Communications Industry Report Card A Value Chain Dynamics

Communications Industry Report Card: A Value Chain Dynamics Perspective Professor Charles Fine Emmanuel Blain Value Chain Dynamics Working Group Communications Futures Program Massachusetts Institute of Technology May 2009 Telecom Italia Future Centre, Venice charley@mit. edu eblain@MIT. EDU

A Simple Value Chain: Sales/Marketing /Distribution Consumers/ Users Product Concept Production Subsystem Suppliers Core Technology Suppliers

Innovation along the Value Chain: How (& why) do Autos & Electronics Differ? Sales/Marketing /Distribution Consumers/ Users AUTOS Add-ons Internet Production Subsystem Suppliers Product Concept Minivan, SUV, Crossover Lean Production i. Pod, X-Box, Palm, Contract Office, Manufacturing Napster, Amazon, ELECDell Digital Photog. TRONICS Apple I Mobile Phone Core Technology Suppliers Hybrid Aluminum Engine, Bonding, Active Carbon Fiber, Suspension CAD tools Java, Microprocessor, Html, Hard disk drive, C++ Photolithography

Performance (sustaining); Technological perspective vs Industry perspective How to measure performance? How to know where you are on the “S”? Where in the value chain? Worse before better? Time

Performance Disruptive Product Innovation in Electronics y h p s ’ a r y C : I g n s o ho o ’s c t t i o n es C h lep o r P t ub o P al e c T t e t t gi l m s E s s i e e u In cu am o D rel Va infr cal t o Wi Ma emi ne t Ch re-li Lean i W Production Mass Production tive Craft Production Time Au o m to

What makes an innovation disruptive? Performance Push an overwhelmingly superior technology/process (mass production, penicillin) Customer Pull new customers care about different measures of performance (wireless phones, personal computers) Organizational Competencies incumbents cannot do what the innovators can (Dell supply chain, Southwest Air)

Drivers of Value Chain Dynamics : “Gear Model” for Roadmapping the VC Corporate Strategy Dynamics Customer Preference Dynamics Technology & Innovation Dynamics Gears differ by size/speed Each has an engine & clutch Regulatory Policy Dynamics Capital Market Dynamics Industry Structure Dynamics Business Cycle Dynamics

ALL COMPETITIVE ADVANTAGE IS TEMPORARY Autos: Ford in 1920, GM in 1955, Toyota in 1990 Computing: IBM in 1970, DEC in 1980, Wintel in 1990 World Dominion: Greece in 500 BC, Rome in 100 AD, G. B. in 1800 Sports: Bruins in 1972, Celtics in 1986, Yankees not lately : -) The faster the clockspeed, the shorter the reign

A Review of the o. IP’s 1. Vo. IP: 2. Voice communication is alive and well. Vo. IP is part of the landscape. Vo. IP, so far, is a sustaining innovation; e. Bay overpaid for Skype.

A Brief Review of the o. IP’s 1. Vo. IP: 2. 2. Mo. IP: Voice communication is alive and well. Vo. IP is part of the landscape. Vo. IP, so far, is a sustaining innovation; e. Bay overpaid for Skype. Music consumers seem pretty happy. Traditional music companies mildly(? ) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple.

Creative Artists THE CASE OF APPLE i. Pod/i. Phone Music Publishers Applications Networks Closed then open to non. Apple apps, VOIP over Wi. Fi, IM, etc. Closed to non-AT&T Music Marketing Open networks i. Tunes homepage Music Sales Listening accessories (& partner) i. Tunes Content Closed to non-MP 3, non-Apple formats Music Player Retailing Music i. Tunes Distribution Music Consumption i. Pod/ i. Phone

Creative Artists THE CASE OF APPLE i. Pod/i. Phone Music Publishers Applications Networks Closed then open to non. Apple apps, VOIP over Wi. Fi, IM, etc. Closed to non-AT&T Music Marketing Open networks i. Tunes homepage Music Sales Listening accessories (& partner) i. Tunes Content Closed to non-MP 3, non-Apple formats Music Player Retailing APP STORE! Music Distribution i. Tunes Music Consumption i. Pod/ i. Phone

A Brief Review of the o. IP’s 1. Vo. IP: 2. 2. Mo. IP: 3. TVo. IP: Voice communication is alive and well. Vo. IP is part of the landscape. Vo. IP, so far, is a sustaining innovation; e. Bay overpaid for Skype. Music consumers seem pretty happy. Traditional music companies mildly(? ) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. Looks to follow music?

A Brief Review of the o. IP’s 1. Vo. IP: 2. 2. Mo. IP: 3. TVo. IP: 4. No. IP: Voice communication is alive and well. Vo. IP is part of the landscape. Vo. IP, so far, is a sustaining innovation; e. Bay overpaid for Skype. Music consumers seem pretty happy. Traditional music companies mildly(? ) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. Looks to follow music? In USA, newspapers declining rapidly; Can bloggers and an army of “volunteers” fill the gap?

