Disruption at play again... Kodak

It happens all around us constantly - however, the digitization of our interactions, mostly facilitated by the Internet, must've had the greatest toll on companies products or their business models.   Schumpeter's creative destruction must be at play more today than at any time in society's history and every Company must now (more than ever) be on the lookout for its own demise 3-5 years out. 

The latest casualty - which took over 100 years - is Kodak (Started in the 1880's).  Being showcased today as almost becoming a penny stock, there is no doubt its days are numbered.  What only 20 years ago were synonyms with photos and pictures - are both today non-existent in the ecosystem: Kodak and Polariod (Started in the 1930's).  The digitalization of memory / event capturing for the masses has been taken over by other companies who's main business didn't even used to be building cameras or producing film.   Most likely, the threat of cannibalizing their major businesses at the time was the major impediment in them fully embracing the newest forms of participating in the industry (which wouldve required full focus), i.e. not making money in the film itself, but, only in the hardware - which probably required the company expanding into other type of hardware.   Another interesting element of disruption is how it migrates spending from components of an existing industry (buying film, develping film, for example) to another (hardware, but, most likely increasing disposable income to be spent somewhere else). 

Kodak and Polaroid had their time in American industry and innovation, which will be crystallized in history.  Its the amazing speed of development that we have seen in the last 50-60 years, and which has really accelerated in the last 15-20, what has consumed companies that are not forever-forward looking.   Leaving nostalgia aside for any of these companies, consumers and society are significantly better off by these forces of creative destruction.

NFLX: A bbuster killer, a cord-cutter, a cord-shaver, or a network?

The advent of Netflix on the media scene has been one of disruption that moves along the value-chain spectrum of video entertainment.  Its roots as a DVD distributor via mail showed it as a disruptor of who until then was the biggest distribution channel for DVD's from movie studios: Blockbuster... in a period of less than 10 years it completed its disruption having acquired a market cap of various billions at the time when Bbuster was filing for bankruptcy.  A graph of the disruption in play: http://yhoo.it/kZKT0G... since I like the topic on disruption, here's another one of Apple vs. Nokia/BBerry: http://yhoo.it/k8vMBn, which has really hit in the last 24 months: http://yhoo.it/j9GJnO


Even before it completed its BBuster disruption, it was already seen as a potential disruptor to video distributors into the home as it digitized its content and set its sights on distributing via bband ("NET"Flix) - providers via cable or satellite... which made them move aggressively in two main ways: (1) expand themselves as multiplatform providers, and (2) seek additional control over the rights to content... despite all the talk about cord-cutting, the low price and long-tail strategy fit NFLX best as a cord-shaver that could live together with cable as an add-on, thus threatening premium tiers offered by these services... establishing that there are certain things valued by consumers that a NFLX would not be competitive in offering: news, sports, live events, plus the still (and probably ever) valuable elements of a curated list of branded linear channels (content), it situated itself as a basic-services add-on...

Having clearly defined its space and its value proposition within the cabsat space, but with its disruptive juices ever flowing, it then started experimenting along two dimensions: (1) original programming - thus threatening its own suppliers (and thus increasing its power within the value chain), and (the latest) (2) seeking to become a network within bband - arguing that not unlike people pay for cable to get certain channels, people pay for bband to use NFLX.

This last pt has been ridiculed by many arguing that people don't necessarily get bband to get NFLX (true), but, its also true that people don't subscribe to bband to get NFLX any less than they subscribe to cable to get some 2nd or 3rd tier channels... or along the same lines, NFLX might be more of a reason for subscribers to increase their download speeds (and spend more money on bband), than 2nd or 3rd tier channels would be in subscribers paying more for cable.

At the end of the day, NFLX's disruptive power will stop at some pt along the value chain, and I would argue it would never fully compete with networks - companies like Viacom have the knowledge and drive the necessary company culture to create the content that particular targets desire (or don't know they desire), and that's a special skill that not easily disrupted.  The kind of disruption that NFLX did - was business first (dvd via mail) and then technological (SVOD via bband), where as talent/creative disruption is something not as accessible... Along the content axis though it will become an enviable competitor to simple "premium movie distributors" who today get a fee by delivering the svc via cabsat.

The NFLX story is one of disruption in our industry that is still being written... that led to the demise of some businesses and led other businesses (that thought they had barriers to entry) to have positive change.... the happy ending is that it has increased the amount of consumption of this great good that we call "branded entertainment"

Myopic Definition of Industries

Just came across this comment on a panel:
“The TV and movie industries have a value chain—grips, actors, screenwriters, etc. What do we do in our industry so it doesn’t get decimated like it has with newspapers or music?” asked Steve Robinson, president of video ad firm Panache.

