This post reworks one of two previous blogs that analyzed The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies by Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave. I used it as part of the Digital Media Management curriculum at New York University and the Digital Media MBA at St. Edward’s University in Austin, Texas. It stresses the importance of substantial barriers to entry, or conversely, competitive advantages, for success in what economists call the “market structure” of a particular product.

The Curse of the Mogul emerged at a time when digital media firms were first starting to wrestle with the Internet. I draw on this book and other sources to continue to stress the importance of firms building strong barriers to entry in competitive economic environments. I changed the focus from digital media to tech companies in line with the changing vernacular and a shift in power to edge computing companies using AI and e-commerce.

The authors of Curse of the Mogul argue point out that companies should focus on developing and reinforcing more serious competitive advantages and/or operational efficiencies (disciplined management of resources, costs, and capital allocation).[1] They were critical of media mogul’s preoccupation with topics like brands, deep pockets, talent (creative, managerial), a global footprint, and first-mover benefits. These points are relevant but obscure other business factors that would likely facilitate better results.[2] Successful tech companies must define and protect more structural barriers to entry or adopt strict cost control procedures and operational efficiencies to enhance productivity and profitability.

Market structure has become a key focus of strategic thinking in modern firms. It refers to the environment for selling or buying a product or product series and influences key decisions about investments in production, people, and promotion. It is primarily about the state of competition for a product and how many rivals a company will have to deal with when introducing it. How easy is it to enter that market? Will the product be successful based on current designs and plans for it, or will the product need to be changed? How will the product be priced? Market structure is impacted by technological innovations, government regulations, network effects, customer behaviors, and costs.

Key factors include the number of firms supplying product, the level of differentiation between products offered, and the main focus of this post – the competitive advantages or barriers to entry that a company can erect to bolster their position or stave off competition. The pricing strategy can also be a factor but that is largely dependent on the level of competition.

In light of the rapid development and convergence of these tech and digitally-based industries, it is worth exploring the areas of key focus for the authors. In this post and the next, 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. How do these categories of competitive advantage apply to a wider group of digital firms?[3] The authors distinguish four categories:

• Economies of scale and network effects;
• Customer captivity;
• Cost; and
• Government protection.[4]

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

This is a central concept in economics and refers to the benefits that come to a firm when it becomes more effcient. It may involve fixed costs or 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. Steven Levy’s “Secret of Googlenomics: Data-Fueled Recipe Brews Profitability” on the Wired website provides an excellent introduction to the search behemoth’s business model, primarily built around its Adwords and Adsense advertising business.

Google has a number of advantages, perhaps foremost being the massive investments in its built infrastructure. Google’s mission requires more than the most sophisticated “big data” software, it necessitates huge investments in physical plant, particularly data centers, power systems, cooling technologies, and high-speed fiber optic networks. Google has built up a significant global infrastructure of data centers (increasingly located close to cheap, green tech) and connecting its storage systems, servers, and routers is a network of fiber optic switches. For example, the Eemshaven data center facility in the Groningen region of the Netherlands is at the end connection point for a transatlantic fiber optic cable.

Large firms like Google can spread their fixed costs over greater volumes of production and operate more profitably than their competitors. For the most part, the details on fixed costs are not readily available as they are proprietary and represent trade secrets. However, aggregate numbers of Google’s fixed costs are informative.

Near Zero Marginal Costs

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 digital content – movie, television show, software, song, or video game are negligible. Most digital goods can experience near-zero marginal costs. This advantage has been challenged in the age of Artificial Intelligence (AI) however, as the “compute” needed to produce results requires significantly more energy than traditional search.

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. This happens for software as well. Microsoft Office, for example, which contains Access, Word, Excel, and PowerPoint, can be distributed over the Internet with little expense. But that is not necessarily a competitive advantage. Digital assets also need to be protected from copying and other forms of theft, and they need to utilize network effects and viral marketing.

Network Effects

Network effects refer to the increasing value of a product or service that occurs when additional customers or users start to use them. Many communications technologies such as telephones, fax machines, and text applications exhibit direct network effects. The telephone system became more valuable to each individual telephone subscriber as more people connected to the phone system. When 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 be sufficient and always be positive, as MySpace discovered after 2008 when members abandoned it for Facebook. MySpace was a social media site that allowed users to create their own “spaces” with pictures, blogs, music, and videos. The darling of early “social networking,” it was sold to Rupert Murdoch’s News Corporation for US$580 million dollars in 2005. Two years later, with 185 million registered users, it had a valuation of $65 billion. By early 2011 MySpace was down to about USD 63 million, while Facebook had jumped ahead with over 500 million members. Tired of pumping money into the sinking ship, News Corp. sold MySpace to Specific Media, an advertising network for $35 million, just 6% of its purchase price.[5] By 2025, Facebook had over 3 billion monthly active users (MAU).

