Internet TV's Impact: Disrupting Viewing Landscape

Disrupting the Viewing Landscape How Internet Television Will Change TV As We Know It Table of Contents Table of Contents ................................................................................................................ ii Introduction......................................................................................................................... 1 Defining the Television Content Delivery Industry............................................................ 1 Natural Technological Limits ......................................................................................... 2 Disruptions...................................................................................................................... 4 Capturing Value in Television Content Delivery ............................................................... 4 Broadcast over-the-air..................................................................................................... 4 Cable ............................................................................................................................... 5 Telecommunications ....................................................................................................... 6 Satellite ........................................................................................................................... 6 IP-TV and Wireless......................................................................................................... 7 Structural Characteristics of Television Content Delivery ................................................. 7 The Current Industry....................................................................................................... 7 Competition..................................................................................................................... 8 Strategy ........................................................................................................................... 9 The future of the industry ............................................................................................. 10 Analyzing the Value Chain: Whither Delivery?............................................................... 11 Complementary Assets ................................................................................................. 11 Integrate backward or forward along the value chain............................................... 12 Deliver additional services (phone services, etc.)..................................................... 12 Evolving Towards IP ........................................................................................................ 13 Firm capabilities............................................................................................................ 15 System Dynamics Model Analysis……………………………………………………16 Conclusion……………………………………………………………………………….17 Appendix 1: The Five Forces............................................................................................ 18 Appendix 2: The Value Chain .......................................................................................... 19 Appendix 3: System Dynamics Model Scenarios………………………………………..21 Introduction Over the last 50 years, America has come home every night, flipped on the television, and lamented that “there is nothing to watch.” Viewers have been limited to preset viewing times and content that is controlled by a few major distributors such as Comcast and Time Warner. However, Internet Protocol television (IP-TV) has the potential to disrupt the industry by not only changing the consumer experience (variety of shows and schedule), but by disrupting the value chain and remaking the paradigm for capturing value. In order to examine IP-TV, we look at the broadcast and delivery industry to o o o o o define the industry; examine how value capture occurs; identify the key structural characteristics; analyze the industry value chain; and speculate on the industry’s future evolution. Thus, we will examine how the looming IP-TV disruption will change the industry and how the current players may respond. We will also examine what risks IP-TV firms face, and what strategies they may employ. Defining the Television Content Delivery Industry The television content delivery industry is defined here as simply those firms who deliver television programming to the consumer. Players in this industry include overthe-air broadcasters like local network affiliates, cable providers like Comcast, satellite providers like DirecTV, and RBOCs like Verizon. Programs are also starting to be broadcast over the web – the emerging IP-TV model – either as a rebroadcast or as the sole source. While the quality and variety of this last category are currently limited, IP­ TV has established a toehold in the industry. TV content delivery technology has undergone three main generations and is on the verge of a fourth. These include the following: I. II. III. IV. Free over-the-air broadcast Analog (Cable) Digital (Cable, Satellite, Fiber) IP-TV (wireline and wireless) In measurements such as picture quality (see Figure 1), IP-TV currently has significantly lower performance than the current standards. This low performance is why IP-TV has not been viewed as a threat by the incumbents. However, IP-TV is improving in this metric through