The TV industry is not tied to a device called "TV" in the same way that the Movie industry was not tied to a cinema or the Music industry was not tied to an LP, cassette, or a CD. The product being consumed by the consumer will not go away by the disruption of the delivery channel or mechanism. This is simply wrong framing of an industry and a lack of understanding of value and competitive dynamics.
The best example is the news industry which for many years was confused with the newspaper industry -> the news industry is more alive than ever - "news" might not be delivered via a physical paper that requires a printing press, delivery trucks, and delivery boys - but the need, the hunger for reading news on a daily basis will only grow. What this means is that the corporations that invested capital in the presses, trucks and to pay delivery boys, (and thus had built huge barriers to entry and in essence created what's called wrongly above "the newspaper" industry) will die, but, the "news" industry that existed before there were printing presses, will also exist afterward.
The "TV Industry" will go along the same lines -> we should start referring to it as the "Video Content Industry" that is composed of professional and less professional creators. Aggregators of content (just like newspapers were) will slowly lose power against the ability of the true content owners to reach their audiences in a more democratic manner. The "TV Industry" will be disrupted in the long-run just like the "Newspaper" industry was.
Having said that, the TV (and its high-quality graphics) distribution channel combined with top-notch streaming video, in my opinion is not only long-ways from dying but, will probably stay forever. Look at cinemas as a distribution outlet for movies -> they provide a totally different product consumption experience no matter where you make those movies available - and people will be willing to pay for that.
Think coffee or dining out -> the fact that you can have Starbucks branded coffee at home doesnt mean that you are not willing to have a different experience by buying it at a store (and significantly overpaying for it).
I am for one somebody who doesnt see himself not willing to pay for a physical newspaper in the future (as i do today, especially for weekends editions) - and I know there would be thousands like me. If the newspaper companies can find a way to satisfy that demand in a sustainable and lean manner they will certainly tap into pockets of sustainable money.

Content vs. Technology

Without going into the details of the objectives of above the line advertising and below the line and taking things "on the margin" (everything else being equal).

The economics of any ad transaction will be disproportionately skewed to those players that are best able to 1) demonstrate cause/effect of the transaction, and 2) be closest to the product purchase decision. We are witnessing this with the astronomical rise in market value (revenues/cash flow) of a company like Google.

Google doesn't own content, its a technology company that has located itself right between online content and the advertiser, at a position that provides the best proxy for cause-effect and closest to the purchase decision (i.e. the "product" it offers is search - and presumably, when people search proactively for something (as opposed to consuming content passively on the TV at the other extreme), they should be interested in that product or service).

So, Google can let other companies be the ones that make the investments in "content", in that highly contested/hit or miss area and then through technology enable the advertising transaction in a very scalable manner, and thus, be able to extract a high % of the investment - a lot more companies will compete for eyeballs/content online than will investing in the technology to control that middle space that provides signficant functions to advertisers.

Strong content owners will always be able to fully monetize its content - premium content will always be a scarce product and they will always be able to do things that less powerful content companies or the technologies companies can't do: product integration or customized sales - having strong brands/powerful content will always be a high return game...but it has been really impressive to watch Google, well after the blow-up of the Internet bubble come in (with survivors of the first such as Yahoo and AOL, not to mention MSFT) and basically grow the industry and grab a disproportionate share of the dollars that are coming in (or better said perhaps driving a lot of money online) by simply being an intermediary (albeit a very special kind of intermediary)....so, I pose the question - how can content companies learn from Google and try to 1) become more data-driven results oriented, and 2) demonstrate how they impact purchase decisions... what is clear is that the click is not a perfect indicator of cause/effect and it doesn't necessarily carry the biggest load on a purchase decision (in most instances)... having said that, its the closest proxy created today for both...

Internet kills industries? Not really... it disrupts industries

We hear more and more about how the Internet puts on a real challenge to some industries (to the point that some of them might disappear). Print media (newspapers, magazines) or Music industry (Record Labels, Retailers) come to mind...

I'm sure this is obvious to a lot of people (but potentially not) - but, industries do not die, they get disrupted (C Christensen's term), or more simply said - the structure of the industry changes and the players who extract economic returns also change.

Lets take media as an example: be it entertainment, information, sports, or even music - there are two basic concepts: Content creators and Consumers... and that reality will never change - for any industry to exist, there needs to be a product or service that satisfies a need... and the Internet has not changed that reality for any industry... it has simply made it easier/cheaper/more efficient for the manufacturer of a product or service to reach its consumption point...

