Article - Issue 12, May 2002
The digital minefield: Knowing the business
Knowing the business
Why has there been so much recent news about digital television companies facing major difficulties? The collapse of ITV Digital comes alongside the problems faced by companies such as the Kirch Group in Germany and the cable companies in the UK. Stephen Barden postulates that many of these problems are a result of a lack of understanding by these companies about the real nature of their businesses.
What do ITV Digital, NTL, the Kirch Group and the failed ‘dotcom’ companies have in common – apart from the fact that they consumed a huge amount of cash? They didn’t know what business they were in.
Most ‘dotcom’ companies thought they were in a new product market, when in fact they were in the distribution business. Unless you know you’re in the distribution business, you tend to focus on the wrong revenue models, the wrong business models and even the wrong customer. The consequences are inevitable.
ITV Digital, NTL and the Kirch Group all believed they were in the business of ‘television’. This has as much meaning as a road builder and airline operator saying that they’re both in the transport industry. The business priorities of ITV Digital did not have much in common with those of its owners, Granada and Carlton. The historical background of Granada and Carlton is not only different from that of ITV Digital, it was, in fact, probably quite detrimental to it. ITV Digital needed to be extremely competitive in a mass consumer market. It needed to attract and retain large numbers of subscribers. Both Granada and Carlton come out of an infrastructure which taught them nothing about the mass market. They built their wealth as a result of the exclusive franchises awarded to them. Their revenues were overwhelmingly derived not from their performance, but their geographical catchment area. Ratings hardly affected the bottom line. After all, where else would the advertisers go? The ITV companies were not in reality commercial, independent or focused on customer care. They had a captive audience and became very adept in keeping the regulator happy, but they knew little about the consumer market.
Selling packaged television
The advent of cable and satellite delivery, in which News Corporation’s brand, ‘Sky Television’ quickly established a strong position, brought not just competition, but another business – the sale of packaged television content to consumers by subscription. Profit was directly related to the level of subscriptions. Because it knew what business it was in, Sky focused on three pillars of consumer satisfaction: product, service and delivery. Sky realised it needed to spend money on the product, not to impress the regulator, but to attract new customers. It found out what its customers wanted and provided it for them: popular movies and sport. At the time, Sky was criticised for paying ‘outlandish’ prices for the Premier League Rights. There was nothing outlandish about it. The price was directly related to the expected return from the growth in paying subscribers.
Similarly, Sky built and managed a superb subscriber management call centre where response time and customer satisfaction were the prime drivers. Not least, too, dishes were installed quickly and efficiently. Problems, when they occurred, were tackled promptly. This business was the sale and delivery of television product to a volume market. There is very little difference between this and the selling of manufactured products. It was a simple process which operated according to well-established practices. News Corporation played it exceedingly well: they gave their customers what they wanted, at the price they could afford. They never succumbed to the vanity of re-inventing the wheel; they focused on both keeping their current customers happy and on acquiring new ones.
The analogue cable companies thought they were in the product business too, but were somewhat confused about which product. Telephony? Programming? They could have saved themselves an enormous amount of money and pain if they had realised – right from the start – that they weren’t in the product business at all. They were in the distribution business. The cable companies distributed connectivity – of voice, data and video. If they had understood that, then they could have developed a secure business plan that focused on customers with deeper pockets rather than on consumers. Instead they decided to hang on to the end user at all costs – delivering both content and telephony: products and distribution. The result was that they failed to make the grade in both.
Their content packages relied heavily on Sky’s programming – with Sky branding. Their customer service was appalling – with delays on everything from the call centre to installation. Their prices were higher than those of Sky. Most importantly, they failed in connectivity. If they had focused on distribution, they could have offered Sky and other content packagers their pipeline at the lowest possible rates and leveraged that against telephone and internet subscription. Instead of wasting their cash on content, they could have offered their consumers data and voice connectivity that was clearly superior and cheaper to that of their real competitor, BT. Was there ever a more attractive distribution network than one which could offer the best of video content (from whichever source), the fastest two way data connectivity and the cheapest telephony? Sadly, they didn’t appear to know they were in the distribution business.