technology and through non-classical viewing situations such as mobile devices. We believe that consumers are increasingly valuing program availability, both in terms of schedule and relevance to them –niche programming. Digital Cable Picture Quality 100 Analog Cable 50 OTA IP-based 1 1940 1970 1990 Figure 1. S-Curve with picture quality as the performance measurement. Note: the second takeoff in Digital Cable represents the introduction of High-Definition TV. In order to evaluate the industry in this dimension, we created “units of content,” or program-hours as the number of programs an individual user can access within a 24-hour period – Figure 2. This industry has evolved over a series of generations, from offering approximately 20 program-hours per day in the 1940s to today’s premium digital subscriptions that offer over 12,000 daily program-hours. IP-TV can make programhours virtually infinite. Natural Technological Limits In the TV content delivery industry, each generation of firms has faced natural technological limits on the number of channels they can provide to viewers. Units of Content 500 III II 50 IV I 1 1940 1970 1990 Figure 2. S-Curve with unit of content as the performance measurement. Note: the second takeoff in Digital Cable represents the introduction of High-Definition TV. More specifically, technological limits have constrained the program-hours provided in the following ways: Delivery Technology I. Broadcast II. Analog (cable) III. Digital a. Fiber Technological Limits Limited spectrum availability, no interactivity, and limited signal range Limited bandwidth and no interactivity - b. Satellite c. Cable IV. IP-TV a. Wireless b. Wireline Despite the high bandwidth, varied content piped into a single broadcast channel can push bandwidth limits Practical limits exist in terms of the availability and prevalence of fiber networks Limited uplink and bandwidth - one pipe multiple channels simultaneous Limited uplink and bandwidth – one pipe multiple channels simultaneous Limited transfer speed/bandwidth and device screen size Download speed (one pipe/one channel – infinite combinations through that one channel) as well as the practical limit of being in its nascent stage of development - affects picture quality and download speed but not number of program choices Disruptions Disruptions occur with the emergence of new content delivery technologies. Each successive generation has brought a significant increase in the number of channels, degree of interactivity and choice of content. With fiber to the home and satellite, new players have entered the market and development of digital technologies has led to a burst in innovation such as video on demand. IP-TV is poised to create a disruption in the foreseeable future. While currently utilized only by lead users and early adopters, IP­ TV allows for an unlimited choice of channels that can be selected by the user without the limits imposed by distributors such as Comcast or Direct TV. Currently, the primary limiters to the amount of accessible IP-TV content-hours include (a) download speeds- a function of internet bandwidth - -picture quality is traded off against faster download due to current technology limits, (b) storage and organization, which affects users’ ability to browse, search, and access content, and (c) listed content. Cable’s technology’s use of fixed channels allow for seemingly instant load time and limited storage -most programs are real-time off of satellite or tape storage with the exception of pay per view, video on demand. IP-TV’s technology challenge is to reach the level of quality on the picture metric as consumers need which is not necessarily were the cable industry is going – HDTV. Capturing Value in Television Content Delivery Content delivery firms capture value in varying ways. As the landscape changes from one generation of delivery technology to the next, these firms have attempted to adapt to a changing landscape and adopt new ways of serving their customer base. With each generation, though, the changes have been dramatic, and consequently, the industry has seen dominant firms shrivel into niche players. The value chain is given in Appendix 2 and discussed in detail later in the paper. Broadcast over-the-air The local affiliates of the big national broadcast companies, such as NBC, ABC, and CBS, provide the over-the-air (OTA) TV services to users who lack either a cable connection or the desire to pay subscription fees. In the past, OTA represented a unique content delivery approach; consequently, they captured value through their uniqueness. Following the emergence of cable technology, however, the OTA providers’ market share shrank dramatically. Yet these OTA providers had already built complementary assets: their content and brand. They all have become content providers for local news and events, earning revenues from advertising. Regulations preventing other broadcast providers from operating have also helped OTA broadcasters to maintain an element of uniqueness. In the future, local stations will become increasingly irrelevant as delivery providers, but will continue to function as local content providers. Thus, the complementary asset of local content production capabilities will be the primary – and perhaps sole – asset by which to create and capture value. Cable Several cable companies dominate the market: Comcast, Time Warner, and Cox. They