- Category: September 2010
The micro-economic landscape that surrounds the digital content market has a major impact on the monetization strategies and business models throughout the content value chain. Ovum identified some of the demand and supply-side factors that affect the digital content economy and suggests that a detailed understanding of such persistent but variable economic factors is an essential first stage for the development of monetization strategies in the digital content space.
Value chain disruption
The digital content value chain is undergoing disruption caused by the convergence of publishers, broadcasters, telecoms operators, and content providers in the digital content space. Because of the resulting competition for digital content, operators must be sure to build strong relationships with content owners and make content deals while keeping an eye on rival services where content owners have equity. This is because content owners are more likely to make deals and offer advantageous terms to a service provider they can consider to be an asset in which they have greater control. Joint ventures are a popular way of locking in content providers. For example, Hulu is a joint venture between NBC Universal, NewsCorp, Disney, and Providence Equity that locks in key content providers as well as providing preferential licensing deals. Telcos could be squeezed out of the top slots for content in this new value chain unless they engage more deeply with content providers. In addition, operators can build strong and committed relationships with content providers by acquiring them. France Telecom, for example, is currently considering a bid for a controlling stake in French newspaper Le Monde.
Beware non-market production
Large swathes of the Internet are populated by “non-market” digital production, adding to the impression of abundant online content. Non-market refers to digital content over which producers have only some or no rights and expect no payment, or to content that plays no part in commercial markets. This includes casual user-generated content, the output of publicly or charitably funded bodies, and free content produced by individual enthusiasts in return only for reputation or personal satisfaction. The army of non-market producers has created a competitive force of free content that competes with the commercial market for content rights. The owners of digital content services need to take a close and serious look at non-market digital content and commercially free offerings as part of their business plans to ensure that the positioning of their service remains viable.
Low marginal costs threaten pay models
Marginal cost is the cost of producing one additional unit, and includes labor, materials, and any additional infrastructure or overhead. Online digital production and transmission ensures that low marginal costs are often systemic, enabling free ad-supported content models. This is a problem for operators that are struggling to compete against this OTT ad inventory with their own advertising networks, and tend not to have the global reach necessary to build scale. The problem does not stop there. Add the structurally low marginal costs of voice and video call services into the mix, and it might only be a matter of time before an over-IP player cuts deeply into mobile and fixed voice revenues by offering free ad-supported services. Free VoIP, video calls, and a complete unified communications (UC) play could compete favorably against the premium value bundles of network operators.
Playing the rights ownership game
While the much-publicized overall picture of digital content on the Internet appears to be one of abundance, a closer look reveals its depth to be conditional on the type of content and the presence of copyright and patents. Digital content is in fact marbled with rich veins of “artificial scarcity” created by limiting the access and supply of digital content through the use of copyright and patents, content exclusivity, pay walls, and sub-standard user experiences. Although controlling artificial scarcity can be a source of competitive advantage, it is often attacked by players that strategically infringe IP assets, making them more available and less scarce (to themselves at least). In the cut-throat battle for market power playing out in the convergent communications and media industries, the most ambitious players will consider infringing rights if they appear weak and the strategic risk seems worthwhile. The legal war zone created by claims and counter claims make the rights-ownership game a key factor influencing the digital economy, and telcos should think hard before excluding themselves from a game whose winners can carve out significant competitive advantage.
Network effects are an opportunity and a threat
Telecoms networks are perhaps one of the original examples of “network effects” in action. By network effects we mean the feeling of increased value every user experiences from each additional user in a network that makes being part of that network much more worthwhile. In the accelerated growth phase of a new network, this value is easily perceived and appreciated by users, as can be seen in a successful new social network. Once a telecoms network reaches maturity, however, the incremental benefits for users of additional users joining a network are immaterial and lost in the sheer size of a globally linked system. Whether using close integration with Facebook to ride their network effects, or developing their own “sub-networks”, telcos need to rekindle the power of network effects to attract new users and reduce churn. To kick-start network effects, telcos need to renew the richness and value of their networks as perceived by their subscribers.
Devices drive demand for content
The installed base of devices drives both the supply and demand of digital content, making it a key factor impacting the monetization of content. New devices create or enable new use cases that drive demand for new types of apps and content as well as introducing new modes for consuming existing digital content. The nature of these devices mostly drives individual (instead of group) consumption, supporting the diversification of personal tastes and discovery. The increased choice of devices drives consumption opportunities, which in turn builds demand. Multi-screen strategies are developing rapidly with the launch of Apple’s market-making iPad, the announcement of Google TV, and tablet and e-reader offerings from a range of CE manufacturers. These adjacent players also have powerful device platforms that are extending across an increasing number of devices backed up by strong developer communities and powerful consumer brands. This is all bad news for telcos targeting the connected home through closed IPTV services in the hope of reversing the decline in their voice and broadband revenues.
Consumer experience reliant on consumer behavior
Don’t forget the less tech-savvy
There is a significant difference between early adopters of technology and the “early majority” (the mainstream market) that consists of users that take much longer to adopt new technology. The growth of digital content services can stall when faced with the challenge of selling services to the early majority, a group of prospective consumers considered less tech-savvy and risk-averse. This adoption gulf between techies and the mainstream is a permanent feature of the digital content economy that must be addressed. The lesson here is to significantly upgrade technology in terms of simplicity and ease of use, and to re-target the marketing effort to engage much larger and wider demographics. Telco subscribers are less likely to have the same demographic profile as leading digital content brands such as You Tube and Spotify, making it necessary for operators to shape their digital content services to target their own subscriber base.
Local culture is increasingly important
The local environment has a big impact on the digital content economy, not least through language. Significant regional differences also exist in consumer behaviour and taste as a result of local cultural, political, and religious factors, which can all affect demand for content. In addition, consumers in different markets have different preferences and habits in terms of the frequency of consumption, disposable income, content genres, price sensitivity, desired devices, and service features. These differences require the review and modification of value propositions, distribution channels, legal contracts, and other elements of the business model.
By Mark Little and Eden Zoller, Senior Analysts at Ovum – part of the Datamonitor group
A more complete list of economic factors is covered in the Digital Content Economy reports available from Ovum’s Knowledge Centre - http://www.ovumkc.com/