(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:
As an Army officer, getting lost is sort of the death knell for your career. For the Band of Brothers junkies out there, I’ve always had the “hot take” that if Captain Sobel could have read a map he would have stayed in charge of Easy Company.
Having had to pull out a map and lead a group of soldiers somewhere, I can testify it’s a nerve-racking experience. There was always this moment when I started planning a mission—from my time in ROTC with squads to training in Ranger School with platoons to being on the ground in Afghanistan—that I essentially had to “unroll my map” and figure out where we were going.
Every time, my stomach would start to churn as I looked to see if I could understand what a bunch of squiggles on paper meant in the real world. Inevitably, I could. We’d start and finish planning and head out. Honestly, my stomach is churning thinking about it.
Today we unroll the map for digital video. But where is the map? There are a few lay outs I’ve seen, like this one from the Wall Street Journal.
Or this map from Recode, which is probably the most commonly linked to image I’ve seen in the streaming wars.
Unfortunately, each has flaws. In both cases, neither links how the various companies relate to each other, merely the sheer size in one case, or the type of business in the other. The challenge is that while you can see the various areas, the concept of the “value chain” is totally missing. Who is producing content versus who is distributing it? Yes, ad-supported is different than subscription, but don’t they fill the same customer need? I’d argue they do. (Also, while the Recode map looks really cool, you know I sort of loathe “market capitalization” as a measure of size.)
So I made my own lay-out. This has been an idea I’ve been tweaking for over a year. Essentially, I’m not just reading a map, but drawing my own of the entertainment landscape. Which is even more nerve racking then just reading the map.
Today, I’m going to explain the two business school frameworks that inspired my map of the entertainment landscape. Next, I’ll talk about the “jobs” completed by various steps in the process. Then, I’ll show the “Digital Video Value Web”, with some explanations about the key pieces. Finally, I’ll highlight the most important terrain of the streaming wars.
A Quick Reminder on Value Chains, Porter’s Five Forces and the “Value Web”
The value web is the name I picked for a mashing together of two well established frameworks for business. The first is this little guy, “the value chain”, who I explained back in May:
(I use potato chips to explain concepts.)
Reread that article for a fuller description, but a value chain is essentially every step of a business process that results in a good. So suppliers provide the raw materials to factories that turn it into goods, which go to distributors to send to stores, who sell it to customers. The “value” component is really asking creates or captures the most value along the way.
The limitation to “value chain” analysis is revealed by the WSJ image. I could make a value chain for ad-supported video on demand, for streaming TV hardware, for sports, subscription video and traditional cable bundles. All those value chains would start to get confusing. But to understand the landscape, we need to understand those connections between the value chains.
We have another tool for that, fortunately. In the past, I’ve also explained “Porter’s Five Forces”. (It’s one of my most popular articles, actually.) Read that article here. Here’s a visual of that…
Porter’s Five Forces is a good organizing tool to lay out the potential threats and opportunities for a specific business. Its limitation is its focus: it only looks at one specific company in one part of the value chain. For example, if I used it for “cable companies”, it would leave out the studios distributing the content, merely the channels providing them content. That’s like a map that is zoomed in to one hillside when we need to look at the whole mountain range.
My insight was simply to realize that the value chain is going across the middle of a Porter’s Five Forces diagram. If I combined them on one table, I could make essentially an overarching view of any rough industry. My name for this is a “value web” because I couldn’t find anyone else making a similar layout and I elevate value above all other business concepts. Here’s my version from my Porter’s Five Forces article.
Now we can make one for digital video.
The “Jobs” Done at Each Step of Digital Video
The first step was to pull out my value chain for streaming video. I’d previously made that here:The challenge was that I left out a fairly big component of the video value chain when I focused on distributors. Really, after a distributor sells their film to a cable channel, they don’t care how customers get that cable channel. But someone is “providing” that feed of cable channels. For the streaming wars that matters.
