Disruptions often occur because businesses confuse their original mission with their current configuration. A great example is newspapers – while newspapers held the banner of “journalistic integrity”, they made their fortunes on the fact that for decades they held a de-facto monopoly on advertisers in their home markets. If you wanted to reach the whole town, you had to put it in the local paper, and this was the engine for their growth and profits. As there started to be many more ways to reach the city (from local TV ads to the internet, etc…) and the monopoly eroded, the “tide went out” on their journalism model because no one was really paying for that, it was just a free ride atop the advertising. This was brought home to me when someone I know left working for a local newspaper in a midwestern city and started working for a non-profit; she noticed instantly how much more polite they were even when rejecting her requests for business; they truly hated the monopoly newspaper and their bile was due to that relationship. And of course the evidence for newspapers’ abject decline is visible in the bankruptcy and stock prices of the remaining entities.
Cellular phone companies, too, are falling into this trap. Companies like Verizon provide a wireless network, and specialized companies like Motorola provided the phones. Between the network providers and the hardware providers, they thought that they owned the experience and would be able to capture large profits in the future. Today, other than when the situation is dire (AT&T), consumers are caring less and less about the particular phone network they use and the hardware, too, is going behind the scenes, as they care about the particular applications on their mobile devices. Apple and its brilliant iPhone took the profits from the network providers, who now are scrambling to hold customers and long-term contracts. And the iPhone itself over time will come under immense pressure on their long term profits as new entrants with similar functionality and access to applications can come in and bring commodity tools to the market efficiently. Originally the phone companies (AT&T, Sprint) and the hardware manufacturers (Motorola, Nokia, Blackberry) thought that they could control the network, user interface, and the content. While Apple is thriving against the new competition (for now) this entire “ecosystem” has not played out in the way it seemed a decade ago, and many of those that expected to capture above-average profits are now either commodity players (hardware) or struggling to keep up with capacity while not being able to leverage this spend into a long term guaranteed return (the cellular network providers). The value is going to those that can “monetize” the mobile advertising experience, which probably will be a group of software(Google) and social networking companies (Facebook).
Now we move onto cable. Cable existed as a foil to over-the-air television, an oligopoly like newspapers that bled its mission white until powerful intruders came and up-ended their business model. Cable started to buy content, and they built a parallel distribution network at huge cost to compete with what was available, for free, over the air. Cable today also is the primary mechanism for broadband internet service, which it links with its paid content (and a bit of phone), to charge large and growing fees.
This article at Bloomberg is titled “The Cable Industry Isn’t Stupid, Right?”
The NPD Group put out a survey on Tuesday that suggested monthly pay-TV rates could reach $200 by 2020, up from the current average rate of $86. The analysts at NPD credit rising content-licensing fees and the average 6 percent rate increase that cable companies jam down users’ throats each year.
This is where the dis-aggregation of cable into 1) network provider (one amongst many) and 2) content provider becomes important.
I recently bought my parents a ROKU 2S box. The box is amazingly small, about the size of a mobile phone and a bit thicker. We plugged it in to an HDMI port on their TV and I connected it up to their wireless network (they have cable) and the software updated and the Roku box was working. In the picture below you can barely make out the small box to the right of the front channel speaker.
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