Wednesday, September 07, 2005
Valuing Disruption, Part 1 (EG, Media 2.0)
A very interesting number: Gen Y consumers have about $2k of digital media stored. Now, there are obviously several caveats to take with this data: that not all of that media is valuable (in the sense that most people would never pay for all the stuff they d/l), that not all of that media is consumed, etc.
Now, let's first discount the number by 50% (because I don't have time to get into methodological issues), and take that number as (close to) the possible value of a next-gen Media/Web 2.0 consumer.
Does $1k of media/user/lifetime (or PV of $1k/user, if you like) sound realistic? Is it good, bad? Let's split the question up into new ventures and incumbents.
Now, I think, for incumbents, this is not such a great number. That's because $1k/user is the lower bound of value in most media markets. For example. the value of a newspaper subscriber is about $850. So $1k (or $2k, if you like) of value created per user is a relatively low number - compared to a world of rigid media with high switching costs and monopolized distribution.
How do we know? Well, we can add values across Media 1.0 markets to arrive at a total media value/user. I won't do it totally, but some examples are cable subs ($2-3k); satellite radio ($1-1.5k); mobile subs ($1-2k). The value of a media consumer across all these markets is on the order of $5-10k; and can be a lot more depending on how loosely we define "media".
So for incumbents moving to an everything-over-IP world, the pie shrinks dramatically - this is another datapoint for media hyperdeflation. Now, of course, the pie isn't gonna completely shrink to $1k/user levels - not everything will be hypercommoditized; some platforms will stay valuable because of distribution and content scarcity (viz the XM/Sirius wars; DirectTV vs Tivo, etc).
But in some spaces, we can see very vivid examples of how media value can erode so rapidly and totally - consider Skype + muni WiFi. In this EoIP world, you connect to the GoogleNet/YahooNet to connect to Skype.
Now, if we consider that a mobile sub is worth around $1-2k now, but a Skype sub is worth maybe $1-200, you begin to see how the shift to everything-over-IP can be disruptive, discontinuous, order-of-magnitude. We begin to see how media value can, in many spaces, just decay.
Where does the value go? Well, some of it's appropriated by consumers; but mostly, it's gone - EoIP and cheap production technology vaporize the old supply curve: much more media can be provided in a Media 2.0 world much more cheaply than ever before. So the story for incumbents is not so great (but the opportunities are huge for those who get it right)
Now, the market is currently valuing the most strategically succesful Media/Web 2.0 startups at around 1/3 of our $1k/user (when you discount this for venture/acquisition risk). Note that growth is already factored into these valuations. So what's happening here is that (if you accept my discounted survey figure of $1k/user) there's still plenty of room for value creation in the Web/Media 2.0 space. We can treat the $1k as a very loose kind of upper bound - if/when we go way beyond it, we should start looking for some other empirical support.
We don't need numbers to tell us this, really: for example, it should be intuitive when the value/user of a richly valued Web 2.0 content convergence play like MySpace is much less than Media 1.0 plays. In fact, low value Media 1.0 plays - for example, content providers like cable channels - are alone valued more highly than the richest Web/Media 2.0 plays right now.
Now, some of this is because of venture risk; but, very realistically, part of it is because Web/Media 2.0 is going to destroy a great deal of value for many incumbents along the value chain.
Of course, part 2 of this story is about how plays like del.icio.us, Blinkx, Zazzle, and SecondLife are going to create entirely new sources of value in place of the old, hypercommoditized ones.