To borrow a phrase from Clayton Christensen, essentially the cable companies do the “job” of providing access to bundles of entertainment. I like putting “ing” after a step of the process because it gets at the type of work being performed. Applying this to my value chain you get:
Talent (acting, writing, directing, so on)
The challenge is that “TBD”. What is it that a cable channel is doing? Or a movie theater? Or a streaming video service? I’d argue they’re all providing the same job, which is creating a library of content to watch, even if they use different monetization methods for those libraries. Frankly, the best word to describe that is “aggregating”. (And yes, we’ll get to Ben Thompson’s Aggregation Theory later in this series.)
That explains part of the “TBD”, but not really the whole thing. Because cable companies then aggregate the “aggregators” or channels. So what do we call them? They are definitely NOT in the same step of the value chain. A a group of cable channels is a separate business from the channels themselves. In reality, they’re providing access to a “bundle” of content which they charge for one price. I call that bundling.
(To quote a second business thinker—cited by Mike Raab recently—James Barksdale has said all business is either bundling or unbundling.)
With that, we have our six jobs being performed (with customers waiting at the end).
The Video Value Web
So I took the six jobs above, and different methods of each at each step. This image will be much too wide to fit in my regular column, so download it or click on it to blow it up:
I’ll be honest, understanding this lay out will be key to understanding the challenges facing streaming video in the streaming wars. When we talk cord cutting we mean everything from Youtube to Hulu Live TV to Netflix, but they all are competing at different parts of the value chain. Or in Youtube’s case, a whole entirely separate category called “social video”, which I plan to explore more later. In other words, they’re doing different jobs. Sometimes the same company is competing with itself at different jobs.
Let’s walk through this step by step, explaining what I came up with. First, I color coded “traditional” distribution in light blue. Digital is in red. That’s our “area of operations”.
The first step is talent. Which have to be included. At first, you may think they aren’t “businesses” in the traditional sense. Then you realize that top showrunners make hundreds of millions of dollars and employ huge staffs and production companies. Right now, those entrepreneurial showrunners are capturing huge amounts of value in this chain.
The next step is the producers, who range from independent folks on their own to big internal production companies at conglomerates. I could have made a few different types of producers here, based on size, but decided to keep it simple. I’d point out that every step on this value chain likely has smaller value chains, as I described for production in one of my favorite articles, “Who is a creative in Hollywood?”
Then comes the smallest section in number of categories, but one of the biggest in terms of importance, which is distributors. The old axiom is that you don’t make money producing film or TV, you make it distributing them. That’s because the big six studios, for much of the 20th century, ran an oligopoly that dominated film distribution. They charged fees from 25-35% to distribute a film before it broke even. Meaning they made money before the talent could make theirs.
As we can see, the change is really coming for who distributors distribute their content to. Before, it was theaters, broadcast, PPV, cable (and premium cable), and home entertainment. Essentially, those were the different aggregators, be they theaters or retail stores or channels. Since Netflix launched, this also meant digital aggregators or SVODs.
Now here comes the big change (for me at least) for how I looked at this even earlier this year. And that’s the “bundlers”. Part of Netflix’s rise came from cord cutters who were “breaking up with the cable bundle”. As Kim Masters—who will forever by my not-strawman on this because she’s brought this up on The Business for years now—has long complained about the bundle forcing her to pay for channels she didn’t want. Mainly ESPN. Netflix allowed her to start breaking up with the bundle.
But as the chart shows, the bundle is coming back. It’s “job” is still being done. First, by the traditional MVPDs, who still have 90% market share. But it’s being disrupted by FASTs, vMVPDs and a new category I’m calling “DVBs”:
Digital Video Bundlers.
In other words, the aggregators are getting aggregated again. Rebundled, this time by Amazon, Apple, and potentially others.
So that’s the lay out in broad strokes. Understanding how our competitors map onto it and who will create or capture the most value at each stage is basically the answer to who will win the streaming wars. And I highlight DVBs in yellow because I believe it will be the most important terrain in the streaming wars.
The rest of the value chain is the providers who are going to continue to take a chunk of revenue from every subscriber for access to their pipes. And the last piece: the consumer.
At the end of the day, we should never forget they’re the one paying the prices for this value chain. And how they interact with providers, bundlers and aggregators will determine who wins the streaming wars. Which I’ll discuss in my next article.