of legal rights, dynamic testing of product/rights/performance/services will require new sophistication for media companies and central tracking of relationships with individual customers.

Strategies for Content Owners

In a world where content owners are attempting to figure out what will be of interest to consumers, media companies appear to be experimenting with different ways of building momentum for series video such as TV series.

Dramatic shows with story arcs have become popular over the last decade. Some of the most important dramatic television – shows such as The Sopranos, The Wire, Six Feet Under, Rome, Lost, Grey’s Anatomy, Heroes, etc. can lose viewers who have been unable to regularly follow the story arc on traditional TV. Late arrivals to a series can often go out and rediscover the early seasons via DVD, video on demand (VOD) or downloads, but for current, “in progress” series, networks have experimented with allowing viewers to catch up on the early episodes in a season, or to finish off a season that has been cancelled in prime time. The lower costs of release on a portal and the lower opportunity cost allows for different economics than the scarce resource assumed in an over the air broadcasting model.

Some competitors have realized that the traditional model of Spring “Upfronts” (pre-buys of advertising in the Spring for the Fall new season) is only one alternative release model and launch new shows at different points in the year.

Strategies for Conduits

The three scenarios introduced in this article produce different pressures for conduits.

In the Forward Integration scenario, content owners, which tend to be large and powerful companies will put pressure on Conduits. With more conduits competing for content, margins for Conduits is likely to be reduced and some conduits will be forced to merge or go out of business.

In the Balanced World scenario, content owners will have successfully pursued strategies where they offer services that are difficult for Content Owners to match. By having sticky services and a better profile of viewers, they may be able to base a strategy upon service stickiness and the better repository of behavioral information that Content Owners will have less skill and opportunity to match.

In the Churning World scenario, high rates of innovation could lead to a new source of content that could give birth to new content companies, but ones that don’t have the muscle to set up broad access to consumers. This new category of “amateur” content developers will likely have to be much more professional and ambitious than the relatively short user-generated material on current user video sites. Aggregators and Conduits could use this new wellspring of content to construct alternative programming portals. But it is likely that Conduits and Aggregators will find, as many have before, that creative talents able to create blockbuster successes are a scarce resource and likely to become more scarce in a world where quality is increasingly important.

Strategies for Niche Players

One of the rules of economic geography is that small markets support few niches and larger markets support many niches. Content is, of course, no different. Given that the Internet expands the reach of a content provider, it’s likely that video content will increasingly resemble the book business with new featured content (“Best Sellers”), series publishing, genre publishing, and back list (sometime referred to as Long Tail asset) marketing.

A limited form of genre publishing has even slipped into network prime time with current networks developing a positioning around police procedurals (CBS), relationship dramas (ABC), legal dramas (NBC), and TV targeted at younger and minority viewers (CW). Specialty cable channels have pursued theme programming with varying degrees of commitment and it is likely that the greater flexibility of video on demand will increase the importance of branding, pyschographics, taste mapping and prediction at an individual level.

Forward integration – Content Owners Build the Portal Brand

An argument for forward integration by content owners is that in a world of Megachoice, a portal is like shelf space in the consumer’s mind. Consumers will likely only visit a limited number of portals and portals will have stickiness that will keep viewers at the site or cause them to bookmark or download inventory for later viewing.

A second argument for forward integration by content owners is that if increased supply of content and cross-content competition drives down prices, pressures on margins will cause the elimination of content distributors (conduits and aggregators) where the margins of the distributor exceed the value created.

A third argument for portal ownership is the increasing importance of creation of relationships with and information about consumers. In a world where advertising revenues are at risk, alternative economic models such as click through revenues for viewers following up on product placement or advertisements offer a potentially significant revenues source. Google in 2006 averaged approximately $1.52 per click through for consumer products under $100. The traditional 30 second spot revenue for an advertising model works out at about 2.1 cents per user in prime time. If networks with their content power can create click through models with the same success as Google, even a low click through rate can compensate for ad skipping.