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. eBay, Uber, Airbnb, and many other “platforms” such as dating or recruiting sites are also known as two-sided networks because they bring two distinct groups together. As the number of the eBay’s customers increased, it became increasingly attractive for others to sell their wares on the site. Conversely, as more products were displayed, it attracted more customers. A major success for Microsoft Office is that files produced on Word or Excel often need to shared and read by others.

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, are another good example of cross-network effects. They rely on a large base of individual card holders for profitability and this large customer base than attracts merchants who want their business and are willing to pay the extra costs to the credit card company. This raises questions about who you charge and if a proprietary platform is needed.

Over-the-top (OTT) services that use the Internet as a distribution system, like Amazon Prime, Netflix, and YouTube, connect consumers with content makers. While Prime and Netflix produce considerable content, they draw on outside content producers to keep their viewers engaged. YouTube has drawn heavily on user-generated content (UGC) as does Instagram and TikTok. In each case, the platform’s success depends on its direct network effects – its ability to connect a large number of viewers with a large number of producers.

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 its nearly ubiquitous installed user base among PC users allowed many other software producers to thrive as they built their applications to run on the Microsoft operating system. Both Apple and Android-based smartphones have allowed 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.

Viral Marketing

Viral marketing is a promotional strategy that relies on the audience to organically spread a marketing message to others, much like a biological virus. The goal is to create content that is so compelling, entertaining, or valuable that people will naturally want to share it with their friends, family, and colleagues. The key characteristics of viral marketing include rapid spread, user-driven growth, shareable content, and short-term growth.

Viral marketing’s primary aim is for the message to spread quickly and widely through social networks and word-of-mouth. Viral marketing relies on individuals to share the content, rather than the company paying for extensive distribution. Successful viral marketing campaigns typically involve content that evokes strong emotions, provides utility, or has a novelty factor that encourages sharing. While highly effective at generating initial awareness and a rapid influx of users, the effects of viral marketing can be short-lived if not coupled with other strategies. Examples of viral marketing campaigns include engaging videos, social media challenges like the ALS Ice Bucket Challenge, and creative contests or giveaways.  

Key Differences Between Network Effects and Viral Marketing

The main differences between network effects and viral marketing lie in their focus and the source of their power. The primary goal of network effects is to increase product/service value for users, while for viral marketing it is to achieve rapid user acquisition and brand awareness. The main mechanism for network effects is to increase value through the number of users while viral marketing works through the spread of shareable content created by the brand. The driver of network effects are the user connections and interactions. That also powers the sharing of content by individual users, which can feed more users for increased network effects. Network effects grows long-term sustainability and creates competitive advantage based on value production. Viral marketing creates rapid, short-term growth based on content appeal that can provide a temporary boost but doesn’t inherently build firm defensibility unless it results in more captured customers.[7]

Customer Captivity

Maintaining the attention and fealty of customers is often vital to a product’s 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. Also, 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 and other information.

Speaking of credit cards though, they remain a consistent vehicle to keep a hold of customers through subscriptions and reward programs. Subscriptions use the automatic payments of credit cards to keep making the necessary payments to maintain the continous service or supply of product. Switching costs and reward forfeitures discourage giving up a credit card. Loyalty programs foster perceived value, not always real value. Switching mean may mean losing accumulated points, changing autopay for multiple bills, and potentially hurting one’s credit score due to new inquiries or shorter account history.

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 the viewer might be interested in watching based on their previous viewing. Amazon destroyed the Borders bookstore with its recommendation engine and 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 I wanted, so I bought them from Amazon, despite the enjoyment of going to the Borders bookstore.

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 Tech Firms, Part 2,” I will discuss competitive advantages related to costs and government protection.

Review

This blog post summarizes key competitive advantages for firms, drawing from “Curse of the Mogul.” It emphasizes that success in a market’s structure depends on establishing strong barriers to entry or achieving operational efficiencies, rather than relying solely on brands, deep pockets, talent, global reach, or first-mover status. The post defines market structure and its influencing factors (technology, regulation, network effects, behavior, costs) and focuses on competitive advantages as barriers to entry. It then delves into several categories of competitive advantages.

