Media business models have been more diverse simply because the
designation covers many activities along the value chain—from the
production of content (words, images, or audiovisual) down to
aggregation and eventual distribution or broadcast. Many companies
have operated in a vertically integrated manner, muddling the
distinctions further, although each model had been very stable
until recently. Players adopted a subscription, advertising, or
transaction (pay per piece of content) business model; some
combined the three. Cable operators, for example, focused on the
subscription model, while broadcast networks relied on advertising.
Film studios employed transaction-based business models, whether by
box office or DVD sales. Newspapers and magazines executed a hybrid
of all three.
The IT realm (defined as software, hardware, devices, and
services) developed its own diverse set of models, many of which
had multiple variations. Device sales were the most
straightforward. Products were priced at the unit level and sold
either through retail or direct routes to market. Mobile devices,
particularly in Europe, were the main exception. There, mobile
operators subsidized their initial cost as a way to drive customer
acquisition and retention. As a result, users paid for the full
cost of the device through the monthly telephone bills.
The software side evolved a dominant packaged-software model.
This licensing schema generated five revenue streams: license,
maintenance, upgrades, professional services, and support.
Meantime, professional services was becoming an important
stand-alone sector within IT, in the form of system integrators
(SIs) and outsourcing firms.
Recent forces of change and their impact
While well known, the massive changes that hit all three industries
over the past seven or eight years are worth briefly re-examining.
These changes have caused the three industries to begin rethinking
their core mission and to question their traditional commercial
models. Let's delve into these forces:
- The storage capacity and processing power of computers (both
servers and PCs and other devices) has continued to grow
exponentially. That has enabled both servers and portable hardware
to perform an enormous variety of tasks;
- The cost of devices has plummeted with advances in silicon
technology, making them affordable to virtually everyone;
- The miniaturization of components has provided a variety of
additional features (such as photo and video capabilities), thus
broadening the range of possible applications available on personal
devices;
- The development of the Internet and of a new telecommunication
network architecture has enabled movement of very large amounts of
digital information (much beyond traditional communication and
messaging) to every point connected to the network;
- A ubiquitous broadband infrastructure (significantly ahead of
most predictions only seven years ago) has been developed, which
has enabled virtually everyone in the developed world to be
connected both to other users and to a server network with massive
processing and storing capacity;
- Mobile networks have become pervasive and have added data
capabilities at higher speeds, which has extended the reach of
services;
- Finally, all these advances have helped develop simple and
well-designed user interfaces to drive more rapid adoption of new
technology and business models.
As individuals, we are familiar with how these trends changed
our personal and workday lives. Today, most forms of information
(business transaction records, videos, personal and professional
communication, news, and so on) have crossed over into the digital
realm. That will continue to have profound implications on our
social and economic interactions. It is reshaping how we enjoy
information, entertainment, and a variety of other applications
(songs, not albums; stories, not newspapers; applications, not
full-featured software packages); how we work (design teams in
Silicon Valley; discrete development teams in Russia, China, and
the Philippines; integration in India); and even how we experience
community (the people we physically see in our everyday life, or
those with whom we share our interests and passions in the
virtual/net world).
However, the change has affected not only our lives, but also
the way these industries operate and how each thinks of itself in
relation to the others. Here are a few fundamental impacts of the
trends we described:
- In telecommunication and media distribution, these forces of
change have blurred the boundaries between the two industries.
Telecommunication companies can now (or in the very near future)
"do media" and cable can "do communication." No wonder that each of
these two industries is starting to reconsider its business
model;
- In content creation, traditional business models based on
physical IP protection mechanisms have been disrupted by
digitization, forcing content owners to re-think their business
models. In parallel, the proliferation of digital distribution
platforms has led content owners to consider alternative channels
or going directly to the consumer;
- In the device space, the fact that PCs, mobile phones, MP3
players, and gaming consoles are becoming prime "real estate" (due
to users spending more and more time in front of them—rather than
in front of billboards or TV sets) has led device makers to
consider ways of collecting alternative revenue streams, by
becoming more "service" than "hardware" oriented. (Interestingly,
mobile operators are thinking along the same lines and have started
moving into the device space.);
- In software, the high level of penetration has led software
providers to contemplate different ways of developing an ongoing
relationship with end users, with industry leaders stepping up
their efforts to offer "on-demand" applications. Software
developers have also stepped up their involvement in hardware, both
in the form of using their influence in promoting their platforms
and in the area of full ownership of the device proposition;
- Finally, the digitization of the value chain has created
powerful new intermediaries sitting across the boundaries of
software, media, and communications. Search-based advertising
business models such as Google's have created not just a new form
of marketing, but are also reshaping advertising and the entire
content-distribution landscape.