Developments in Germany
In the mid 1980s, in Germany, the world’s second biggest television advertising market, the movie rights owner, Leo Kirch, started moving into what he thought was ‘the commercial television business’. Kirch had dominated the German rights to Hollywood movies – which he had supplied, at healthy margins, to both the state networks ARD and ZDF. With the introduction of so-called private commercial television, and primarily to safeguard his rights business, he bought controlling shares in two free to air networks (Sat 1 and Pro 7). At that stage, he still knew what business he was in: the rights distribution business. Massive losses at Sat 1 and huge costs at Pro 7 were more than offset by the returns on his rights sales. Then he decided to emulate News Corporation and build himself a pay television network. On his own territory he was in a much stronger position than Sky was in the UK. In addition to his film rights, he wielded rights for both Bundesliga football and Formula One motor racing. He had major investments in content-producing companies and he owned a large stake in Germany’s biggest newspaper and magazine publisher, Axel Springer. So he set about developing his own digital set top box and took over a pay television network. Unfortunately, he now found himself in a new business and he had neither the expertise nor the organisation to run it.
Whereas Sky’s multi-channel television network satisfied a real demand in a market which had subsisted on a handful of channels, German viewers had been used to around 30 free channels since the mid 1980s. It would take a huge amount of unique and exclusive programming to turn them into paying subscribers. Sky bought its football and movie product knowing its consumers would pay for it. Kirch bought its products thinking it was enough that his own stations would buy it.
Rupert Murdoch had essentially presided over a network of operating companies with considerable depth of management. Contrary to popular belief, there was extensive delegation and decentralisation of functional powers. Kirch’s infrastructure, on the other hand, was built on the needs of his rights business. It was strongly centralised around Kirch himself and a small number of acolytes. Sky never made the mistake of thinking it was in the technology business. It only owned a digital technology company for a short period in order to have a lever on certain technologies at a critical time in their evolution. Whereas Sky used both the analogue and digital decoders as gateways – and shared both the costs and the rights with other developers – Kirch insisted on building his so-called D-Box in-house at enormous cost.
Kirch made the mistake of confusing vertical integration of a business with the core of the business itself. He thought that because Sky controlled the content and the technology and used a unique distribution system, it was in the broadcasting, distribution, technology and content business. It wasn’t. Sky exerted its market power over all these areas to maximise the return of its core business: selling its product to its consumers. Because he made this mistake Kirch even failed in his core business. This most fierce-some of negotiators started paying over the odds for movie and sports rights. If he had been in the consumer business his price would have been dictated by the calculated return from subscriptions. Because he thought and operated as a rights distributor, he didn’t realise that his creditworthiness would be increasingly judged, not primarily on his assets, but on his projected cash flows – his ability to bring in new subscribers. Kirch’s company fell because he had moved into a new business which he didn’t fully recognise and which his organisation was not capable of recognising.
The digital opportunity
In Britain, the introduction of digital technology offered extraordinary opportunities for both consumers and television operators. Not only could it provide the wherewithal for immense programming choice but – sitting across appropriate delivery systems – it could open the door for easy and cheap exchange of video, audio and data amongst consumers.
To the operators it provided the opportunity to combine profitably old businesses and move into new ones – shedding the baggage of the old structures. It gave the ITV companies the chance to maximise the commercial value of their assets and skills: their ease of access to the bulk of the population; the nation’s core television programming and their comfortable position in the political infrastructure. It gave Sky the chance to deliver more products to more viewers at lower cost. Digital compression made the cable operators the perfect platform for both the incoming and outgoing flow of data traffic in homes, offices and institutions.
Digital technology gave all the players the opportunity to increase their respective market strengths and reduce costs by strategic co-operation with some of their current competitors. But, once again, the industry fell into confusion. The business had changed again, but the players carried on as before. As with the Internet, many people thought the technology was, if not the product, then certainly the killer application. The unspoken thought was that the viewer would subscribe to digital … because it was digital.
Satellite, cable and terrestrial companies set about building their own access systems – trebling the cost of the collective platform. Instead of making access to their product clear and simple, they set about confusing the customer. Which service should I go for? And, if I go for one, what would I be losing? If I want all the choices that digital technology promises, will I have to buy all the boxes?