Portals, in effect, become similar to the traditional prime time network with syndication a manageable option that can be done in parallel or sequentially depending upon the best value capture. In some situations, making content available at many sites may be economically preferable and technologically more feasible (if bandwidth is a constraint or reach is the key issue). In other situations, proprietary content acts to pull consumers to the site for the premium content and allows the site to keep viewers at the content owner portal.

Backward Integration – Do Conduits Build Content Empires?

For many traditional conduits, the threat of forward integration has forced them to consider whether they should be in the content business. Comcast considered purchasing Disney. Terry Semel, former CEO of Yahoo was brought in for his Hollywood connections. Google has been forced to pay for some of the news content that is aggregated on its site.

The issue for these firms is (1) Can they provide services that are sufficiently attractive to make their sites sticky enough to make them attractive redistribution or referral sites for content distributors? (2) Do they need to develop or acquire proprietary content? Google recently announced a joint venture with Nielsen’s to improve reporting on advertising viewing, an example of using value added services to differentiate its capabilities and network from aggregators that only sell eyeball access.

Horizonal Integration – Integrators Offer Eyeballs to Content Owners

Again looking for parallels in publishing, even if content owners deliver directly to consumers, there is still a role for “selectivity”. One buys The New Yorker magazine for the editorial talent of the magazine. It is far easier to delegate the responsibility for content creation to an intermediary if one is busy.

While the new functionality of the Internet gives choice to those that want it, the role of intermediaries, reviewers, aggregators, web mavens and ratings is to simplify choice. These intermediaries are the 21^st century equivalent of book, music or film critics and editors. (Alistair Davidson and Jonathan Copulsky, Managing Mavens, Strategy and Leadership Magazine, 2006)

Packaging Strategies – Packagers Build Device/Content/Conduit Packages

In a world of Megachoice, some consumers will be overwhelmed by the choice available. Many consumers find the emerging digital living room complex to understand, complex to buy, complex to install, and complex to use. Apple has taken the view that ease of use and pre-configured products and services makes adoption easier. Over time, we can expect more vendors to follow Apple leading in pursuing high degrees of integration and to reduce usage complexity. This shift in performance towards the ease of use expected by consumers will be a continuing area of challenge. Strategies that can be expected to emerge include:

1. Bundled products and services, e.g. Apple, Microsoft Zune, cell phones with video capabilities and attached services.
2. Families of integrated products and services, e.g. Xbox, Zune, Vista; Apple iPod, iTunes, Macintosh, iTV.
3. Standards based products and services e.g. MP3 music services without DRM.
4. Products and services focused on bundling capabilities into a single product to reduce complexity to consumers.
5. Open source, open content, open device combinations e.g. Gutenberg project to provide free copies of off copyright material; similar projects exist for audio books.

Viral Strategies

A current flaw in most digital models is that one of the most powerful mechanism for creating sales – recommendations from a satisfied content viewer -- is largely ignored as a sales channel.

The primary reason for not harnessing peer to peer recommendations seems to be the absence of a cost effective micropayment infrastructure coordinated with digital rights management (DRM). However, as the content explosion increases choice, distribution models based upon referral may become exceptionally attractive and the next generation of social networking. A secondary driver here will likely be pressure from writers seeking remuneration for reuse of their content on new digital media.

Financial Strategies: Own Content vs. Syndicate Risk vs. Consumer Financing of Project

It’s likely that some content owners will be unable to establish a destination quality portal. For these content owners, the availability of aggregator portals with many eyeballs will remain attractive and represent a way of raising funds or syndicating risk.

Large portals may from time to time want to syndicate the financing and distribution of large or risky projects in the same way that European TV networks may cooperate on content development with a US network.

Perhaps more interesting is the idea that disintermediation could emerge for cult video content. Under such a scenario, addicted cult-like viewers might choose to purchase content in advance of creation in return for the psychic satisfaction of prolonging a series, otherwise unfundable, in return for a lower price on the eventual release, or even for profit participation.

