Up here in New England, there's been a lot of talk recently about "the Curse".
That is, the "Curse of the Bambino", which allegedly was put on the Red Sox
by Babe Ruth in retaliation for being ignominiously sold to the Yankees in
1920. The dreaded Curse prevented the Sox from winning the World Series for
86 years until this year's four game sweep of the Cardinals.
A while back I read about another curse. It's called the "The Incumbent's
Curse" , which speculates that breakthrough product innovation can only be
accomplished by younger, unencumbered companies not tied to traditional ways
of doing things.
Understanding the Incumbent's Curse
By definition, big companies need to institutionalize their business practices
so that thousands of employees act consistently. When business conditions
are favorable, big companies make lots of money by leveraging the scale of
their operations across huge market opportunities. Incentive systems for
everyone from front line employees through senior executives are designed
to reward and reinforce the behaviors that lead to success. Typically the
organization becomes increasingly invested in sustaining that successful
business model.
However, I believe that few things last forever and inevitably disruption
threatens longstanding business models. New competitors spring up. Existing
technologies become obsolete. Customer behaviors evolve and their evolution
can be accelerated by the new technologies. While a deliberate approach is
exactly what investors in big companies want, the problem arises when cautious
executives focus more on preserving their existing models than on innovating
to meet these new market realities. Hence the Incumbent's Curse.
Challenges to Basic Cable
In the cable business, the traditional model of delivering video programming
to subscribers through a set top box has worked extremely well. The "basic
tier" remains cable's core offering. In fact, to receive any digital or advanced
services, a subscriber has to "buy through" or subscribe to the basic tier
first.
The paradox is that while many subscribers are attracted to these recently
launched advanced video services, my informal survey suggests that there is
also frustration with having to first subscribe to the ever more expensive
basic tier, for many channels that are neither used nor valued. At the same
time, consumers are proactively changing their viewing behaviors to conform
their viewing to their busy lives.
I think that ignoring this frustration and behavioral change makes the industry
vulnerable to the Incumbent's Curse. An increasingly evident reality in today's
media business is that consumers are driven by value, choice and control. Consider:
Personal Viewing - It is no secret that personal video recorders and VOD are
proliferating. The industry is aggressively pushing both of them, as they are
key competitive imperatives. However, their success obliterates the notion
of scheduled viewing and with it, the concept of networks and a conventional
channel lineup. In a PVR and VOD dominated world, the only thing the viewer
cares about is getting the desired program when they want it.
Satellite Growth - DirecTV and EchoStar have been gaining quarterly subscriber
(albeit with high churn rates) while cable, as an industry, is slowly losing
basic subscribers. DBS offers all digital pictures with simplified channel
lineups at comparatively lower prices than cable.
A La Carte Rumblings - A regulatory framework that envisions channels being
available for individual purchase by customers is making the rounds in Washington.
However impractical and unlikely a la carte is (and it is both), politicians
(for the most part) seek to please their constituents and so if they're supporting
a la carte, they likely see popular appeal in it.
How All of This Relates to Broadband
Meanwhile, internet protocol (IP) has been slowly developing into a viable
alternative for delivering high- quality video to the TV. This would mark
the next evolution of video streaming and downloading that has steadily grown
over the last five years.
Cable has done its share in making IP an attractive platform for video distribution
by growing the number of total broadband-connected homes in the US to approximately
30 million by the end of '04. This is well into the zone where the economics
of program distribution solely to broadband homes make sense, particularly
given the positive demographic skew of broadband homes that programmers and
advertisers find so attractive.
At the same time, huge investments are being made by software and consumer
electronics companies in areas such as consumer-friendly home networks, Microsoft
Media Center PCs, digital media adaptors and portable video players, all in
an effort to further accelerate the shift to IP. And with the advances of enabling
technologies such as sophisticated media compression, high-quality wireless
connectivity, digital rights management and content management tools, the prospect
of delivering high-quality video either to a PC or to an IP set top box (as
the telcos intend) is now a reality.
So the time seems right to ask the following questions:
Should MSOs and programmers focus on broadband, with its potential to deliver
IP-based video, as the next platform to innovate their business model?
Would such efforts threaten the stability of the core basic tier, and the
growth of advanced services that leverage off of it, or open up huge new revenue
opportunities?
What are the risks of not pursuing broadband and IP's potential as a video
delivery platform?
Next month, I'll explore answers to these questions. How the industry, including
both MSOs and programmers, chooses to act will determine the relevance of the
Incumbent's Curse
