The authors argue that these managerial strategies must be more consistent with the historical 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 must define and protect more structural barriers to entry or adopt strict cost control procedures and operational efficiencies to enhance productivity.

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. 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:

• Economies of scale and network effects;
• Customer captivity;
• Cost; and
• Government protection.[3]

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. Digital goods can experience near-zero marginal costs.

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. Microsoft Office for example, which contains Access, Word, Excel, and PowerPoint can be distributed over the Internet with little expense. But that that is not necessary a competitive advantage. Digital assets also need to be protected and utilize 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 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 63 million, and 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.[4]

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.

Customer captivity 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.

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.

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.

Citation APA (7th Edition)

Pennings, A.J. (2014, Mar 30). Determining Competitive Advantages for Digital Media Companies, Part I. apennings.com https://apennings.com/media-strategies/determining-competitive-advantages-for-digital-media-firms-part-1/

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] Jackson, Nicholas. “As MySpace Sells for $35 Million, a History of the Network’s Valuation.” The Atlantic, Atlantic Media Company, 29 June 2011.
[5] I finally found the hard copy of this book at a Borders near Wall Street in New York City.

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Anthony 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.

Category: books and films, characteristics of digital media, digital media management, media strategies
Tags: Ava Seave > Bruce C. Greenwald > competitive advantages > cross-network effects > Curse of the Mogul > Customer captivity > Economies of scale > emotional stress > equipment costs > exit fees > fixed costs > Government protection > Jonathan A. Knee > learning effort > Network effects > operational efficiencies > Search costs > start-up costs > Switching barriers > The Curse of the Mogul: What Wrong with the World’s Leading Media Companies > viral marketing

Origins of the “Information Economy”

Posted on | March 16, 2014 | No Comments

The economic understanding of knowledge’s contribution to the economy accelerated in the 1970s and terms such as “information society” and the “information economy” began to achieve high rates of circulation by the next decade. When I was at the East-West Center in Honolulu as a graduate student during the 1980s, I was part of a team of economists studying the roles of communication and information in the economy. Headed by Meheroo Jussawalla, we were primarily looking at the Asia-Pacific region, although necessarily attuned to the global technological and theoretical trends of the time.

The proliferation of microprocessing technologies, particularly “microcomputers” such as the Apple II and the IBM PC, as well as the commercialization of communications satellites and other digital technologies, stimulated ideas about the social impact of “high tech” and formulations about a new type of society taking shape. Competing characterizations included the “post-industrial economy” introduced by Daniel Bell in his The Coming of Post-Industrial Society (1973). Also, the “knowledge economy” by Fritz Machlup in The Production and Distribution of Knowledge in the United States (1962) that was expanded upon in later volumes in a series called Knowledge: Its Creation, Distribution, and Economic Significance. The “knowledge society” was also popularized by Peter Drucker in his Age of Discontinuity (1992) that included a chapter with the same name.

Marc Porat‘s doctoral dissertation was an important voice in the emerging discourse that recognized the increasing importance of information as a cultural and economic phenomenon. Porat’s doctoral work at Stanford University is noted for the measures of the information economy that he created to analyze U.S. Department of Commerce employment data. It has often been cited as empirical proof that agriculture and manufacturing industries were on the decline and that the “information economy” had arrived.[1]

By focusing on the activities that workers performed rather than their explicit job titles, Porat was able to argue that, by 1980, more people in the United States were engaged in information work than any other kind of work. About 48 percent of the U.S. population were employed in one form or another of information activity, as compared to only about 3 percent in agriculture and slightly more than 20 percent in manufacturing. About 30 percent were engaged in providing services – an important category because information work and services were often statistically combined, whether flipping hamburgers or arguing a legal case. Porat helped establish information work as a separate category.