The market, which was eagerly embracing other forms of digital technology and had initially shown every indication of welcoming digital television – was now left milling around in bewilderment. The industry, similarly, had lost its way. ITV Digital still thought it was in the traditional environment and that its protected dominance would carry over. Instead of focusing on getting its analogue customers to switch to digital, ITV Digital actually thought they would meekly continue to watch more of the same – on digital television. This, not surprisingly, did not work and they have now collapsed.
Cable has slumped into a melancholy stupor. The companies spent so much on acquiring territory that the digital roll out has all but petered to a halt. They even failed to capitalise on their real advantage: the launch of broadband services before BT.
Is Sky the exception? Has it avoided the confusion? Not entirely. Digital technology has changed the way we communicate, and wish to communicate. Instead of delivering and receiving media in audio/video or text, we now need them in all three: all together. We may not want to use the television set as a workplace computer, but we do want it to compute. We want text and links on the television to be as fast as on the computer. We may not use the home computer for complicated spreadsheets but we do want it to be fast. We want to download digital images and stream video quickly - for fun. Convergence is here. It’s here in practice and in our expectation of how our technology should work.
On the one hand, Sky can carry on selling video content to subscribers via satellite. With the state of its competitors it will in all likelihood take the biggest share of the market. The danger of doing that – for Sky, the industry as a whole, the government and us – is it that would ensure the switch over to digital would be slow and cautious. On the other hand, Sky could open up the market – expand the opportunities for all and probably reap the lion’s share of the rewards. If Sky were to lead the industry to build and deliver a common digital platform, a decoder that would access cable, satellite and terrestrial, each of the players could focus on the business they’re really in.
A different approach
Imagine a system in your home with:
the telephone and Internet connectivity of broadband cable
the programming, the customer service and the speed of delivery of Sky Digital
the plug in ease of ITV digital and their core programmes
the combined technological resources of all three ensuring your platform would keep up with the market.
For this to happen without inequitable sacrifices by any of the players, regulators need to take a completely new approach to the distribution systems. Currently we have a virtual monopoly on each of the distribution paths: ITV/BBC on terrestrial; Sky on satellite and NTL and Telewest on cable. Government needs to ensure that each licensed service provider should have right of way on all distribution systems so that providers are able to ‘transport’ their wares down whichever route they wish. After all we would all think it absurd if Sainsbury were suddenly told they could only transport their goods by road and Safeway by rail.
We all go to a particular supermarket, mobile phone provider or insurance broker because of a combination of factors: availability of products, service (including after sales) and price. We should be able to approach our media provider in the same way.
For example, you may decide that your priorities are broadband connectivity, good core programming, efficient service, no satellite dish and extensive movies and sport. You like the cable broadband facility but you hate their service and programming. So you contract ITV Digital Mark 2. It has the right to buy access into your home via cable to provide your broadband service but remains as your overall service provider. Products, like programming, remain subject to commercial agreement but access becomes a matter of right – at nonpredatory prices. The principle is ‘The products you sell in your shop is a matter for the market, how you deliver them is a matter of right’.
Focusing on the ‘right to access’ approach has a number of impacts:
no one provider is excluded from a customer home because of its distribution path
the consumer has the right to choose (to a much greater extent) providers for the quality of their goods and services rather than (absurdly) for their mode of transport
confusion in the market (about which ‘technology’ to opt for) disappears
the real price of decoders (and the technology) goes down with a standardised, expanded market
providers are able to focus on their core business – and compete to develop unique products and services.
It is futile to talk about television as a business. The media are a multiplicity of businesses. Service providers need to understand clearly what those businesses are and in which particular one they are. Those who have not understood that will not survive. Government needs to understand that the media are just like any other industry. You would not dream of insisting on how wholesalers should deliver their goods to their customers. So why license the media players in that way? Consumers need to understand that they have a right to receive information and entertainment in a way that suits them, their households, their businesses and their institutions – not only in the way that suits government and the industry.
The unspoken thought was that the viewer would subscribe to digital … because it was digital.
In a career in the media spanning over 30 years, Stephen Barden has been Chief Executive of such organisations as Axel Springer Television, News Digital Systems and Quadriga Worldwide. Earlier he was also General Manager of BSkyB and Managing Editor of TV-am. He is currently a consultant specialising in strategy and development in media organisations.