Capacity Management

No matter what the technology, it always seems that demand is greater than capacity in telecom. A critical issue in the world of Megachoice is the problem of blockbusters. It’s unlikely that any one major content vendor will, in the near term, have enough capacity to handle the demands of extremely popular content. Imagine for example that a content owner wanted to make available a blockbuster piece of content digitally in HD to 500M homes internationally. While time zones would provide some timing advantages, it’s likely that server and network capacity might have to be rented with third parties. If advertising sponsored, there are likely to be additional constraints on tracking viewer data.

A number of capacity strategies are possible:

1. Design capacity to handle an average volume of transmission.
2. Rent peak capacity to preserve purchase, rental or advertising revenues.
3. Distribute from multiple sites in order to maximize the value capture within a narrow time window.
4. Use differential pricing to manage capacity effectively. This strategy is a traditional phone company and utility strategy, but it has not yet been widely adopted in media environments. One could envision using auctions to get privileged access to popular content or differential pricing based upon capacity availability on an actual or predicted basis.

In other high tech markets, vertical integration has been replaced by horizontally dominant competitors. With computers, different companies dominate different components of the personal computer.

Category of value added	Dominant Player (s)
Microprocessor	Intel, AMD
Operating system	Microsoft
Hard drives	Seagate
Graphics boards	AMD/ATI, nVidia, Intel
Routers	Cisco/Linksys
PCs integrators	HP, Dell

In the world of networked media, companies are attempting to pursue similar horizontal strategies. One can characterize the layers as follows:

Category	Major Players
Content development	Disney, NBC/Universal, CBS/Viacom, News Corporation/Fox, TimeWarner
Aggregators	Content owner portals, search engine and directory portals, user generated content portals, social network sites
Content serving services	Akamai, Brightcove, Google (predicted)
Major transmission owners	Cable companies, satellite companies, IPTV networks owned by telcos, Google
Owners of last mile or mobile connection	Cable, telcos, electrical utilities, bandwidth owners, cellular companies, metropolitan wifi connections, Wimax networks
Content/ad viewing tracking services and ad tracking/serving	Google/DoubleClick, Microsoft/eQuantive, Yahoo, CBS, Nielsens,

Summary: Decisions, Decisions, Decisions

Strategists in media companies are dealing with a massive change in their industry. There are, as a result, no magic bullet decisions but rather a series of decisions that need to be made and managed over time as technologies and installed bases change. Common to all the likely decisions is the need to increase the granularity of information about customers in order to create appealing support structures for making the life of individual customers easier.

The basic approach will likely be:

1. To understand the economics of the distribution chain. Where are profits being made? What is the value of the intermediary role? What strategies are dependent upon the intermediary? Where can the intermediary be eliminated?
2. To build, rent or partner to create capacity to deliver different business models.
3. To develop, acquire and use highly granular information about individual customers’ preferences, behaviors and usage.
4. To understand where distributions and partnership deals are test beds, short term volume builders or long term relationships. A strategy of simplicity such as Apple’s 99 cent music pricing will inevitably change to a more complex pricing model as significant competition emerges.
5. To run series of experiments in business models and content packaging to understand the changing preferences, installed bases and habits of customers.

Author

Alistair Davidson is a strategic and marketing consultant who has extensive experience in software development, high tech start ups, and working with companies in markets with changing technologies and business models. He is the former CEO of a number of startups including firms developing strategic planning tools, new product success prediction tools, market simulation, new media advertising tools and exchanges. He has been responsible for developing more than a dozen high tech products including first of breed products and commercializing them internationally. He has an undergraduate and MBA degree from Harvard, is the author of three books on strategy and technology and is a trained facilitator. He has worked with telecom, communications equipment, financial, media, new media, publishing, high tech, healthcare and government clients. His business web site is www.eclicktick.com and his personal web site is www.alistairdavidson.com .