Transcript Newly Vulnerable Digital Goods

NBA 600: Session 16
Newly Vulnerable Digital Goods
13 March 2003
Daniel Huttenlocher
Announcements
 Group assignments
– Due Friday at 5pm
• Hand in hardcopy to 346 Sage and email to me
(dph2)
– Will contact by email if want brief in-class
presentation 3/27
 Change in due dates for remaining two
short papers
– #4 from 3/27 to 4/1 (handed out 3/25)
– #5 from 4/8 to 4/10 (handed out 4/3)
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Today’s Class
 Finish discussion of darknets
– Likely evolution of darknets based on current
legal, social and political environment (in US)
 Clemons paper on newly vulnerable
markets for information goods
– Competitive strategy theories
– Application to music and newspaper industries
 Your analysis
– Applying theories of newly vulnerable markets
and co-specialized assets to music industry
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Likely Evolution of Darknets
 Large-scale file sharing will be limited
– For music, RIAA and labels will identify hosts
that share lots of data
• Shut down through legal means
– File sharing will become more subject to
viruses and corrupted files
• As more mainstream will become larger target
 However small-scale sharing hard to stop
– Sharing only with friends
• Can’t prohibit without alienating users
• Less problem with trusting content
– But harder for users to find new things
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Leaves Room for Online Sales
 Make it easy for friends to share music,
while still encouraging purchase
– Systems such as Threedegrees do this by
enabling shared listening but not copying
– Perhaps leading to reduced costs for
radio/video promotion
 Supplement with easy means of making
online purchases
– Many purchasers of music under age 18 and
don’t have credit cards
• Could be good for Paypal and other prepaid
payment services
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Large Opportunity
 Safe, secure, easy purchase online a
viable alternative to illegal downloads
– Make easy to find music
• Search, sample, online community, reviews
– Can be provided by industry or retailers
– Value more than being easy and safe
• “Tipping point” phenomenon, people willing to
pay for perceived value
 Not just to avoid other costs such as viruses and
corrupted files
 Offering wide variety of pricing models
– Per song, per “album”, per listen, subscription
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Information Goods Strategy
 Clemons identifies theory of newly
vulnerable (contestable) markets
– Newly easy to enter
– Attractive to attack
– Difficult for incumbents to defend
 Considers two information industries
– Music and newspapers
 Also draws on Teece’s theory of resourcebased value retention
– Other required resources make entry difficult
• Co-specialized assets
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Market Vulnerability
 Newly easy to enter – due to changes in
– Regulatory rules
– Technology
– Consumer preferences
 Attractive to attack
– Cross subsidies
• Some customers subsidizing others; pricing not
reflective of costs
 E.g., credit card industry
• Some products or services subsidizing others
– Also: decoupling of co-specialized assets
• Clemons views this as a kind of cross subsidy
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Market Vulnerability
 Difficult (for incumbents) to defend
– If incumbents can respond in-kind then profits
competed away
– Regulation can be stricter for incumbents
• E.g., landline vs. cellular telephony
• E.g., banks offering credit cards
– Channel conflict issue for incumbents
 Similar problems if too easy for new
entrants
– Many entrants will compete away (at least
their own) profits
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Digital Goods Industry Players
 Content creators
– Composers, writers, artists, performers, actors
• Often contractors not employees
 Content producers – packaging, promotion
– Record labels, newspapers, studios
 Reproduction facilities
– Printers, CD/DVD/tape duplication
• Often owned by content producers
 Distributors
– Wholesalers, retailers, broadcasters
• Close relations with content producers
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Roles of Digital Content Producers
 Identify and develop individuals and works
 Certify “value” or credibility of work
– More important for information than
entertainment (e.g., news vs. music)
 Control or have relationships with
distribution channels
 Promote and advertise work
– Including branding, promotional copies, etc.