earn revenues from subscription fees as well as advertising. Cable firms have recently added pay per view service, which brings in incremental revenues from one-time event fees. From its inception, cable technology has disrupted OTA broadcasting by enabling cable providers to offer higher picture quality and more content channels than OTA. Specifically, inclement weather causes signal interference for OTA broadcasts, and the signal itself degrades at greater distances (1/R2). Both result in poor picture quality. Meanwhile, the regulation of the frequency spectrum limits the number of available OTA channels. Cable’s technology removed these limiting factors and with their increased programming channels, they were able to attracted consumers willing to pay for programming and advertisers eager to reach these consumers. Cable’s huge install base of subscribers serves as a key complementary asset enabling value capture, as it allows for power vis-à-vis the content providers. At the same time, regulations that require a cable company to serve an entire city or region all but create regional monopolies, and thus, erect significant barriers to entry for other cable firms. In the future, capturing value through customer relationships and install base seems unlikely to change. Cable firms are looking to create new value by using two strategies: 1) create a new dimension of performance, which is the “control” capability, by offering more On Demand features; and 2) expand their operations to provide additional services – such as broadband internet access and phone. Telecommunications Telcos are trying to enter the content delivery market through their fiber-to-thehome technology. Their business model is similar to cable companies. Yet because of the uniqueness of the fiber technology, the Telcos can provide higher quality and additional channel content, disrupting cable technology a way that is analogous to cable’s disruption of OTA broadcasting. Telcos are also trying to build their complementary assets, most notably their customer base and brand recognition. Telcos, however, have an advantage that cable companies didn’t initially: they already have a customer base through their phone service offering. The Telcos can leverage this install base to gain share in the TV content delivery market. In the future, the way Telcos capture value will almost certainly change. As they compete with cable providers, Telcos will increasingly rely on complementary assets – specifically, the install base – and less on the uniqueness of fiber technology. Install bases will also drive competition among the Telcos, as the competitive map will largely reflect existing regional footprints. Satellite DirecTV and Dish Networks are the primary competitors in the satellite TV space. Their revenue sources are similar to those of the cable companies: subscriptions and ad revenue. They compete through the uniqueness of the satellite technology: geographic reach (especially in rural areas where cable has not installed lines due to persubscriber costs) and portability. They initially offered more channels than cable but that difference has eroded. Satellite providers currently are working toward building complementary assets. For example, DirecTV has invested significant capital on advertising to build its brand. In the future, satellite providers – especially DirecTV – will attempt to compete through the complementary assets of install base and brand. However, these firms will probably continue to rely on the uniqueness of satellite: while the value of geographic reach is diminishing as a competitive advantage in the US, this unique attribute has already shown some of its potential in emerging markets in Latin America and India. IP-TV and Wireless IP-TV is an emerging and potentially disruptive technology. The uniqueness of this technology derives more from the control it offers users, rather than from an escalation along the quantity dimension. In the future, IP-TV and wireless providers could also create and capture value through uniqueness on the “units of content” or program-hours dimension – if and when content storage databases grow to a critical mass. Moreover, wireless could also prove to have unique assets (i.e., brand and technology for delivery to mobile customers) established from its location and situational uniqueness. Through the growth process, these companies can build other complementary assets, such as expertise in serving an evolving customer base or executing on mobile delivery. The method for achieving a strong value capture by firms in the delivery industry is less clear in IP-TV then the others. Structural Characteristics of Television Content Delivery The industry and its potential earning capabilities have historically been linked to cable’s regional monopoly characteristics. The introduction of satellite and fiber-to-thehome has challenged this paradigm. However, with each of these technological advances, the competition has focused on expanding the capability to provide content, rather than on achieving lower price points. With development of video on demand and internet and mobile broadcasting, the content delivery industry will undergo significant structural changes. The Current Industry In order to examine the current state of the industry, we utilized the five forces model (see Appendix 1). The key factors include: high barriers to entry (BTEs), due to a huge minimum efficient scale; high supplier power for the most popular program owners (e.g., ESPN) but low for most others; limited availability of substitutes (for television content broadly); and muted rivalry among providers of the same technology, but more intense rivalry among providers of competing technologies. The industry’s attractiveness stems from the drivers that shape the five forces. Specifically, the customers have fairly homogeneous demands. Where preferences differ, all the delivery companies are able to easily price discriminate, since consumers self­ select between basic and premium viewing packages. Additionally, the industry learning curve is relatively flat, in terms of actual delivery (this does not include programming, marketing, or other expertise). Fixed costs, in the billions of dollars, represent the vast majority of total costs in the industry. There are huge economies of scale, and accordingly, profits are determined by the ability to secure a sizable customer base, which spreads the fixed costs over a greater volume and lowers the firms’ per-unit costs. Moreover, the larger the customer base, the more bargaining power a delivery firm has when negotiating rates with content providers. Finally, the size of the customer base also affects the ability to capture local advertising revenues. One of the interesting aspects of the industry is that it has seen the growth in its economies of scope over the last three years. Content delivery firms now offer voice (phone service), interactive games, and video on demand at lower per-unit costs over a single infrastructure. However, while content delivery firms expand their product offerings such as voice, existing voice providers such as the RBOCS have entered the content delivery market, as they look to defend their core business and build new revenue streams. There are a good deal of complementarities, including TVs, Tivo/DVR, and settop boxes. Each of the complementarities is set up to the standard protocols which makes them interchangeable for the current designs. There are no network externalities at present; however, they may arise in the future if and when interactivity among users takes off (such as in the gaming segment). Competition Competition has been muted in the past by regional monopolies and the focus on content (quality of picture and number of channels). Historically, competition has not hinged on price. Pricing strategies, including promotional offers, have been used to bring more customers into the industry rather than as a differentiator among firms. While one might think that the low switching costs should cause firms to compete strongly, it is clear to all firms that pricing could approach marginal costs quickly if competition heated up; firms therefore choose to compete on the other dimensions for the most part. With that said, there have been instances where satellite providers saw their “uniqueness” erode, and with no discernible product advantage, attacked cable on price. Tremendous spillover in the industry would also suggest price competition, especially considering that from a purely technological standpoint, there is little preventing competitors from installing their own lines. However, incumbents’ high sunk costs have translated into regional fiefdoms, keeping competition minimal. Strategy The reinforcing loop driving success in the industry is as follows: investment in technology improves content quality and/or increases content volume, which attracts more customers, helping to achieve economies of scale and, in turn, higher profits, which then enable further technology investments. The following diagram illustrates this dynamic: Invest in + Technology Regulatory BTEs Deregulation Competition + Revenues per Sub + + Delivery Capacity Tech Investments + Content Volume/Quality Economies of Scale + + Install Base Thus the competitive strategy for the industry is given below: 1. Above all, compete for – and on – install base, by investing in developing technological uniqueness in terms of content quality, volume of programming, and features, and later by leveraging complementary assets. 2. Compete on other services – e.g., broadband and phone services. 3. Compete on customer service – e.g., 24/7 service in the home and minimizing “downtime” during inclement or hazardous weather conditions. 4. Ratchet up marketing efforts and brand equity by increasing advertising to new and existing customers 5. Slash prices – although this is a decidedly unattractive option – once a class of firms (e.g., satellite providers) find themselves devoid of both uniqueness and differentiated complementary assets. Hence, the key is to compete not on price but on other features. Regional monopolies and content quality differentiation has allowed the content deliverers to achieve healthy profit margins. However, competition is beginning to increase and many of the industry’s structural characteristics that had made it attractive can be viewed as sources of weakness in the future. We see the push to add additional features and services as a means to avoid price competition. The future of the industry Three new innovations promise to impact the shape of the industry: fiber to the home, IP-TV, and mobile broadcasting. First, fiber to the home (FTTH) is the RBOCs’ push into the content delivery market as a response to the cable providers’ push into phone