Above all, each of the three industries hold that the "grass of
growth" may be greener in the neighboring space, and that what
matters most is the battle for direct "customer ownership" (a
common but unfortunate industry term that does not necessary
reflect the ultimate aspiration of the end users).
A period of intense experimentation
There is certainly no shortage of examples illustrating the
richness of recent experimentation in new business models in each
of the three sectors of the Digital Ecosystem (defined as the
telecommunications, media and IT industries). Some examples below
illustrate the variety of activities in each sector and how, as a
result, the boundaries among the businesses are increasingly
blurred.
For example, in telecommunications we have seen a number of
recent experiments in developing new revenue streams by charging
for unit of content rather than for bandwidth in mobile (witness
ring tones, wallpapers, downloads in the case of Vodafone Live!,
and Orange Verizon Wireless's V-Cast). Advertising models are being
explored as well; examples include Blinkx or Sugar Mama trading
mobile voice minutes or text message against ad viewing. Firms are
also experimenting with payment services and charging for share of
transaction (with DoCoMo's Felica service in Japan being an
example). And a number of Telecom operators are developing their
IPTV offerings along the lines of a subscription plus pay-per-view
model very similar to traditional cable (see BT Vision, AT&T
U-verse, Verizon's FiOS).
Traditional cable and satellite companies have at the same time
started to bundle communication services into their offering,
either through third-party infrastructure (as with Sky's
acquisition of EasyNet) or through their own upgraded one (Comcast
or other cable companies in the US and Europe).
In addition, some of the recent business models in telecom have
involved charging the service providers a percentage of content
revenues (see imode or Vodafone Live!). In other cases, at least
the possibility of charging content companies or intermediaries
(like Google) according to the traffic generated has been raised by
DT in Europe and AT&T in the US (see discussions involving
industry and policy makers over the last couple of years in the US
and Europe).
In the area of content creation and aggregation, the level of
experimentation with new business models is similarly very
rich—consortia of traditional players have started new online
platforms (for example, NBC Universal and Fox with Hulu in the US;
BBC, Channel 4 and ITV with Kangaroo in the UK). New ventures with
similar offerings have been started as well from scratch in WebTV
(see Joost or Babelgum). In music and video, experimentation
continues with various flavors of offering with different degrees
of DRM protection (see recent agreements between Warner, EMI,
Universal, and Amazon on one hand or the deal between Fox, Disney,
and iTunes on the other). Not to mention the 2007-2008 Writers
Guild of America strike, which has reiterated the need of adapting
traditional media models to the digital age.
In the device space, there have been multiple cases of device
makers moving rapidly into services' revenue streams (iTunes has
been the prime example, but more recently also deals between Apple
and operators on the iPhone, which include a revenue-sharing
component). Another example is Nokia, which has strengthened its
service proposition both with OVI and with the purchase of Navteq
and has even reorganized along services and hardware lines.
Qualcomm's efforts with Brew have also a very similar flavor of
entering the services space.
In software, Microsoft has been very active on multiple fronts,
investing, for example, in Windows Mobile and promoting device
offerings in addition to the traditional ones available through
traditional mobile device makers, not to mention its activities in
gaming consoles with the Xbox and the Multimedia IPTV platform
development for operators.
Among the new intermediaries, Google moved into new territory
with its recent entry into the mobile software platform space with
Android on the back of an opportunity to unleash greater variety of
applications on mobile devices by driving a set of alliance members
around it. And, of course, Google is even considering a bid for
spectrum in the US auction.
The software space is in the throes of a major transformation as
well, with the packaged software model under pressure from
Software-as-a-Service (a subscription-based business model), "Web
services," and "mash-ups"; in addition, they will likely soon have
to wrestle with the impact of virtualization as well.
The list could go on.
Issues generated by recent evolution of business
models
Consumers, businesses, and the society at large have
largely benefited and will continue to benefit from the innovation
that the Digital Ecosystem has generated and will generate—think
about the increases in labor productivity, the availability of
lower-cost channels, greater geographic reach for companies and
individuals, the ability to source talent globally, the benefits of
mass collaboration among individuals online, greater consumer
choice, and enhanced and instantaneous access to knowledge.
The Digital Ecosystem participants have benefited, too, and can
continue to do so. However, in our view, it is legitimate to
question whether the current trends of deploying new business
models aimed at entering new competences in neighboring industries
within the Digital Ecosystem will have an unambiguously positive
impact on the ecosystem's health.
