I had a college roommate, Franz, who after taking business classes would come back to our house, pound a few beers, proclaim, “Dude, when in doubt, get horizontal” and then proceed to pass out in front of the TV. (I still can't believe Forbes let me write this back in 1998!)
This may provide a clue as to what will happen with the (mostly) vertically integrated media mess.
The computer industry used to be a vertical behemoth. IBM (or DEC in minicomputers) did everything from system architecture to designing chips, manufacturing them, assembling boards, slapping them in boxes, writing software and applications and then the mainframe was sold through their very own sales and service organization. Soup to nuts (or chip to ship) – IBM controlled the whole thing. And why not? Why give up profits to someone on the outside when you could capture it for the centrally controlled enterprise?
It was the model of efficiency, – five year plans and all (just like that other model of efficiency in the 1970’s, the Soviets). Once customers were set up with IBM mainframes, the switching cost was high, so companies would pay what ever IBM asked, so eventually, IBM lost touch with price. They even unwittingly unleashed the horizontal model that would destroy them, going outside for parts for the IBM Personal Computer (a toy that internal projections had at selling 250,000 units over five years - ooops). Intel processor, Microsoft operating system, Western Digital disk controller.
Same with the old AT&T. They manufactured phones, leased them to customers, ran long distance lines, built switches and ran the wires to our home. Again, soup to nuts, why give up profits to someone else when you can capture it all for yourself. AT&T did IBM one better - they claimed a natural monopoly, why have more than one set of wires running to your home - and were regulated by the Federal Communications Commission, who approved rates as a reasonable return on investment.
And of course, it failed. IBM and AT&T may
the profits from mainframes and telephone calls, but there was a much
computer and communications business that they missed. Like railroads
forgetting they were in the transportation business instead of stuck on
tracks. They forgot about price and outsiders took them out at the
Media companies are mostly vertical. They produce shows (or control the independant companies that do), market them, deliver them, sell ads, everything that touches their pipe, soup to nuts, they do. Only regulations like fin syn or limits on ownership changes this formula. Why give up profits to those outside, blah, blah.
The new horizontal model is more efficient, at
least for computers and communications - with media, we shall see. The
the winners from the losers, not some putz on the executive floor
making decisions (swayed by internal backstabing politics, no less).
By the end of the '80's, you could create a multi-billion valued
enterprise just owning a
sliver of intellectual property on any one of the horizontal layers.
But no one
gave it to you, you had to earn it.
And it’s not just Intel and Microsoft, which are the most lucrative and most visible, there are scores of slivers in disk drives, graphics, storage control, font handling, virus protection, compression, and the list goes on. Same in telecom. It’s not just Cisco or Yahoo, there are stacks of useful slivers that companies can wedge their way into. The trick is to not pick some narrow market, but to go wide, serve millions or hundreds of millions of devices or users.
OK, I get it. But how does that explain successful media companies on the Web - Google, Ebay, Yahoo, Apple?
Well, these are market entrepreneurs (no regulations beyond patents and copyrights which everyone has access to). Even though the telecom cloud is a chaos of packets getting passed around and no "end to end" pipe, these companies and others have figured out how to create a virtual pipe, keep content and viewers/users inside a pipe they control. Pretty neat and quite a lucrative parlor trick.
How do you keep users in your corral? Circle the wagons, pardner. It ain't easy. Packets go where they damn please. It's the Wild West - an open prairie. You've got to be creative. Use a tractor beam to get them into your camp and a mind meld to keep them there. Or something like that.
eBay pulled one off. They created a closed "community" of buyers and sellers, locked in via feedback ratings creating a layer of trust amongst the chaos of anonymity on the Web. Wall Street applauds to the tune of $40 billion. But now eBay is struggling to show that their growth is sustainable.