service. FTTH will compete for the exact same customer base as the current cable providers. The FTTH solution will be able to provide greater bandwidth which will allow for more channels and greater download capabilities. Second, IP-TV can change the nature of program selection. When bandwidth becomes great enough (~30MB/s speeds), cable-quality video on demand becomes possible. The industry will radically change, because content delivery will get squeezed as its ability to create and capture value withers. With IP-TV and mobile broadcasting, the customers are not limited to a single regional provider, nor do the high fixed costs of new lines per subscriber remain an issue. This opens the door for new content delivery players to enter the market with low BTEs. Also, content producers can easily make their programming available via the internet and capture a large proportion of the value if they choose. Content delivery firms will have at their disposal a range of possible strategies, including: • Backward integration into the content providing segment of the value chain; • Development of new capabilities (e.g., the “server farm” that stores and provides access to vast quantities of content); • Forward integration into becoming the primary user interface in an IP-TV world; and • Lock-in of content producers, in order to become the exclusive provider of certain content (an evolution of current strategies among content providers) Exclusivity becomes important for the content delivery industry as a way to differentiate in what could become an increasingly commoditized industry, characterized by low switching costs, uniform content, and comparable quality. In order to further explore competition, we have created inputs to be utilized in the systems dynamics model of Sterman and Henderson to model the industry evolution. This data is given in Appendix 3. Analyzing the Value Chain: Whither Delivery? Appendix 2 illustrates the various players that comprise the industry value chain. The TV content delivery industry is moving toward the IP-TV model, which will take one of two forms: • • Consumers view programs directly from the content producers – for example, to watch The Sopranos, a viewer would download directly from and pay directly to HBO Consumers view programs through a portal – for example, a viewer would access Comcast.com or google.com, then select a program and make a payment to Comcast (either per program or in a bucket plan) In the first case, the TV content delivery firms’ value will be destroyed. The content producer will deal with end users directly and bypass the content delivery firms. In the second case, firms should start to build customer relationships around this model so that they can capture the value once the model is proven. The following analysis uses complementary assets to help firms understand which direction they should go. Complementary Assets The TV content delivery firms have built up the following complementary assets: • Regional monopolies • Brand • Infrastructure • Billing systems • Customer knowledge and relationships • Service • Supplier relationships (content producers) • Interactive capabilities Integrate backward or forward along the value chain Because the content delivery firms reside next to the final link in the value chain, i.e., they face the end users, forward integration is not an option. This leaves the possibility of integrating backward, i.e., becoming content producers. Having a regional monopoly does not lend itself to migrating up the value chain to content production. Brand may be of some use, but only marginally. While cable and satellite TV companies have built recognizable brands, they have not done so as content providers. As for the other complementary assets, none of them helps. Moreover, any backward integration may actually damage supplier relationships with other content providers. Thus, firms are hardly able to integrate backward organically by leveraging complementary assets they’ve already built. One viable way to move into content production is through acquisition. The Comcast/Disney acquisition attempt was a good example of such an attempt. Yet in such cases, it is not clear that any synergies exist that can bring additional value to shareholders through such an acquisition. Rather, this type of scenario may well serve as a classic example of the principal-agent problem. Deliver additional services (phone services, etc.) However, providing additional services, such as phone services, to existing customers, seems to be more promising for content delivery firms. Although their regional monopolies may not prove to be of much use – due to regulatory issues – the other complementary assets can be easily leveraged. Again, delivery firms are well-known entities among end users. Therefore, by marginal additional investment they can easily establish their brands in new services. Moreover, these firms’ vast infrastructure can be used to provide new services. Cable in particular has already established a presence in the home, which has come at an enormous fixed cost. Meanwhile, tweaking the billing system for new services should not be a problem, for two reasons: because customers prefer a single bill and because this internal competency is already developed. Delivery firms also have the developed knowledge and skills in managing customer relationships, a complementary asset that is equally