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New business models for the new media world

T

he new media world has arrived. It’s a wild frontier market where youthful

demographics are the prize and tech-savvy adventurists lead the way. In this digital

gold rush, Internet successes such as YouTube and MySpace, and their associated

audience growth rates, are the envy of broadcast TV and the rest of the entertainment

establishment[1]. To examine the clash between new and traditional media and explore

future industry scenarios, we conducted a comprehensive study that included interviews

with leaders of media companies and an in-depth analysis of the factors that are shaping the

industry outlook (see box, ‘‘Study methodology’’).

Ourfindingshighlighttwotrendsasparticularlydisruptivetomainstreammedia.Inthetraditional

world, content produced by professionals and distributed through proprietary platforms still

dominates. But in the new world, content is often user-created and accessed through open

platforms.Thesepolarizedtendenciesmarktheconflictbetweennewandoldmedia.

Data points

Though the current battle between traditional and new media is real, it remains lopsided – in

terms of finances if not buzz. The number of unique visitors to MySpace.com has now

surpassed the 50 million mark – something akin to the number of US households that tune

into the Super Bowl[2]. Every day, consumers around the world watch about 100 million

videos on YouTube – putting that number in context, the top 15 British primetime television

shows combined attract about 100 million viewers, as do the top four US shows[3].

Based on our analysis of current forecasts, worldwide revenue from new media channels –

such as Internet advertising, mobile music and online games – is expected to reach nearly

US$55 billion in 2006[3]. But that pales in comparison to the US$455 billion in revenue that

traditional channels are expected to yield in 2006[4]. New media, however, is growing much

faster than traditional media. Its revenue compound annual growth rate (CAGR) from 2006 to

2010 is 23 percent versus 6 percent for traditional revenue streams[5].

An emerging conflict: the media divide

Our research also found evidence of another developing conflict that we call the media

divide. This second conflict will emerge among existing players – between traditional

Study methodology

The study consisted of primary research and analysis as well as supplementary secondary

research. Specifically, IBM conducted in-person interviews with more than 75 senior media

executives, industry analysts, economists and technology visionaries and also worked with the

Economist Intelligence Unit to survey another 125 executives from media, Internet portal and

telecommunications companies.

Saul J. Berman is a Partner

and Global Executive of

IBM Global Business

Services (saul.berman@

us.ibm.com).

Steven Abraham has

world-wide responsibility

for IBM Global Business

Services in the Media and

Entertainment industry

(steven.abraham@

us.ibm.com). Bill Battino

serves as the Leader of the

Americas Media and

Entertainment consulting

practice for IBM Global

Business Services

(william.battino@

us.ibm.com).

Louisa Shipnuck is the IBM

Institute for Business Value

Global Media and

Entertainment Leader

(louisa.a.shipnuck@

us.ibm.com). Andreas Neus

is the IBM Institute for

Business Value European

Media and Entertainment

Leader (andreas.neus@

de.ibm.com).

content owners (such as studios, game publishers and music labels) and media distributors

(television affiliates, retailers, motion picture exhibitors, cable and satellite providers and the

like). It could pit partner against partner in a struggle for growth.

For example, content owners will be increasingly interested in new open distribution

channels that lead to greater licensing volume, brand extension and market

disintermediation. Conversely, media distributors will want to bolster closed or ‘‘walled’’

communities, driving more subscriber loyalty and higher margins from interactive features,

user-created content and niche experiences. As a result of these competitive struggles, we

expect traditional media companies to seek growth in new business models.

Business models through 2010

When we examine the industry in terms of content source and distribution and device

platforms, we see four primary business models (See Exhibit 1):

delivered through a ‘‘walled,’’ conditional-access environment and dedicated devices.

