Anthony J. Pennings, PhD

WRITINGS ON DIGITAL STRATEGIES, ICT ECONOMICS, AND GLOBAL COMMUNICATIONS

Determining Competitive Advantages for Digital Media Firms, Part 1

Posted on | March 30, 2014 | No Comments

In the Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies, Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave provide a general critique of upper media management. The authors argue these moguls are preoccupied with “fantastical factors” that do little to provide high returns on capital, market share stability or shareholder value in a time when they are direly needed. The mogul’s preoccupation with “sham” competitive advantages: deep pockets, brands, talent (creative, managerial), a global footprint, and first mover benefits; obscure other business factors that would likely facilitate better results.[1]

The authors argue that these managerial strategies suffer a major disconnect from the historic performances and economic realities that have created and defined the modern (digital?) mediascape. Instead, they point out that media companies should focus on developing and reinforcing more serious competitive advantages and/or operational efficiencies. Successful media companies need to define and protect more structural barriers to entry or adopt strict procedures of cost control and operational efficiencies to enhance productivity.

In this post, I review some of the major sources of competitive advantages according to The Curse of the Mogul and reference how they might apply to digital media firms. The book refers primarily to traditional big media firms. In light of the rapid development and convergence of these areas, however, it is worth exploring how these categories of competitive advantage apply to a wider group of digital firms.[2] The authors distinguish four categories:

Due to space constraints, I will cover economies of scale and customer captivity in this post and cost, innovation, and government protection in a future one.

Economies of Scale may involve both or either fixed costs and network effects. Fixed costs refer to both the traditional sense of decreasing costs per unit produced as well as to the barriers created by a company like Google with the ability to spend lavishly on equipment, knowledge attainment and other factors that make it prohibitive for other firms to match. Large firms can spread their fixed costs over greater volumes of production and operate more profitably than their competitors. Web sites, for example, can benefit by localizing their content and expanding their reach to other countries. In fact, one of the characteristics of digital media is that although initial production costs may run high, the costs for additional viewers to experience the resulting movie, television show, song, or video game are negligible.

Economies of scale for book publishers have always meant they needed to cover their fixed costs such as editors and author royalties before they can achieve profits. However, if they have a bestseller, it can be quite profitable as they spread their costs over a larger production run. Digital distribution through Amazon’s Kindle or Apple’s iBooks not only reduces the costs of production, but as no ink or paper is involved it significantly reduces the costs of delivery as well.

Network effects refer to the increasing value of a product or service that occurs when additional customers or users start to use them. As more mobile phone users started to take advantage of Short Message Service (SMS) or “texting”, it attracted even more users. When I got my first text from my sister, for example, who was not known at the time for her technological prowess, I knew that texting had arrived. Network effects are complicated and may not always be positive (As MySpace discovered after 2008 when members abandoned it for Facebook). Digital firms need to consider multiple repercussions such as cross-network and indirect network effects.

The authors use the example of eBay, an online auction company that benefits from cross-network effects. As the number of the customers increased, it became increasingly attractive for others to sell their wares. Conversely, as more products were displayed, it attracted more customers. Network effects makes a site or product more valuable as it includes more people and those additional people make it more attractive for another group. Credit cards, for example, rely on a large base of individual card holders for profitability and that large customer base than attracts merchants who want their business. This raises questions about who you charge and if a proprietary platform is needed.

Another phenomenon is indirect network effects. This occurs when the increasing use of one product or service increases the demand for complementary goods. The standardization of the Windows platform in the 1990s for example, and it’s nearly ubiquitous installed user base among PC users, resulted in the opportunity for many other software producers to thrive as they built their applications to run on the Microsoft operating system. Both the Apple and Android based smartphones have made it possible for thousands of apps to be added to their functionality. So the network effects attributed to the popularity of these PCs and smartphones carry over to applications that run on them.

Customer captivity is a strong component of digital media success and is reinforced through habit, switching costs and search costs. Successfully introducing customer practices and reinforcing habitual use is a crucial strategy for retaining customers. Mobile apps lock users into a much more narrow range of options than surfing the Web on their PCs. Amazon’s One-click purchase option makes it quick and easy to complete the deal without dragging out the credit card and inputting all the numbers.

One new digital tool that is proving effective is the recommendation engine. Netflix uses a recommendation engine to keep customers engaged. It constantly suggests titles that the viewer might be interested in watching, based on their previous viewing. Amazon was able to destroy Borders with its recommendation engine, especially combined with an effective email system that targeted customers with what they wanted. Borders could only offer pictures of loosely associated books with dubious links to the customer’s interests. I, for example, was not interested in their fine collection of Harlequin-like romance novels. Borders did not recommend the books that I was interested in buying, so I bought them from Amazon.

It is also important to keep customers from switching to competitors. Switching barriers can involve exit fees, learning effort, equipment costs, emotional stress, start-up costs, as well as various types of risk: financial, psychological, and social. Cable and home security companies are notorious for trying to keep customers in long-term contracts to keep them from switching. Making it easy to learn new products is helpful as is reducing any stresses associated with understanding new features or upgrading. One way to keep customers is to make the payment system easy. Automatic payments work for subscription based services like Netflix and other deliverers of online content that tie in customers through credit cards and other continuous payment systems.

Search costs encourage consumers to stay with a particular product or entice them to go with your brand if the information provided is convincing enough to cause them to give up their search. Rational consumers will tend to search until the perceived benefits outweigh the costs. Testimonials and good reviews will help alleviate their concerns. Big ticket items like cars, homes, or major appliances tend to require more search time than smaller items. But any search requires a calculation of the opportunity costs involved. What are they giving up to spend this time searching?

In the passages above, I reviewed competitive advantages as specified by the authors of The Mogul’s Curse and applied them to digital media firms. Their focus on moguls doesn’t hold as much interest for me as their discussion about competitive advantages for smaller companies.[4] Being technologically dynamic, the digital media field is still investigating and exploring its ability to create competitive advantages and erect barriers to entry.

It is also important to understand that two or more competitive advantages may be operating at the same time. Recognizing the potential of reinforcing multiple barriers to entry and planning strategies that involve several competitive advantages will increase the odds for success. In “Determining Competitive Advantages for Digital Media Firms, Part 2,” I will discuss competitive advantages related to costs and government protection.

Notes

[1] “Reviews: The_Curse_of_The_Mogul.” Quantum Media: Links_Reviews. N.p., n.d. Web. 30 Mar. 2014.
[2] Greenwald, Bruce C. “The Moguls’ New Clothes.” The Atlantic. Atlantic Media Company, 01 Oct. 2009. Web. 30 Mar. 2014.
[3] Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave, The Curse of the Mogul: What Wrong with the World’s Leading Media Companies. 2014.
[4] I finally found the hard copy of this book at a Borders near Wall Street in New York City.

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AnthonybwAnthony J. Pennings, PhD is a professor of global media at Hannam University in South Korea. Previously, he taught at St. Edwards University in Austin, Texas and was on the faculty of New York University from 2002-2012. He also taught at Victoria University in Wellington, New Zealand and was a Fellow at the East-West Center.

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  • About Me

    Professor and Associate Chair at State University of New York (SUNY) Korea. Recently taught at Hannam University in Daejeon, South Korea. Moved to Austin, Texas in August 2012 to join the Digital Media Management program at St. Edwards University. Spent the previous decade on the faculty at New York University teaching and researching information systems, media economics, and strategic communications.

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