Porat and the others helped develop a conversation about a new economy based on the dynamics of information in a high-tech environment. Many saw the changes as a harbinger of a post-industrial revolution which would democratize wealth because the “nature” of information made it intrinsically undepletable and infinitely shareable. Information was also a crucial part of the automation process and would help relieve humanity of the drudgery of work. These ideas persisted well into the 1990s with the “new economy” and its resultant dot-com bubble.

Many economists did not share this utopian view. Although classical economists had based market theory on assumptions that information was free and readily available, information economists saw through this simplistic rendering. Machlup was, in fact, a student of Ludwig von Mises, and supervised his doctoral dissertation. Von Mises is better known today as the founder of the so-called “Austrian School of Economics.” With other disciples such as Friedrich von Hayek, who wrote The Road to Serfdom (1944), a critique of government planning; von Mises’ group of economists examined the role of information in markets. In particular, they focused on the use of prices as communication or signaling devices in the economy. The process of exchange, they argued, is a knowledge producing and sharing activity.

The Austrian school seemed to stumble on to the role of information in the economy while targeting their main nemesis, socialism. It was the planning activities of communist and socialist governments that drew their ire. Their targets included modern democratic political economies after nearly all non-communist countries adopted the macroeconomic ideas of John Maynard Keynes. The Austrians would be instrumental, in fact, in the Reagan-Thatcher turn to market ideology in the 1980s after a turbulent decade of inflation and economic stagnation.

These liberal-minded economists had their critics. For the less enthusiastic, usually Marxist-informed interpretations, “information” and related technologies were seen in terms of enriching the rich and expanding the global sphere of capitalist control. They saw information as a way for corporations to extract surplus value from the production process without extensive investments in additional equipment, labor, or raw materials. Information was a way to enhance productivity, but usually at the expense of the workers involved. 

Herb Schiller in his Who Knows: Information in the Age of the Fortune 500 (1981) pointed out that information technologies were primarily being used by a few thousand “super-corporations” to form a transnational web of cultural hegemony and economic control. The Canadian take on communications and information, arguably started by Harold Innis and Marshall McLuhan also undertook a theoretical investigation of the economics of information. Canadians were especially sensitive to the trade in information and cultural products across the border with the USA. For instance, Thomas McPhail‘s Electronic Colonialism pointed to the globalization of a new type of empire due to the proliferation of mass media messages. This new media empire would operate by influencing the attitudes, values, and languages of people around the world.

For liberal theorists, the new information environment would also upset previously dominant structures of power and democratize society by providing information composed not from the “top”, but from diversified and autonomous sources. These would combat the dominant one-way, industrially produced, mass media messages with interactive technologies. Ithiel de Sola Pool for example, in his Technologies of Freedom, mirrored this view with a “soft” technological determinism arguing that the new converging communication and information technologies are “conducive to freedom” and are more “pluralistic and competitive.”

Peace scholar Majid Tehranian, a Harvard-trained political economist, wrote Technologies of Power in response to Pool. It remains one of my favorite books because it not only addressed the issues of economics and freedom but connected information “machines” to the complexities and importance of democracy, as well.

The above is only a cursory overview of the ferment that characterized the time. Hopefully, it points to some of the names that struggled to come to grips with the increasingly important roles of communications and information in the economy. It was an intellectual period in which the impact of information technologies was not at all as apparent as it is today.

As for me, I did my doctoral dissertation on electronic money and dystopias, because if there is one thing economists find inconvenient, it is money. Money is the Achilles heel of free market economics.

Notes

[1] Porat, Mark Uri (May 1977). The Information Economy: Definition and Measurement. Washington, DC: United States Department of Commerce. OCLC 5184933.

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Anthony 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.