This is where most established media companies operate today. Examples are

community-generated content within a ‘‘walled’’ or conditional access environment

through dedicated devices. Typically, these are traditional businesses that allow user

contributions and nontraditional features. For instance NTT DoCoMo has over 95,000 user

and special interest communities, all accessible via their service on their devices[6]. And

Comcast just announced an agreement with Facebook.com to produce a television series

from user-generated videos[7].

available in open channels, without dedicated access providers or devices. Examples

here include the BBC with its My BBC interactive media service, Lucasfilm Entertainment

Company and Sony Online Entertainment Star Wars Galaxies massively multiplayer

online role-playing game as well as the myriad broadcast networks in the USA that are

making content available from their own Web sites.

content and open distribution platforms. It is arguably the most disruptive, as neither

incumbent studios nor distributors have legacy advantages here. This is where you’ll find

predominantly user-driven aggregators like YouTube, MySpace.com and Second Life, as

well as a host of less-publicized players, such as LiveJournal, XING, mixi, DailyLOL and

NetMusicMakers.

For the next three to five years at least, we see no clear winner among these four business

models. Instead, we expect different companies to pursue divergent models and unique

combinations that leverage their historical strengths and assets – and as a result, the market

overall will look extremely varied, even chaotic at times.

Preparing for the future – divergence and all

We have seven industry-specific recommendations for incumbent media companies as they

face the immediate threat from new entrants and eventual collisions with traditional partners:

1. Deliver experiences, not just content.

2. Leverage virtual worlds.

3. Innovate business models.

4. Invest in interactive, measurable advertising services and platforms.

5. Redefine partnerships, while mitigating fallout.

6. Shift investment from traditional business to new models.

7. Create a flexible business design.

1. Deliver experiences, not just content

Building a new-world experience will likely require new content, a new way of consuming it,

and new tools to make the experience easy. The video game industry provides an illustration

of this evolution in content and format. Video game publishers have launched new content

experiences by moving beyond traditional licensing and console relationships to online

subscriptions (such as with the popular Sony Online Entertainment Everquest I and II

games), context-appropriate marketing and genre-specific product placement. As

experimentation in games has shown, engaging media experiences easily cross

channels, from one screen to another, and switch between ‘‘real life’’ and online play.

Clearly, the consumer’s media experience will also be influenced by a media company’s

relationships with partners, from retailers to distributors to back-end providers. So in addition

to working within an organization, fluidity for the user will hinge on a media company’s ability

to influence others for coordinated execution. Delivering convenient and seamless

experiences takes a Herculean effort – but the return on that effort could be highly

profitable, especially if the experiences can be mass customized.

2. Leverage virtual worlds

Another important expansion that media distributors should be thinking about is how best to

venture into the virtual world for brand and service extensions. Here, we’re not using ‘‘virtual

world’’ as slang for the Internet in general, or community sites like MySpace and FaceBook.

We literally are referring to digital virtual worlds where tech-savvy and fashion-forward

consumers can assume new personas and carry out everyday activities, such as shopping,

chatting with friends at a crowded restaurant or attending a ‘‘live’’ concert. Linden

Research’s Second Life, one of the most popular virtual world sites, now has over five million

total ‘‘residents,’’ over 1 million of which were logged in regularly – with a median age of 36,

half of whom are women[8].

For their part, content owners can use virtual worlds for content, loyalty, character and

storyline extensions to entice those users that require advanced interactivity. Because virtual

worlds allow self-styled experiences, virtual world inhabitants control if, when and how they

interact with various brands.

3. Innovate business models

New kinds of media experiences necessitate new business models, as well as a revived

spirit of invention and faster way to test emerging ideas.

As companies enter emerging channels, they must be willing to cannibalize a bit of their

current business to grow a new one. (An example of this from the print media industry is

newspaper classifieds moving online.) Media incumbents must aggressively experiment

with the revenue model, the industry value chain and the enterprise model, including the use

of partnerships and acquisitions. This also involves rapid innovation in content windows and

their underlying economics (ad-subsidized, subscription, pay-per-use, licensing) – before

an outsider chips away at their traditional businesses. Some experiments are already

underway, such as the music industry’s digital single pre-CD release date, as well as near

real time television on demand from North American broadcasters like CBS, ABC or FOX to

international ones, from Alsat in Albania to Meridiano in Venezuela[9]. The revenue from

these new channels can be significant, as has been the case with recording artists, Green

Day, 50 Cent and Beyonce´ , who have all received the Recording Industry Association of

America Digital Gold Sales Award (for significant digital downloads in six digits)[10].