important to the provision of new services. Existing service resources, such as call centers and technicians, can also be leveraged to serve customers after a relatively small investment in supplemental training. The supplier relationships, of course, have nothing to do with new services. The last complementary asset, interactive capabilities, can help them apply the knowledge surrounding user-controlled viewing that delivery firms have been gaining by providing the current On Demand services will prove to be extremely useful as consumer demand for such control expands to other services. Therefore, after conducting the above analysis, delivering additional services represents the most viable option because content delivery firms will be able to leverage their existing complementary assets. In the first case, where the content delivery industry becomes obsolete, these firms can still survive by providing other services using their existing complementary assets such as providers of the content pipe and experience in brand recognition with content producers. In the second case, where delivery firms serve as a portal, customers are already drawn to them for TV-related services, and we are already seeing delivery firms expanding their product portfolios. In conclusion, regardless of which model becomes dominant in an IP-TV world (portal vs. direct), moving into additional services is the recommended course of action. Evolving Towards IP As cable and satellite TV provided much more units of content than Over the Air broadcast, IP-TV can provide almost unlimited units of content via the internet. To become the dominant design, however, IP-TV needs to achieve critical technical and content requirements, such as download speed, storage, and content library. "To exactly mimic the broadcast experience," according to Atlanta-based DAVE Networks’ CEO Ken Lipscomb, "we would need at least 10 - 30 Mbps capability. This will be enabled over time with ADSL-2, FTTH [fiber to the home], and faster cable systems. Additionally, new wireless systems will also be able to deliver these speeds."1 At the same time, the storage requirement is also important. “Demand based content service requires large high capacity server farms. At 19 Mbps, a 90-minute HDTV movie requires about 13 GB of storage. Multiply this by thousands of titles and thousands of customers, and the requirements are staggering,” notes Tom Schmidt, Vice President of Strategy & Development for G-cluster, an IP-TV set-top box (STB) vendor. The fast development of storage technology appears able to solve this problem – availability of storage and falling costs. Last but not least, the size of the content library is also important. Some firms can already provide a large content library: manufactured by Giant International's Tao Consumer Electronics division, the DAVETV set-top box will deliver over 70,000 hours of original entertainment content directly to living room TVs using any existing broadband connection.2 In the future, much more content will be provided over the internet. Those technologies will make IP-TV a feasible solution on PCs. However, to succeed on the TV platform, a device must be developed to either link the TV screen to the PC using wire line or wireless connections, or attach an intelligent device to the TV itself. Those devices are already exist or under development. Based on historical experience, once the IP-TV meets the technical and content requirements, and once customers get acclimated, the market will tip to IP-TV, no matter which standard it uses. After the market tipped toward cable, a small fraction of viewers still clung to OTA broadcasts. Similarly, IP-TV will marginalize cable and satellite TV within the market, once the nascent technology’s unprecedented choice and control gain traction among consumers. Cable or satellite firms charging high subscription fees for limited choices cannot be sustained once consumers can choose infinite programs to watch on the internet, at significantly lower prices, with an equally high quality picture. Moreover, IP-TV will enjoy indirect network externalities, meaning that if the content can attract significant numbers of customers; gaining popularity will entice more content providers to target this delivery mode – classic, specialty programming, new studio offerings, and thus will affect the purchasing decision for other customers. This dynamic will represent another cycle of the reinforcing loop (see Strategy section above). Therefore, once the technology matures to the point of providing a differentiating delivery capability, customers will turn to IP-TV, and the market will move toward a tipping point. Firm capabilities In the IP-TV world, the complementary assets of content delivery firms will no longer be effective. Their physical infrastructure’s value will decline: in the past, delivery firms bundled access to their cable, fiber, or other infrastructure with content in order to charge a higher price for the cable connection. If consumers no longer depend on these firms to deliver content, then today’s delivery firms essentially will become tomorrow’s broadband service companies. Therefore, other firms that can provide internet connections – via xDSL, FTTH, WiMax, or other technologies – will be able to attack today’s broadband providers by offering cheaper service and/or faster data rates. Also, brands will be less valuable as