Category: democratic political economies, digital media economics, dystopian economies
Tags: Age of Discontinuity > Daniel Bell > East-West Center > Fritz Machlup > Harold Innis > Herb Schiller > Ithiel de Sola Pool > John Maynard Keynes > Ludwig Von Mises > Majid Tehranian > Marc Porat > Marshall McLuhan > Meheroo Jussawalla > Peter Drucker > Reagan-Thatcher turn > Technologies of Freedom > Technologies of Power > The Production and Distribution of Knowledge in the United States > Thomas McPhail > Who Knows: Information in the Age of the Fortune 500

How the Web Secures Your Data

Posted on | February 13, 2014 | No Comments

Central to facilitating the usefulness of net-centric communications and commerce is the set of protocols that secure private data. Information such as usernames and credit card numbers going through the Internet pass through many types of host routers, as well as your ISP — any of which can constitute a security threat. It is possible for unencrypted information to be monitored and stolen at many points along the route from sender to receiver. The following explanation of the most commonly used security system is abbreviated, but should provide a start for understanding how your data is protected on the Internet.

An initial solution that is still in use is the Secure Sockets Layer (SSL) protocol that was adopted by Netscape in the early days of the World Wide Web to protect sensitive data flowing over the Internet.

SSL starts with a “handshake”, an exchange of information that authenticates the server and sometimes the client (your computer). The process begins with the browser sending a HELLO message containing information about its security abilities and some random data that will be used later on. The server then determines which encryption methods will be utilized, based mostly on the SSL capabilities of the client’s browser, and sends it own HELLO message containing the details of the encryption method that will be used in the session. The encrypted data is then sent between the client and server.

If you are starting a website and need to provide secure transmissions, you can purchase an SSL certificate from a company like godaddy.com or another of the web services company that are SLL certificate authorities such as Symantec or highly rated DigiCert. DigiCert offers a number of different certificates and various seals that you can display to assure visitors to your site that you have properly secured the connection and are protecting their data.

Along with the HTTPS address prefix and icons like the padlock, we are now seeing changes to the address bar such as turning it green to indicate that increased SSL-based security measures are in place.

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Anthony J. Pennings, PhD recently joined the Digital Media Management program at St. Edwards University in Austin TX, after ten years on the faculty of New York University.

Category: global communications, global e-commerce, mobile technologies
Tags: (SSL) SSL > Netscape > Secure Sockets Layer

Bitcoins and the Properties of Money

Posted on | January 27, 2014 | No Comments

“Money is a matter of functions four, a medium, a measure, a standard, a store.” – Lyrical couplet used to memorize the roles of money.

Bitcoin emerged during the Great Recession to challenge the notion of official money and particularly its political and symbolic connection to a national system. While the US and much of the rest of the world teetered on financial ruin, it emerged as the great geek hope for an ultra-national currency.

Bitcoin is a complex computer-based type of digital money proposed by the mythical Satoshi Nakamoto that utilized the principles of cryptography and peer-to-peer networking. This “cryptocurrency” emerged from the calculative and recording abilities of modern processing technologies and the transactional capabilities of highly encrypted networks spanning the globe. It has been both embraced and vilified for its capacity to act as money, to transcend national regulation, and for the volatility it offers speculators.

Bitcoin’s value spiked in 2013 when it traded at around $1000. A striking example of its appreciation was a pizza purchased in 2010 by one of the Winklevoss twins for 10,000 bitcoins. The value of those coins at the end of 2013 would be worth around $10 million. One of the most intriguing aspects of this innovation is that this bitcoin money supply is “mined” by computers doing complex calculations.

But can Bitcoin conduct the activities that are required of a currency: the facilitation of exchange; the capacity to price, the ability to compare value, and the storage of wealth.

An analysis of Bitcoin or any other cryptocurrency or even an electronic payment system like Paypal should start with an examination of money and how our current system works. Economists give a wide berth to the question of what is money. The standard agreement is that money is anything that can be used to buy goods and services or anything that is accepted by both sellers and buyers as payment. They also generally agree that money has the following functions that can used as criteria to evaluate the utility of a type of money:

1) Medium of Exchange – Money facilitates the exchange of goods and services. It operates as a “symbolic third”, a separate entity that helps to reconcile the value of other goods and services. It is much more efficient than barter, which requires a “double coincidence of wants” (I want your cow, you want my chickens). Money reduces the transactions costs associated with a purchase primarily by reducing the problems associated with bargaining. Can you imagine trying to negotiate for all the products and services you use? How about standing in line when four people in front of you need to negotiate for their milk and bread? Virtual currencies like Bitcoin are seen to reduce transaction costs, especially if they can be used to avoid the billions in fees paid to companies such as Visa Inc. and Citibank for the use of credit and debit cards.

