Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Thursday, December 08, 2005

Research Note - TV 2.0: How To Think Strategically About the Future of TV

TV is on the cusp of radical change. Like the newspaper market, the TV market is about to be fundamentally reshaped by technological disruptions and discontinuities in consumer preferences.

Together, these shifts threaten to fundamentally reshape industry economics - by vaporizing entry barriers, exploding substitutes, and eroding the market power of incumbents.

And because these shifts are discontinuous, strategy decay, will more than likely, as in other media markets, be violently, suddenly revealed - resulting in a rapid, exponential erosion in market cap and value creation potential.

Consider the following:

"...However, he is skeptical of a future without TV networks as a platform to introduce programs, build loyalty or direct viewers to affiliate programming like local newscasts. "Nobody's got a crystal ball here," he said. "But I'm not sure we're ready to throw out 30 years of television industry economics."

"We are searching for the new platform or the new channel that will drive the profits in the future, but there are so many unknowns . . . What we do know is that the entire model is up for grabs.'"

While industry players can feel the earth beginning to tremble beneath their feet, because the coming shifts are so total - in fact, they're inversions of mass media economics - it's hard to know where to begin strategically. What can players do in the face of such total disruption?

To begin with, it's imperative for TV players to take a lesson from newspapers. For newspaper publishers, strategy decay didn't bite for many years. But when industry economics shifted discontinuously - in the course of the last year - a wrenching, accelerating decline in market cap, and value creation potential, was the result.

Like newspapers, TV players are deep in strategy decay. Like newspapers, rather than building new resources and competencies for the eventual shift to service and network driven economics, TV players have invested heavily to protect slowly decaying strategies and business models - through regulation, by building iron curtains of distribution, and by choosing to invest marketing rather than in innovation.

But the genie is out of the bottle - as a slow, but accelerating, decline in market cap and value creation potential along all segments of the TV value chain demonstrates. The gears driving the structural shifts that will fundamentally and radically reshape industry economics are spinning up - and no amount of inertia from incumbents can resist them.

Players in the TV market should immediately begin making four moves to disrupt - rather than be disrupted.

1) Shift strategic intent from the core to the edge. That is, understand the dynamics of competition at the edge, why market power is shifting to the edges, and what strategies dominate the new economics of media.

2) Invest in new models, like Smart Aggregators and Reconstructors, which can hyperefficiently allocate attention, and exert market power from the consumption edge of the value chain

2) Invest in Microplatforms, around which communities of connected consumers can self-organize, exerting market power from the production edge of the value chain

4) Use these new resources and competencies - edge platforms and edge competencies - to drive new sources of sustainable, strategic, powerful value creation backing up hyperefficient new business models.

What are dominant strategies for TV players facing an imminent disruption in industry structure? How can players across the value chain compete effectively in a world of unbundled, plastic, liquid media, and fallen iron curtains of distribution?

The most dangerous mistake TV players can make is, like the newspaper publishers, to focus their intent on new revenue streams. A short term focus on monetizing content causes players to miss the forest for the trees: the real question industry players must answer is, instead, how to renew and revitalize deeply decayed strategies.

Why are TV players in strategy decay? TV, like other media markets, is marked by byzantine and complex revenue sharing agreements between value chain players - content creators, networks, and affiliates. These agreements are adaptive solutions to the problem of risk: that only a tiny universe of content, in a mass media world, can be offered to consumers.

That is, information about which content is likely to meet aggregate expectations and preferences is extremely costly. Because it's costly, the TV market is fraught with risk, which is shared among players along the value chain. Viewed through this lens, networks manage risk by bundling content, and affiliates manage risk by bundling networks.

This risk concentrates market power in the core of the TV value chain, where programming is commissioned and purchased, and distribution is locked in by iron curtains (like affiliate agreements and schedules). That is, the core of the value chain is where asymmetrical information on both sides is collected, and utilized by execs to transform resources - lights, camera, action - into outputs, or finished goods.

But VOD - the first step on the road to TV's shift to a network market - shifts this market power towards the edges of the value chain. That's because an on demand world doesn't just begin to blow apart iron distribution curtains, and vaporize entry barriers, atomizing the core, but, far more importantly, it begins to arbitrage this information asymmetry - by letting consumers reveal where, when, how, they prefer to consume media.

It's not that execs will be disintermediated; it's that newer, radically more efficient mechanisms for aggregating information about consumer preferences and expectations - and then using that info to make production in turn, hyperefficient; to produce and deliver content in ways that maximize utility - are slowly taking their place, making them irrelevant. The value at the core - execs, stars, marketing, meetings, and memos - is being replaced by decentralized communities and markets, where connected consumers self-organize around the media they love.

How can TV players build new sources of advantage? Not by focusing on new revenue models in the near term. Rather, by taking the steps above, building new kinds of resources and competencies at the edge, which lay the groundwork for new, dominant Media 2.0 strategies, by exerting market power over the atomizing core, which, in turn, support the creation of new, hyperefficient TV business models - models like AdSense which are already achieving huge efficiency gains by vaporizing risk.

TV players who invest in these models - and build edge platforms - will have the ability to quickly and costlessly experiment with new business models because they occupy the strategic high ground: increasingly, they will be able to dictate terms to players who aren't part of the emerging value chain. That's because investing in edge platforms, like reconstructors and smart aggregators, lets TV players leverage - and control - the most strategically scarce resource in the value chain: attention.

At the same time, these players can leverage edge platforms and connected consumers for hyperinnovation across activities - radically new kinds of marketing, distribution, and products and services.

In fact, players who are taking a non-strategic approach to new revenue models - those attempting to grow incremental revenues from the www and VOD as new distribution channels - will find themselves at the mercy of competitors who thought strategically, because as TV shifts to a network market, natural monopoly dynamics will dominate.

These moves above are dominant because they reflect the fact that the TV value chain is being fundamentally reshaped - new niches are emerging to reflect the new sources of media value creation: plasticity, liquidity, and aggregation. It is these niches, in combination, that allocate attention - the scarcest resource in the new media value chain - hyperefficiently.

You can read more about Bubblegen's Media 2.0 and edge competencies practice areas here (500kb ppt) and here (250kb ppt).

-- umair // 2:53 AM // 10 comments


Well done, Umair. I couldn't agree with you more. This is what we're doing in Nashville with Nashville is Talking and Now if we could just get everybody else to listen to us, eh?
// Anonymous Terry Heaton // 2:08 PM

Umair - nice post and nice work on your blog. I read this post and your New Econmics of Media powerpoint, and agree with your analyses and viewpoints.

Quick question for you - can you list some examples of Media 2.0 companies that are doing a great (or even good) job in the categories of (1) Smart Aggregators, (2) Micromedia platforms, and (3) Reconstructors??

I currently spend way too much time reading blogs that interest me (too much parsing for the info gathered, but I like some output from a lot of sources).

Podcasts are a whole different story - I like a ton, but listen to very few as I only need segments from each.

Anyway, I'm thinking about digging into this problem and providing a solution that will be a smart aggregator or microplatform, but ultimately a reconstructor.

-- bkm
// Anonymous BKM // 5:25 AM

What bkm said...
// Blogger DALLASmix // 7:29 PM

Yep. Brilliant.

I hadn't really understood the reasons for strategy decay, but that makes a lot of sense.
// Blogger phil jones // 12:47 AM

hi bKM,

You might find here what you are looking for here
// Blogger Rajan // 3:29 PM

Thanks Rajan .... that was it.

-- bkm
// Anonymous bkm // 4:38 PM

excellent work - thanks for sharing...
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