Media 2.Uh-Oh Part 2: Layer Cake

Intro
Part 1: Pipe

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!)

The point I was making is that both the computer and communications businesses have transformed over the last 20 years from a vertically integrated business to a horizontal layer cake. 

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 have captured the profits from mainframes and telephone calls, but there was a much bigger 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 knees.

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 market sorts 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.

The next piece in the series will show a few examples of valuable virtual pipes - virtual media, if you will. Media 2.0? Perhaps. Sustainable? Hmmm.?

Comments

[Natalie Hodge]

Hi Andy, I'm just hearing of your book about " Rebooting Doctors" Thank God I'm not a radiologist. I've utilized the vision of Bill Gates in "Business at the Speed of Thought" and am cultivating a young company that is rewriting the rules for my pediatrics profession. Our administrative support system for pediatricians embodies EACH of the five predictions Bill Crounse ( head of Healthcare Innovation for Microsoft) makes for the future of healthcare. I'd love to send you a copy of my book " The Personal Pediatrics Guide for the Progressive Parent" and get one of our affiliate Pediatricians going in a neighborhood near you!! Our system is a utopian little "Blue Ocean" in Healthcare in which the only one left out in the cold is our major insurers. Take a look at my blog personalpediatrics.blogspot.com and website www.personalpediatrics.com. Incidentally, we're making it happen with private angel funding and hope never to need Silicon Valley! ( I Hope) Warmest Regards,Dr. Hodge

[Michael]

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My sense is that if you really want to boil things down to the absolute core....well, it's really about 24 hours...or rather 1440 minutes...1/3 of which are not really accessible (due to sleep!) That leaves 950 minutes per day per person.

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[David Bofinger]

Apple is a good example of your thesis. They produced the operating system, and a lot of the application software, and the hardware. And they found it hard to compete on price as a result. Their attempt to keep a foot in both camps (make computers but also allow clones) was a fiasco. Recent success has come from the horizontal model: iPod and iTunes. The shift to Intel isn't horizontal yet, but it's a launch pad for it.

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