 Control sale and reproduction of work
– Including defending copyright of the work
• Most important for items of long term value
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Music Industry Vulnerability
 Cross-subsidies of talent
– Different products (artists) provide large
differences in profitability
– In principle subject to pick-off of talent,
traditionally combat with
• Long-term contracts
• Not many record labels to turn to
 All providing similar services at similar costs
– Internet provides potential for successful
artists to distribute content on their own
• Bypass the record labels once contracts expire
• Leaving only less profitable acts to labels
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Music Industry Structure
 Value creation and revenue production are
co-specialized assets in music industry
 Value creation
– Done by artists
– Realized by labels
• Finding acts, producing recordings, promotion
 Revenue production
– Largely through selling physical copies
• Reproduction and distribution of those copies
controlled by labels
 Internet threatens decoupling
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Challenges for Incumbents
 Where to find revenue with changes in
control of reproduction and distribution
– Fight to maximize life of current model
• Challenge online services
– Try to control reproduction and distribution
over internet
• Copy protection technologies and strict laws
– Investigate new revenue models
 How to keep most profitable acts
– Demonstrate value of services other than
reproduction and distribution
• Probably share more revenue with best talent
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Several Industry Scenarios
 Clemons models various cases
– Base case of late 1990’s structure
– Defection of big groups from labels
• Defecting groups enjoy more profit but labels
become less profitable
• Depending on degree, labels become
unprofitable and decrease promotion
 Fewer new bands and lower consumer choice
– Rapid proliferation of pirated copies
• 75% of top acts content stolen, 25% of others
 Artists and labels lose money, fewer new bands,
lower choice
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Will We See Reduced Choice?
 Clemons’ simulations illustrate current
structure doesn’t adapt well to Internet
 Do consumers value choice
– If so business opportunities in identifying and
promoting new bands
• Labels that become known for exciting new
artists in some genre
 Value in reducing search costs
 Simulations also don’t consider large scale
adoption of online distribution by labels
– As predicted by Forrester study
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Newspaper Industry
 Reporters don’t have star power of
musical acts
– Not much cross-subsidy of talent like music
– Newspapers play larger brand and certification
role than music labels
 News a very different experience from
entertainment
– Likely to want to experience once rather than
many times
• Less desire to make a copy
– Care more about credibility, viewpoint – brand
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Newspaper Industry Revenue
 Again presence of co-specialized assets
– Value creation done by reporters and editors
– Revenue production from printed copies
• Mainly circulation-based advertising not sales
 According to Newspaper Assoc. of America
81.5% of revenue from advertising
 Printed copies less important than
packaging of advertising with content
– Consumers unwilling to view ads alone
– Consumers want news but generally not willing
to pay costs
– Advertisers want to reach these consumers
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Newspaper Industry Vulnerability
 Widespread defection of content creators
not viable
– Value of newspaper brand, news gathering
ability and lack of star power
 New entrants such as weblogs may over
time provide brand competition
– Editorial and viewpoint value
 Advertising bundled with content adapts
well to the Web
– As long as content not widely pirated
• Seems likely to be the case given time sensitivity
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Newspaper Industry Vulnerability
 Substitute sources of information that
reduce newspaper readership
– Reducing advertising revenue
– Recent Web news sites compete with papers
 Substitute advertising channels
– Ways of reaching desirable audience not
through news
• Recent Web sites provide substitutes for
classified ads (e.g., eBay, monster.com)
 Risk of death spiral if such revenue
reductions cause reduced value creation
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Possible Defenses
 News businesses not easy to enter
– Brand is important to get viewers/readers
• And thus advertising revenue
– Quality news product not easy to create
 Easier for incumbent to go online than for
new online news service to arise
– Largely bringing together competitors from
different branches of news
• Television, newspaper, magazine
 Using new technologies for more targeted
and thus valuable advertising
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Strategies for Music Industry
 Newly vulnerable markets theory
– How important is cross subsidy
– What barriers are there to widespread new
entrants
– How applicable is this to illicit copying
– What predictions relative to Forrester report
– What defensive or offensive actions should
incumbents take
– Will artists go it alone and why
 Other strategic models and applicability to
this industry
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