One possible scenario is that what appears currently to be a
collision among these industries will result in a zero-sum—or even
negative—game across IT, media, and telecommunications due to each
competitor aiming at maximizing its share of the pie rather than
the size of the pie itself. There are many examples of trends that
could lead to this outcome, but let's pick two examples
illustrating the point:
- As telecommunications companies aggressively enter the media
domain, and cable and satellite companies bundle communications
services in their offerings, it is possible that the outcome would
be simply a reduction of the overall pie;
- As traditional forms of IP protection become vulnerable in the
online world, IT players without existing vested interest in
content copyright may be tempted to ride this trend to their
temporary advantage. The possible result: a reduction of the
overall "content value pie," which ultimately feeds all these
industries.
There are also other reasons why the proliferation of business
models replicating neighboring-industry ones could reduce the
overall pie:
- The plethora of business models could end up acting as a
barrier to more widespread adoption of newer services, because
companies are spreading their resources and attention too thinly
across a broad set of initiatives and the resulting fragmentation
could generate more complexity than add value for the
consumers,
- That many potential partners are also increasingly potential
competitors may make companies more inclined to do everything
internally, rather than to think more dispassionately about where
they should partner or outsource certain activities, which could
make collaborative "grow the pie" solutions less likely.
These zero-sum game, or "shrinking of the pie" scenarios, are
not at all inevitable. We are clearly still at the dawn of the
digital revolution and there is still enormous upside to come.
There are positive scenarios in which the industries can share in
the welfare created for consumers, businesses, and society at
large.
Some of the themes that the Digital Ecosystem players will need
to address to achieve the win-win scenarios are explored below.
Developing a Digital Ecosystem "agenda" for the
future
The Digital Ecosystem participants have an opportunity to shift the
scenarios away from a purely zero-sum game and toward a win-win.
This requires that they develop a shared vision on some of the key
issues that need tackling in order to grow the pie while continuing
to positively change the way we all work and communicate. It also
requires looking at issues both inside and outside the Digital
Ecosystem. Here is a list—by no means exhaustive—of areas in
which the ecosystem participants could engage.
- Social issues. Ecosystem players could spend
more effort in identifying the next areas of welfare creation that
can be targeted in all sectors of the economy, thus generating
additional value for the industry to share in. Sectors such as
healthcare, logistics, transportation, financial services,
education, and retail are all likely to present significant
opportunities to leading companies within the digital ecosystem in
the coming years. Indeed, shifting focus away from competing within
their existing boundaries to solving pressing social and business
problems in these sectors may afford participants in the TC, ME and
IT industries opportunities to collaborate and grow their
collective and individual profit pools.
- Intellectual property. Today, an accepted set
of rules governs the protection of intellectual property in the
physical world. This is indeed considered one of the foundations of
the rule of law in a free society, whether it covers innovation and
patents for new products (e.g., software, engineering, pharma) or
for information and entertainment services (books, music, works of
art, movies). The Digital Ecosystem participants have an
opportunity to work together towards drawing the new rulebook of
frameworks which is compatible both with the spirit of IP
protection and with the digitization of content;
- Infrastructure. A large infrastructure still
needs to be put in place and upgraded for the economy and the
community—servers, routers, fibre to the curb or to the home, new
generation networks—to derive the benefits of the Digital
Ecosystem. The investment case may often be uncertain at least in
the short-medium term and, in some geographies, current business
models may never allow the costs to be fully recovered. This
deserves the full attention of the ecosystem participants so that
they can work out creative solutions. These may involve making
"grand bargains" with regulators and policy makers or some form of
private public partnership
to unleash the full potential of the ubiquity of the
infrastructure; - Standardization. The creation of standardized
environments in a variety of industries has historically
accelerated revenue growth and adoption, irrespective of whether
standards have been proprietary, or open and industry driven. Some
examples of success stories are the GSM standard particularly in
Europe or the global standardization around the DVD format, not to
mention HTML, USB and other efforts. Alternatively, some less
successful stories, like the low take-up of mobile content have
been driven at least in part by the significant fragmentation in
standards, which has created a very costly environment for
developers. The ecosystem participants have an opportunity to
jointly identify what are the next barriers to growth caused by
lack of universal standards and decide what they can do to remove
these barriers.
These are examples of issues that the ecosystem can only resolve
with some form of cooperation across the industries. Ecosystem
leaders will be companies with both vision and influence
that—while accepting they will continue to compete for their fair
share of the pie—will be able to align the system around them
toward some common and mutually beneficial goals.
The World Economic Forum can help further the evolution of the
Digital Ecosystem by encouraging industry participants to develop a
shared view of where collaboration among actors could benefit all,
and where continued aggressive competition is better suited to
driving innovation and differentiation.
Michele Luzi is a partner at Bain & Company and leads
the firm's European Telecom, Media, and Technology Practice in the
UK. Jennifer Binder-Le Pape is a practice manager in the firm's New
York office.