complementary assets as competition takes place along the highly quantifiable dimension of bandwidth. Moreover, the most valuable complementary asset for the cable firms is their local monopoly power, which stems from regulations that will no longer apply to an IP-TV world. Therefore, the “old” firms, such as Comcast, DirecTV, et al, will be hard-pressed to compete in the IP-TV world. To successfully compete in IP-TV, a firm can first leverage uniqueness – i.e., its technology – then build complementary assets around it. At first, the technological capability refers to solving specific technical challenges inherent in implementing IP-TV, although this will not be sustainable in the longer term as expertise readily spills over. The true competitive technologies are search capabilities and content management technology. Two kinds of firms will fight their way into the IP-TV market: first, firms like Google that can provide search capability to locate content within hundreds of thousands TV programs (Google News and site-specific Google searches illustrate a pattern of expansion by the search powerhouse). Second, a new type of content aggregator will emerge, which can effectively manage the content and allow users to choose TV programs easily from within content libraries. Those two kinds of firms may have some proprietary technology, like Google’s search algorithm and data storage, retrieval, and application management technology, which can endow them with some kind of uniqueness. After establishing the initial user base, firms can try to build some complementary assets around them. Brand recognition will likely serve as a key asset, as firms jockey to position themselves as the primary content aggregator or portal. The second complementary asset may be the access that delivery firms have to the content providers. Such access can provide delivery firms to benefit from any combination of lower prices, the latest content, and/or exclusivity agreements that deny competitors access to such content. Customer awareness will become the most significant complementary asset, however. By establishing the customer base, firms can obtain customer data and race down the learning curve for providing the best viewer experience in this uncharted territory. More than ever, knowledge of customer preferences and behavior will provide a true competitive advantage by enabling IP-TV firms to provide more relevant content and superior access and selection to the end user. System Dynamic Model Analysis Based on our discussion above, we ran the system dynamic model on following scenarios: Scenario 1: We turn off other factors, and only focus on product functionality and R&D. (See Appendix 3, Scenario 1, for details). It means that marketing doesn’t have impact on customer acceptance, and firms spend on R&D on developing tools to better serve consumers to find their TV programs and maintaining a more robust server farms. Firms don’t compete on price, because customers are not price sensitive. In this scenario, if one firm tries to compete on price to get market share, it will make a big loss yet get slightly larger market share. However, if the firm spends more on R&D while pursue a very high price strategy, both firms will enjoy big profit and almost equal market share. Yet if it spends too much on R&D, it will make way less profit than its competitor with almost the same market share. Scenario 2: We turn off other factors, and only focus on marketing to build brand equity. (See Appendix 3, Scenario 2, for details). Each firm tried to spend aggressively on marketing to get market share. In this scenario, there is no way for firms to succeed. Both firms make a huge loss, while the market share remains the same. The reason is that basically they provide the same product. Therefore, they are essentially competing on price. Even firms embrace the other’s standard, that doesn’t help since technology plays no role in this scenario. Scenario 3: If each firm only cares about install base, and lower the price to compete for market share, there is also no way for any firm to win. (See Appendix 3, Scenario 3, for details). They all make a huge loss, with an equal market share. Scenario 4: The most likely scenario might be: product functionalities matter, and word of mouth is very important. The impact of marketing is medium, and install base plays an important role. Each firm tries to get slightly higher market share, but not aggressively compete on price. (See Appendix 3, Scenario 4, for details). In this scenario, the first significant thing is: if one firm embraces another’s standard but the other doesn’t, it will win with 100% market share, since install base is very important. Another possibility is: none of them compete aggressively on price. Therefore, they both enjoy a high profit with equal market share, and the firm that spends slightly more on R&D makes more profit. Conclusion IP-TV will move from lead user to the dominate method of content delivery as the performance measurements of picture quality and download time reaches sufficient level and content producers migrate more content to servers. Both of theses are technology issues that other industries are funding and significant progress is being achieved. IP-TV will change the competitive landscape of the industry both in terms of structure and value capture by allowing new players such as Google to enter with