As they begin experimenting with new business models, media companies need to have a

specific set ofbusiness goals inmind – andastrategy forhowthey will accomplishthese goals.

For instance, as content owners move toward more ‘‘open’’ Internet-based strategies, they

must articulate what they specifically want to achieve – from brand extensions to incremental

revenue to user stickiness. They need to decide whether to proceed with open strategies

directly, or through licensing to a partner or via a consortium of competitors (See Exhibit 2).

Oncethe entry strategy is determined, next steps include deciding on the operating model (for

example, whether toownoroutsource the supply chain)andanorganizational design withnew

roles, skills and capabilities.

Similarly, as distributors identify new business opportunities, we suggest being explicit

about the goals, identifying optimal entry strategies as well as operating models and

requisite organizational designs. For all initiatives, we recommend scenario-planning

exercises that test assumptions about possible cannibalization or additive affects of new

windows and channels. Along these same lines, media companies can learn valuable

insights about planned obsolescence and organized disruption from other industries such

as electronics and consumer products.

We also suggest using rapid pilot programs to test new business models and garner ‘‘real life’’

data on consumer interest, though the digital media is evolving so fast that in some cases the

skill to full scale projects may be crucial. Other considerations for accelerating the innovation

process include: sharing risk and investment with partners (or even competitors) and

establishing an incubation program office with dedicated funding and defined success

criteria.

4. Invest in interactive, measurable advertising services and platforms

Venturesome users are leaving traditional advertising outlets and giving more time, attention

and ‘‘impressions’’ to new media and information devices. Even with traditional channels,

increasingly popular services like DVRs and on demand viewing impact how, when and if

advertisements are viewed at all. In the next three to five years, we do not see traditional

channels, like television, sliding into cataclysmic decline. But, we do expect palpable

change nonetheless. For media companies to exploit, not succumb to, inexorable change,

new thinking and systems will be required. Media companies have an opportunity to lead the

industry in investment incubators, experiential consumer research and the development of

new metrics. This may also involve moving to behavioral measurements, and away from

impressions.

5. Redefine partnerships, while mitigating fallout

As content owners look to new, more open channels and media distributors seek out niche,

user and ‘‘prosumer’’[11] content, both groups will need to establish decision criteria for

evaluating new potential partners and acquisitions. They will also need to assess and

address chess moves made by others.

Evaluation criteria for partnerships and acquisitions will often include a target’s brand

alignment, customer reach, management talent, financial stability and proprietary

technologies, among other assets. For example, media distributors may be focused on

partnerships or acquisitions that offer quality long-tail content, user communities or regional

exclusivity rights for branded content. Content owners, conversely, may be interested in

those companies that offer enabling Internet technologies or recognizable online brands.

As the interests and strategies of traditional content owners and media distributors diverge,

it will be critical to assess and plan for the impact these actions have on existing partners. If,

for instance, a content owner makes previously exclusive content available across multiple

open channels, it needs to understand the short- and long-term effects on traditional

distributors. When distributors bring user-contributed content inside their walled gardens,

they should attempt to understand – and quantify – the cost to existing content providers in

terms of lost attention. (See Exhibit 3).

6. Shift investment from traditional business to new models

New growth initiatives will need to be funded from significant cost savings carved from

traditional business areas. It’s also quite likely that the products and services of new entrants

will increase pricing pressure, which, in turn, would reduce revenue in some corners of the

business. Incumbents must find ways to substantially lower current costs to both fund

growth and maintain competitive advantage.