Economies of scale and network effects are key barriers to entry. Firms can benefit from increased efficiency, including spreading fixed costs over larger production volumes (relevant for digital media with near-zero marginal costs, though AI compute challenges this with their high energy costs). Network effects are the increasing product/service value with more users (direct effects like communication technologies and indirect/cross-network effects seen in platforms like eBay, Uber, Airbnb, and the complementarity of products like Microsoft Office). The post notes that network effects aren’t always sustainable. For example MySpace vs. Facebook showed that network effects can tip one way or another quite fast. Once a platform reaches a critical mass of users, the value it offers becomes hard to replicate.

Customer captivity is reinforced through habitual use crucial for retention, as seen in mobile phone usage. Switching costs also present barriers preventing customers from moving to competitors and include fees, learning effort, equipment costs, and various risks. Also, search costs encourage sticking with an acquired product if the cost of searching start to outweigh the benefits of a new product. Recommendation engines and online reviews can play a role in reducing the costs of searching for a replacement product.

The post concludes by stating that the tech field is still exploring the creation of competitive advantages and barriers to entry. It highlights that multiple competitive advantages can operate simultaneously, increasing the likelihood of success.

Conclusion

This post outlines the critical importance of tech firms establishing powerful competitive advantages, particularly economies of scale, network effects, and customer captivity. These include firms operating in any market, including the dynamic digital media landscape. By dissecting these concepts and providing relevant examples from both traditional and digital companies, it underscores that sustainable success hinges on creating structural barriers to entry or achieving significant operational efficiencies, rather than relying on more superficial advantages often touted by industry leaders. The follow-up post on cost and government protection suggests a comprehensive exploration of the strategic levers available to companies seeking to thrive in competitive markets. Ultimately, the post serves as a framework for understanding how businesses can build lasting advantages in an ever-changing economic environment.

Citation APA (7th Edition)

Pennings, A.J. (2025, May 14). Determining Competitive Advantages for Tech Companies, Part I. apennings.com https://apennings.com/media-strategies/determining-competitive-advantages-for-digital-media-firms-part-1/

Notes

[1] Jonathan A. Knee, Bruce C. Greenwald, and Ava Seave, The Curse of the Mogul: What Wrong with the World’s Leading Media Companies. 2014.
[2] Knee, Greenwald, and Seave argue that the poor financial performance of major media conglomerates isn’t primarily due to external factors like the rise of the Internet. Instead, they contend that it stems from internal operational inefficiencies and misguided strategies driven by the egos and “megalomania” of media moguls. Lack of Focus on Cost Control: The moguls often prioritize growth, acquisitions, and maintaining a powerful image over rigorous cost management. They tend to downplay the importance of “number crunchers” and “pencil pushers,” leading to bloated budgets and unnecessary expenses. Driven by a desire for scale and market dominance, media companies frequently overpay for acquisitions and strategic investments that don’t yield commensurate returns. This misallocation of capital hinders profitability and shareholder value. Even when acquisitions have strategic rationale, poor integration processes often lead to duplicated efforts, loss of synergies, and ultimately, underperformance. The book challenges the notion that simply having the best content guarantees financial success. It argues that efficient distribution, marketing, and monetization strategies are equally, if not more, crucial. Moguls who fixate solely on content creation often neglect these operational aspects. Finally, the authors argued that moguls often believe their creative nature exempts them from standard financial scrutiny. This allows operational inefficiencies to persist without being adequately addressed. Unlike operationally efficient businesses that concentrate on core competencies and streamline processes, media conglomerates often lack focus, dabbling in diverse and sometimes unrelated ventures without achieving deep efficiencies in any one area.
[3]”Reviews: The_Curse_of_The_Mogul.” Quantum Media: Links_Reviews. N.p., n.d. Web. 30 Mar. 2014.
[4] Greenwald, Bruce C. “The Moguls’ New Clothes.” The Atlantic. Atlantic Media Company, 01 Oct. 2009. Web. 30 Mar. 2014.
[5] Jackson, Nicholas. “As MySpace Sells for $35 Million, a History of the Network’s Valuation.” The Atlantic, Atlantic Media Company, 29 June 2011.
[6] I finally found the hard copy of this book at a Borders near Wall Street in New York City.
[7] This post is a rewrite of the version I wrote in 2014. I used Gemini to add a more information on the distinction between network effects and viral marketing.

Share

© ALL RIGHTS RESERVED

---

Anthony J. Pennings, PhD is a Professor at the Department of Technology and Society, State University of New York, Korea, holding a joint research appointment at Stony Brook University. Before joining SUNY, he taught at St. Edwards University in Austin, Texas. He was on the faculty of New York University. Previously, he and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.

Related

Category: creative industries, digital media economics, digital media management, disruption

Comments

Comments are closed.