The Internet economic model is the antithesis of the physical economic model... at a first level, it provides instant and seamless information to the consumer - the physical world required an investment close to consumption to provide that information (think any product or service you can research today on the Internet and think how you used to get information 15 years ago - think travel for example - a good amt of the service travel agents were providing was information)... at a second level, it provides the ability to transact without a physical presence, again, the physical world required physical contact (think Amazon for everything it sells vs. how you would acquire any product you today acquire on Amazon 15 years ago)... and at a third level it provides the ability to consume without a physical presence (think music for example)... when something reaches that third level (ability to consume without any physical presence - aka without the need for any middle person), then its pretty clear that unless you provide something that the content creator can't do by him/herself or something the consumer can't do by him/herself, then there isn't a need for middle person... in a very simplistic way - musicians can create music, post it on the Internet to be consumed or an author could theoretically publish a book online (if a software existed for them to do that) - who needs labels or a publisher or anybody else in the middle? (of course, labels and publishers do provide value - as a new artist or author would find it very difficult to be discovered without the investments and knowledge that labels and publishers put on the table).

Ultimately, the Internet disrupts, and takes away profits from "physical players" or i call them "friction players" (as they benefit from a friction-full environment) and either gives them back to manufacturers or end up in consumer surplus.

In a sense the newspaper industry was never an industry - it was a segment of the "news industry" - it was the "paper news industry"... and with the internet, it has allowed that the segment within the news industry called the "digital news industry" to become a bigger portion of the news industry... and the digital news industry is one that is more democratic, fragmented, just in time that brings the news (the product) closer to consumption by consumer... so while in the "written news industry" most of the economics were extracted by a middleperson (newspapers) that provided technology, guidance, buildings, etc. to the actual creators of the news (news writers)... the digital age has allowed the content creators to not need those middle men (supply and demand not decided by middleperson) and the economics to change as well - the billions of dollars that were supporting those middlemen (Newspapers) will now flow to the content creators or end up as extra savings for consumers to spend elsewhere (Starbucks coffee, iTunes, etc.)... The NEWS industry is as alive as ever, its consumed more than ever, and its more participatory than ever... just like the MUSIC industry is.

The changing face of content and value capturing

At a high level, there are content creators, content aggregators, and content distributors - no matter the medium. For example, in TV -> there are content creators (various), content aggregators (media companies, who can also be content creators, and who build brand value), and content distributors (PayTV operators).

The internet changes the dynamics in media, just like it did in the traditional retailing model (cuttting out middlement and getting manufacturers closer to consumers). So, in media, content creators don't need (as desperately) content aggregators in order to reach an audience - at least the barriers to entry are a lot lower, and content distributors have no distribution limits (there is unlimited capacity to distribute (albeit the pipes do have a capacity).

Lastly, a new entrant in the online distribution medium I will name content organizers or finders -> these are the technology companies of the world who enable people to get to content in such a disorganized world. These content finders, in a way, work against content aggregators value online -> if you could find anything that would be of value to you via a Google search, for example, you would never need to go to a popular brand you know will be aggregating the type of content you like. Lastly, companies like Hulu seek to aggregate content, but, in a very horizontal manner, so in a way they are also like technology companies.

This brings very interesting elements for those businesses involved in pure content aggregation (like PayTV programmers), where as in the past, content creators had limited options to get to audiences (and consumers had limited options to find their interests), this is not necessarily true for either end of the spectrum when we talk about online distribution/consumption of content.

As such, only those content aggregators that do invest in content or strike the right partnerships with other content creators will be able to survive in an online-only world (we may be years away from having such a world, but, the fragmentation of entertainment can't be ignored). As they garner traffic and consumption, then they do exert brand value and ignite other creator's interest to be part of such network.

A New Business Model for Music?

Music ownership and distribution is a broken business, its a good product with a broken business model. While we can talk about various flaws, I will concentrate on a couple:

1) Hit or miss dynamics leads to too much risk accumulation -> there is too much risk at every single record label. The music industry is not unlike the oil exploration business - you invest in various assets, with the expectation that the return on a reduced number will outweigh the investment in the losers. Betting on too many losers and you can lose the house. Furthermore, its a little different than oil exploration in the sense that by further investment in a presumably dry oil well can bring actual oil... the problem becomes when the threat of betting the house on losers, actually leads to lack of investment in potential winners, thus eroding any future winners as the current winners age. Potential solution-> create consortiums where various firms or investors spread their risks (investments) over a larger number of potential winners.'

2) Standard pricing for non-standard quality... there is a tendency to look at all music products under the same light - they have the same price, while they don't necessarily have the same value, but, wildly divergent values. From the price charged at the retail point to the idea of pricing the content the same to TV distributors or online distributors, the price is simply not discriminating the value and this could be the wrong formula.

Brands and Kids

I was driving today with my son and at his 32 months i became amazed at how powerful brands can be. I am guessing there is significant research and testing behind creating any corporate image out there targeting any consumer, but, I was impressed at how children react to brands at such an early stage.

My child not only associates particular brands with earlier experiences, but, also has the ability to guess/identify brands he doesn't know

I am not judging if there is anything right or wrong with that - I was just impressed at the power of branding and its effect on the human brain from the youngest stages in life