2) Unit of Accounting/Measure of Value – Money is used to price products and services and to express those prices in terms of a common unit of account. It is a measure by which prices and values are expressed. By making nearly everything price-able and exchangeable, a system of comparison is created. When the prices of goods are stated in terms of the monetary unit, the relative price-value of all items become comprehensible. This function also allows for prices to be displayed – crucial for a market environment. In the US we have the dollar, in Japan the yen, and in Brazil, the real. In each case, money provides a common “nominator” – a way to use numbers to value products. It can be used to add up the wealth of a person, a company, or a nation in monetary values.

Economists use the term “nominal indicator” to refer to this process of naming a price-value in terms of monetary numbers. Indo-Arabic numerals (0,1,2,3) have been nearly universally adopted as the major money nominator around the world. The power of zero and its place-value system of writing helped displace Roman numerals and provide the vehicle for new calculative innovations. Spreadsheets have given the nominal function of money extraordinary new power by creating enhanced capabilities for budgeting and other types of financial analysis at any one point in time, or over time, or projected into the future.

3) A Store of Value – Money should have the ability to hold its value over time. Although currencies do deflate and inflate in value, it needs to be able to transfer most of its value (wealth) into the future. Granted, most people would actually like to see it increase in value. This capability of money allows it to act as a standard of deferred payment in a credit process where money is lent out with the expectation that it will be returned, with interest, at a future date. Because of its volatility, countries like Sweden have classified Bitcoin as as an asset like art or jewelry that can be taxed – and not as a currency.

Surprisingly popular, Bitcoins are accepted by a wide number of merchants and companies such as Zynga. It would seem network effects are in play as the currency becomes more popular with each additional site that accepts it. Bitcoins offer companies a new option for accepting payments and announcing your willingness can be a PR event in itself. Companies should monitor the value of the cybercurrency and convert their Bitcoins to official currencies often to avoid major fluctuations in value. Bitcoins have been subject to hacking as well and thefts have occurred. A company should also be prepared to pay taxes on any transaction as if they were dealing just with dollars.

Bitcoins suggest the possibilities of a secure, decentralized, and distributed currency system outside of control of national governance, but they also raise additional concerns and issues about the role of money in an globalized digital economy. Bitcoins promise a monetary system where its value and amounts produced are determined by it’s cryptocurrency parameters and not the influences of any individual or organization, including central banks. But how will nations control their money supply? What will it mean for organized crime? Will it create new inequalities? Will its value vary too much to be useful for anything but asset speculation or a temporary hedge?

It is likely that the international system of nation-states will continue to block Bitcoin’s growth. The Bank of Finland recently denied Bitcoin status as an official currency or even a payment instrument because Finnish law states that “a payment instrument must have an issuer responsible for its operation” according to Paeivi Heikkinen, head of oversight at the Bank of Finland. They have joined China and Germany in taking action in slowing the adoption of the virtual currency. The US on the other hand has taken a cautious approach to the issue with Fed chair Bernanke acknowledging the Fed doesn’t have the authority to supervise bitcoin and other virtual currencies. However, Bitcoin broke $1000 when Bernanke suggested that they “may hold long-term promise.”

While the future of Bitcoins is uncertain, what we should be looking at is the platform it runs on called a blockchain. This is a distributed electronic ledger shared among the nodes in a participating network and suggests a new era of online services.

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Anthony 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.

Category: dystopian economies, electric money, financial technology
Tags: Bitcoin > blockchain > cybercurrency > digital money > medium of exchange > Satoshi Nakamoto > store of value > virtual currencies

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