A Brief Review of the o. IP’s 1. Vo. IP: 2. 2. Mo. IP: 3. TVo. IP: 4. No. IP: 5. Fo. IP Voice communication is alive and well. Vo. IP is part of the landscape. Vo. IP, so far, is a sustaining innovation; e. Bay overpaid for Skype. Music consumers seem pretty happy. Traditional music companies mildly(? ) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. Looks to follow music? In USA, newspapers declining rapidly; Can bloggers and an army of “volunteers” fill the gap? On-line banking: a sustaining innovation?

A Brief Review of the o. IP’s 1. Vo. IP: 2. 2. 3. 4. 5. 1. 2. 3. Voice communication is alive and well. Vo. IP is part of the landscape. Vo. IP, so far, is a sustaining innovation; e. Bay overpaid for Skype. Mo. IP: Music consumers seem pretty happy. Traditional music companies mildly(? ) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. TVo. IP: Looks to follow music? No. IP: In USA, newspapers declining rapidly; Can bloggers and an army of “volunteers” fill the gap? Fo. IP On-line banking: a sustaining innovation? 6. Ao. IP: Is “consumption” of the arts different? Important distinctions among the arts? Classical, Contemporary, Performing, . . . ?

A Brief Review of the o. IP’s 1. Vo. IP: 2. 2. 3. 4. 5. 1. 2. 3. 4. 5. Voice communication is alive and well. Vo. IP is part of the landscape. Vo. IP, so far, is a sustaining innovation; e. Bay overpaid for Skype. Mo. IP: Music consumers seem pretty happy. Traditional music companies mildly(? ) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. TVo. IP: Looks to follow music? No. IP: In USA, newspapers declining rapidly; Can bloggers and an army of “volunteers” fill the gap? Fo. IP On-line banking: a sustaining innovation? 6. Ao. IP: Is “consumption” of the arts different? Important distinctions among the arts? Classical, Contempary, Performing, . . . ? 7. SPoi. P: Sports as a fast-clockspeed performing art; Time shifting reduces value. . .

Sports over IP: A Dynamic Modeling Perspective Potential Fans Casual Fans (Video) Rabid Fans (Live)

Potential Fans + + Fan Creation Rate Team Popularity + Success Ratio + Number Of Stars + Casual Fans (Video) Rabid Fan Creation Rate + + Rabid Fans (Live)

+ Potential Fans + + Fan Creation Rate + Casual Fans (Video) Team Popularity + + + Demand For Video Content Rabid Fan Creation Rate + Number Of Stars + Over The Air Cable TV + + + Success Ratio + Licensed Internet Rabid Fans (Live) Demand For Live Performances + Un-Licensed Internet

+ Potential Fans + + Fan Creation Rate + Casual Fans (Video) Team Popularity + + + Demand For Video Content Rabid Fan Creation Rate + + Number Of Stars + Team + + Revenue + + Over The Air Cable TV + + + Success Ratio + Licensed Internet Rabid Fans (Live) Demand For Live Performances + Un-Licensed Internet + Stadium Prices and Attendance

+ Potential Fans + + + Fan Creation Rate + Casual Fans (Video) Team Popularity + + + Demand For Video Content Rabid Fan Creation Rate + + + Team + Revenue + Number Of Stars + Over The Air Cable TV + + + Success Ratio + Licensed Internet Rabid Fans (Live) Demand For Live Performances + Un-Licensed Internet + + Stadium Prices and Attendance

+ Potential Fans + + + Fan Creation Rate + Casual Fans (Video) Team Popularity + + + Demand For Video Content Rabid Fan Creation Rate + Success Ratio + + + Team + Revenue + Number Of Stars + Over The Air Cable TV + + Licensed Internet Rabid Fans (Live) - (Local Sports Blackouts) + Demand For Live Performances - - - + Un-Licensed Internet + + Stadium Prices and Attendance

+ Potential Fans + + + Fan Creation Rate + Casual Fans (Video) Team Popularity + + + Demand For Video Content Rabid Fan Creation Rate + - + + Team + Revenue + Number Of Stars + Over The Air - Cable TV - + + Demand For Live Performances - - Success Ratio + Rabid Fans (Live) - + + Licensed Internet Un-Licensed Internet - + + Stadium Prices and Attendance

+ Potential Fans + + + Fan Creation Rate + Casual Fans (Video) Team Popularity + + + Demand For Video Content Rabid Fan Creation Rate + - + + Team + Revenue + Number Of Stars + Over The Air - Cable TV - + + + Licensed Internet + - Internet Innovation + Demand For Live Performances - - Success Ratio + Rabid Fans (Live) + - Internet Users + Un-Licensed Internet + + +Broadband + + + Stadium Prices and Attendance Demand

Conclusions/Observations/Questions 1. Research: Modeling value dynamics is feasible for the performing arts (more to come) 2. Observations: Internet viewing can potentially grow the overall market for the arts, but may also reduce revenue opportunities for art distributors. All the o. IP’s grow the pie for Broadband providers. 3. Questions: Can Broadband providers get their “fair share” (e. g, versus Apple, Google)? 1. What is fair? 2. Innovative business model design is big opportunity.