To do so, we recommend that companies conduct a full assessment to identify potential

areas for consolidation, scale efficiencies and even structural changes to the business. By

examining the business in terms of its fundamental components – or groups of like activities

– a company can more easily discern which areas of the business are ripe for outsourcing or

converting into shared services.

It is important to set – and begin working toward – efficiency and effectiveness targets now,

before external factors force a company into a corner and elicit an ill-prepared reaction.

Companies must hold the management of traditional businesses accountable for freeing up

dollars for new investment. Companies should incorporate these new goals into their key

performance indicators and track progress systematically.

7. Create a flexible business design

As incumbents reinvent their businesses for the new media world, the watch word should be

flexibility. They need the ability to sense and respond rapidly. They must anticipate and move

quickly to stay in sync with consumer behavior shifts. This will involve tackling head-on the

issues of internal silos, vertical infrastructure and fragmented content exploitation

companywide.

Internal silos – and the inertia they cause – can be one of the biggest barriers to flexibility

and speed. In particular, media companies must examine their go-to-market capabilities

and purge them of any ingrained organizational conflicts. Incumbents will have to overcome

other substantial obstacles, such as legacy thinking, unaligned performance measurements

and insufficient resources. (See Exhibit 4).

To operate in the new world, media incumbents will have to ‘‘horizontalize’’ their business

silos. More specifically, they will need a sideways and complete view of their consumers that

spans content types and channels and a common customer relationship management

system. This will help media companies deliver an end-to-end experience for the consumer,

without timing, pricing or brand experience breakages or conflicts.

The current clash between traditional and new media is reaching a fevered pitch. Industry

incumbents are responding – but perhaps not quickly or completely enough. As a guide to

action, we offer a how-to checklist. (See Exhibit 5).

While they fight an escalating competitive battle on this front, traditional media companies

cannot ignore the possible division in their own ranks. Content owners and media

distributors need to develop individual strategies for turning conflict into opportunity and

growth as they navigate this emerging media divide.

Notes

1. ‘‘Social Networking Sites Continue to Attract Record Numbers as Myspace.Com Surpasses 50

Million U.S. Visitors in May.’’ comScore Networks press release. June 15, 2006; ‘‘Super Bowl

2nd-most watched show ever.’’ The Associated Press. February 7, 2006.

2. ‘‘Super Bowl 2nd-most watched show ever.’’ The Associated Press. February 7, 2006.

3. ‘‘YouTube serves up 100 million videos a day.’’ Reuters. July 16, 2006; Broadcasters Audience

Research Board, ‘‘Weekly Viewing Summary’’ for week of November 13, 2006; Nielsen Media, ‘‘Top

4. Ibid.

5. Ibid.

6. IBM interview with Masaaki Maeda, NTT DoCoMo USA, Inc. Senior Vice President, Service &

Technology Division.

7. Yao, Deborah. ‘‘Comcast, Facebook to Launch Video Series.’’ The Associated Press. February 6,

2007.

8. ‘‘When *precisely* did we hit 1 million Residents?’’ The Official Blog of Linden Labs; Ondrejka, Cory.

‘‘Web 3.0.’’ Presentation at O’Reilly Emerging Technology (ETech) Conference, San Diego, CA,

March 7, 2006.

2007.

10. Recording Industry Association of America, ‘‘Idiot Rules!’’ March 2, 2005; Recording Industry

Association of America, ‘‘50 Cent Cashes In.’’ May 3, 2005; Recording Industry Association of

America, ‘‘Goodbye, 2004. Hello, 2005!’’ December 21, 2004.

Corresponding author

Saul J. Berman is the Global Media & Entertainment Strategy Lead and worldwide Strategy &

He has over 20 years consulting experience advising senior management of large corporate

organizations, as well as start-up companies, on a broad range of strategy, organizational

transformation and operations issues. His clients have included entertainment and

telecommunication companies, consumer goods manufacturers and retailers in the USA,

Japan, Europe and Australia.

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