Anthony J. Pennings, PhD


Determining Competitive Advantages for Digital Firms, Part 2

Posted on | April 18, 2014 | No Comments

In a previous post on competitive advantages, I discussed some structural characteristics for digital media firms. Using the framework laid out in Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies as a point of departure, I was able to extend their analysis of traditional media companies to the more dynamic realm of digital media and tech firms. To be successful, these new companies need to understand how to shore up barriers to entry to solidify their positions and become profitable. Within the competitive environment of the Internet, it is important to be aware of how companies can ward off other companies looking to capture their market share.

The authors critique media moguls for not paying adequate attention to four general categories of competitive advantages: economies of scale; customer captivity; cost; and government protection. Previously, I covered economies of scale and customer captivity. I paid particular attention to network effects that are one of the most critical determiners of success for net-centric firms. Customer captivity in terms of habits, search costs, and switching costs are also important determinants of success for companies dealing with digital media programming, products, and applications.

In this post, I focus on innovation, cost, and government protection. Media companies need to proactively develop and protect new technologies as well as instill a culture of rapid learning and implementation. They also need access to vital resources, whether raw minerals or refined human knowledge and skills. Lastly, government support can help a firm develop a competitive advantage.

Innovation involves developing, utilizing, and protecting technologies, implementing a climate of learning, and applying new knowledge to fundamental production and work processes. While the book puts these under the category of cost, I thought it might be more beneficial to examine these processes through the lens of innovation. This rationale is partially due to the changes in GDP measurement that now include many aspects of research and development – as well as media production – as capital expenditures and not expenses.

Digital media firms need to develop key proprietary technologies that they can use and protect. This increasingly involves software enhancements to core products and technological innovations such as recommendation engines and other “big data” solutions. Guarding the firm against cyber-espionage and techniques like reverse engineering has become a high priority.

Utilizing intellectual property protections such as copyrights, trademarks and the use of patents, including the business method patent can provide legal protection for a product and protect against encroaching companies. Patents, for example, give the owner the exclusive use of a technology for 14-20 years.

Digital media firms should strive for constant improvements in production and efficiencies to separate themselves from the “pack” through organizational learning. They should also be cognizant of the opportunities inherent in disruptive innovations that may initially offer poorer performance, but that may improve or reach new audiences over time.[2]

As digital media companies traffic in various types of communication and content, it is crucial that they find new ways to produce, package and monetize media. The authors are wary of business models based on content “hits” and stress instead the importance of producing continuous content. This may require innovations in digital media production, programming, and ways to utilize user-generated content.

Cost issues involve ensuring access to essential resources or what economists call “factors of production” (land, labor, capital, entrepreneurship). These might be cheap energy and other natural resources, talented labor, sources of investment as well as expertise in startups. Google’s Finland data center and the Green Mountain Data Center in Norway are good examples of attempts to use the cold waters in those areas to cool thousands of servers and reduce energy costs.

Raw materials may not be considered critical for digital media sectors directly, but to the extent that they rely on other high tech sectors, they may be indirectly reliant on a number of raw minerals including indium niobium, platinum, and titanium. Indium, for instance, is used in touchscreens, liquid crystal displays, and to manufacture microprocessors. Africa and China are major supplies of critical raw materials for the high-tech sector.

Access to skilled labor and a climate of intellectual discussion and sharing that facilitates innovation are also important factors to consider. I’ve written previously about five digital media “archetypes”: design; technology/programming; business management; communications; and analytics. Richard Florida’s thesis that these types of talent congregate around creative clusters is instructive. He encourages areas interested in developing their creative economies to support their universities, particularly faculties that do science and technology; cultivate new industries that capitalize on creativity; prepare people for a creative global economy, and foster openness and tolerance to attract the creative class.”

Government protection can also impart benefits to a digital media business or be a deterrent to its competitors.[3] From the perspective of an individual digital firm, it can benefit from outright subsidies, grants or guaranteed loans. The Small Business Administration (SBA) and the National Telecommunications and Information Administration (NTIA) are two of the most supportive US agencies for digital enterprises.

Preferential purchase policies for companies can provide an edge. Governments often list specific advantages they are willing to provide smaller to medium sized enterprises (SMEs) especially dealing with specific sustainability, or gender/minority diversification programs. Often these are advertised as support for specific products or services.

Exclusive licenses have been a historical reality in the media business, primarily due to the importance of a scarce resource – the electromagnetic spectrum. This key media resource has gone primarily to television and radio operators, but the interest in mobile services and Wi-Fi has opened up new frequencies for use. When we created PenBC (Pennings Broadcasting Corp. – seriously), the prime asset was the FCC license for microwave transmission from the satellite dishes to high rise buildings throughout Honolulu.

The 2015 FCC auction of low-frequency spectrum was interesting to watch as incumbents AT&T and Verizon fought off other mobile carriers such as T-Mobile and satellite TV provider Dish Network that have garnered US Justice Department support to achieve a more level playing field. Verizon was the only wireless operator to win a nationwide license in the 700MHz auction in 2008. The new spectrum it won with US$ 20 billion in the 2015 auction allowed it to offer faster speeds on its 4G LTE network, so customers to do more bandwidth-intensive like watching video on their smartphones and tablets.

A government may also erect barriers to entry in favor of domestic industries to support local media content and may utilize import tariffs and/or quotas. Movies, games, and search engines are some of the areas that have experienced difficulties in breaking into certain markets. Google service in China is extremely limited. Google Maps operates under restrictions in South Korea which refused to export the country’s detailed mapping data to Google due to national security concerns.

Whether environmental, safety-related, procedural, or otherwise, regulations typically impose stricter burdens on some organizations than others. Regulations are often written up by specific companies or related trade associations beholden to specific companies. They are often aided by employees who formerly worked with related government agencies. They often write policy prescriptions and may lobby for government administrative support or legislation. The authors are somewhat glib about government intervention and recommend hiring very good lobbyists.

In “Determining Competitive Advantages for Digital Media Firms, Part 1,” I discussed barriers to entry related to economies of scale such as fixed costs and network effects. I also discussed how different forms of customer captivity can be beneficial for a digital firm. Above, I looked at innovation, cost, and government regulation. 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 a company’s odds of success.

Citation APA (7th Edition)

Pennings, A.J. (2014, Apr 18). Determining Competitive Advantages for Digital Media Companies, Part 2.


[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] Christensen, Clayton M. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston, MA: Harvard Business School, 1997.
[3] The history of early digital innovation and development is a case study in government involvement. IBM got its start with the national census and social security tabulation. The microprocessor and the PC industry emerged through the Space Race and MAD (Mutually Assured Destruction) and the Internet can be said to have taken off after the Strategic Defense Initiative or “Star Wars” required supercomputers at different universities to use the NSFNET. National defense/security spending and other policies can help a company shore up its own defenses against competition.



AnthonybwAnthony J. Pennings, PhD is Professor and Associate Chair of the Department of Technology and Society, State University of New York, Korea. Before joining SUNY, he taught at Hannam University in South Korea and from 2002-2012 was on the faculty of New York University. Previously, he taught at St. Edwards University in Austin, Texas, Marist College in New York, and Victoria University in New Zealand. He has also spent time as a Fellow at the East-West Center in Honolulu, Hawaii.


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