very low BTE and minimum fixed costs. The strategy to compete in the IP-TV world will focus on product functionality (search engines, personal preferences in selecting programs) and access to content (exclusivity). We see a turbulent ferment stage similar to that experienced by the internet service provider industry with an eventual shake out. This will leave a few large firms that will try to avoid price wars by looking to features such as understanding the individual consumer through data mining to drive up the individuals switching cost (usability) where they can use their intellectual property to help buffer against new entrants. Appendix 1: The Five Forces Buyer power Æ low No collective negotiating power among consumers Supplier power Æ equipment: low Æ content: - premium/popular (HBO, ESPN) = VERY HIGH - others = low BTE Æ HIGH - sizable install base (customers + 1 line + setup) - minimum efficient scale - regulations Substitutes Æ low (no direct/easy substitutes) Define substitutes as alternate things you can do at home in your spare time: Movies, live events (musicals/sporting events), video games, web surfing. We still pay for cable/satellite. Rivalry Æwithin a technology segment (i.e., cable companies) = LOW thanks to local monopolies and regulations Æ between technology segments (i.e., cable vs. satellite) = HIGH Appendix 2: The Value Chain Current State Equipment Cable, Satellite Talent Content Producers Equipment TV, Handsets, PC Content Delivery Viewers Talent Producers Delivery Equipment Users Post IP disruption Equipment Cable, Satellite Talent Content Producers Equipment TV, Handsets, PC Content Delivery Viewers Talent Producers Delivery Equipment Users Appendix 3: System Dynamic Model Scenarios Scenario 1: All about product functionality and R&D: Industry Settings and Market Demand 100M Initial Size 0 Population Growth Startup Industry Maturity Word of Mouth Impact of Marketing Sensitivity to Price Durability Technology 300 Initial Price 0.1 Direct Costs 0 Variable Customer Preferences 1 Functionality 0 Brand Equity 0 High None Availability of Complementary Goods Compatibility Availability 0 0 Medium Price -2.5 1 Year Product Max Functionality Innovation Spillover Spillover time Process 500 Lifetime Medium Learning Curve Yes Spillover 0.25 Spillover time Competitor Strategy Competitor Price Target Competitor Target Market Share Competitor Share Strategy Embrace Standard of Company 1 Product Development Spending Neutral 0.5 Fixed Yes 0.2 Scenario 2: All about marketing and brand equity: Industry Settings and Market Demand 100M Initial Size 0 Population Growth Startup Industry Maturity Word of Mouth Impact of Marketing Sensitivity to Customer Preferences 0 Functionality 1 Brand Equity 0 None High Availability of Complementary Goods Compatibility Availability Medium Price -2.5 0 0 4 None Yes 1 Price Durability Technology 300 Initial Price 0.1 Direct Costs 0 Variable 1 Year Product Max Functionality Innovation Spillover Spillover time 1 None Yes 0.25 Competitor Strategy Competitor Price Target Competitor Target Market Share Competitor Share Strategy Embrace Standard of Company 1 Marketing Spending Minimum Allocate to Marketing Process Lifetime Learning Curve Spillover Spillover time 4 None Yes 0.25 Low 0.8 Fixed No 0.2 $1,000,000 Scenario 3: Play with the install base: Industry Settings and Market Demand 100M Initial Size 0 Population Growth Startup Industry Maturity Word of Mouth Impact of Marketing Sensitivity to Price Durability Technology 300 Initial Price 0.1 Direct Costs 0 Variable Customer Preferences 0 Functionality 0 Brand Equity 0 High Medium Availability of Complementary Goods Compatibility Availability Medium Price -2.5 1 0 1 Year Product Max Functionality Innovation Spillover Spillover time 1 None Yes 0.25 Competitor Strategy Competitor Price Target Competitor Target Market Share Competitor Share Strategy Embrace Standard of Company 1 Process Lifetime Learning Curve Spillover Spillover time Low 0.8 Fixed Yes 4 None Yes 0.25 Scenario 4: The most likely scenario: Industry Settings and Market Demand 100M Initial Size 0 Population Growth Startup Industry Maturity Word of Mouth Impact of Marketing Sensitivity to Price Durability Technology 300 Initial Price 0.1 Direct Costs 0 Variable Customer Preferences 0.8 Functionality 0.5 Brand Equity 0 High Medium Availability of Complementary Goods Compatibility Availability 0.8 0 Medium Price -2.5 1 Year Product Max Functionality Innovation Spillover Spillover time Process 500 Lifetime Medium Learning Curve Yes Spillover 0.25 Spillover time Competitor Strategy Competitor Price Target Competitor Target Market Share Competitor Share Strategy Embrace Standard of Company 1 Product Development Spending Marketing Spending Minimum Allocate to Marketing Neutral 0.6 Fixed No 0.2 0.1 $1,000,000 If one firm embraces the other’s standard (10 years): Market Share (%) Price ($/Unit) Unit Direct Costs ($/Unit) Total Unit Costs ($/Unit) Revenue ($/Year) Net Income ($/Year) Product Development You 99.9 62.84 30.00 44.12 10.02B 1.357B 2.004B Competitor 0.1 19.19 30.00 44.12 18.94M -217.86M 3.789M 4 None Yes 1 Expenditure ($/Year) Product Functionality Index Marketing Expenditure ($/Year) Capacity Utilization Fraction of Installed Base Compatible With Format Fraction of Complements Compatible With Format Cumulative Profit ($) 83.00 76.72 1.002B 1.894M 0.94 1.00 0.05 0.00 0.00 0.00 28.72B -2.018B