Tuesday, January 31, 2006
The Funny Math of On Demand
By now, you've read the numerous analyst reports gushing over on demand.
Not so fast.
First, read this naive but illuminating comparison of what unbundled TV might cost.
Second, let's think about the assumption behind the models for a sec. They assume first, that $1.99 is a sustainable price for TV. Second, that huge numbers of the audience will shift to on demand - in fact, the worst case is 20%.
I think both of these are v(to put it mildly) dangerous assumptions to make. Assuming that 20% of any population is a worst case - let alone one as fickle as a TV audience - is a bad bet.
Second, assuming price competition won't set in is (how can I say this nicely) very...optimistic. It's already setting in on iTunes - witness the rise of variable pricing. More than likely, we'll see price bundles and volume discounts sooner rather than later.
But the big problem with these analyses is what I keep pushing: they're not strategic.
They totally miss the big picture, by myopically focusing on making big assumptions about short-term revenues, and failing to explode the cannibalization vs incremental false dichotomy. There's little point, often, to not cannibalizing a business with falling market share or margins, for example; or, conversely, to building an incremental revenue stream with no isolating mechanisms to protect it.
It's only by understanding the new value chain - and how market power is distributed along it - that you can realistically understand how value capture is going to shift, and think strategically about where and how to seek sustainable advantage.
I will write a longer research note about this and post later...
Definitely looking forward to your further analysis of this space! Popularity of IPTV is making its rounds again ...
The TV-on-DVD market parallels the on-demand TV download market with a 2-3 year head-start. It does offer a significant chunk of profits for many successful shows, but sales aren't anywhere close to 20% of the market even with both bundling (& resulting lower price-points than downloads) and the higher market-saturation of DVD players vs. video iPods or even PC's with broadband (in the US).
Despite the projections both DVD and on-demand are just higher margin products and not the "future". After all, TV is largely an incidental rather than an active audience.
A few months back I did a similar analysis of how much UK TV license payers currently pay for TV programming they watch from the BBC.