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deeper
An IBM Institute for Business Value executive brief
ibm.com/bcs
The IBM Institute for Business Value develops fact-based strategic insights for senior
business executives around critical industry-specific and cross-industry issues. Clients in
the Institute’s member forums benefit from access to in-depth consulting studies, interaction
among a community of peers and dialogue with IBM business consultants. This executive
brief is based on an in-depth study created by the IBM Institute for Business Value. This
research is a part of an ongoing commitment by IBM Business Consulting Services to provide
analysis and viewpoints that help companies realize business value. You may contact the
authors or send an e-mail to iibv@us.ibm.com for more information.
Contents Introduction
1 Introduction A recent study by MTV1 revealed that their typical viewer lives a 30-hour day. No,
2 Media and entertainment this doesn't mean that America's youths have given up sleep. It means they're living
at a crossroads in an on demand world: they surf the net, view DVDs, play MP3s, send instant mes-
6 On demand sages, download movies, and sometimes even watch a little TV – doing enough of
business capabilities this simultaneously to add up to 30 hours of daily, à la carte media consumption. And
8 Examples of on demand these multitasking teenagers aren't alone: today audiences of all kinds are revolu-
M&E businesses tionizing how they access media and where and when they consume it. Retirees are
9 The on demand roadmap downloading rare jazz recordings, working parents are catching CSI: Miami on Tivo
11 Getting started at midnight, and executives are whiling away meetings by checking movie reviews
13 Conclusion on their wireless PDAs. An explosion of new media delivery technologies is allowing
13 About the authors us all to participate in a powerful vision: rapidly available information and entertain-
13 About IBM Business ment, served up on demand.
Consulting Services
13 About IBM Media However, most media and entertainment (M&E) businesses have yet to make money
and Entertainment pursuing this vision, and some have lost their shirts in doing so. Their travails indicate
14 References that for M&E businesses, "on demand" has to mean far more than simply making
content quickly accessible to consumers. The media industry's abrupt transforma-
tion – from last century's seller's market to this century's turbulent buyer's market
– has made it critical for an M&E company to acquire a similarly transformed set of
capabilities. These capabilities must include rapid response to customer needs and
market changes (not just promotional expertise), and dogged focus on integrating
core processes (rather than maintaining unconnected operations) - all delivered at
low fixed-investment levels by extensive use of variable cost structures (rather than
"build it and they will come" approaches). M&E businesses that achieve these new
capabilities will be positioned to be flexible enough to weather today's turbulent
markets and enjoy the industry's next growth phase. Those that do not, simply put,
risk failure. Unresponsive, fixed-cost business models are likely to lose share at an
increasing rate to more responsive competitors, and disjointed portfolios of busi-
nesses may be forfeited to companies who will acquire and better integrate them.
How can M&E businesses successfully meet the challenges of this on demand era?
In this paper, we examine in more detail how the industry got to this point, describe
what an on demand M&E business might look like, and provide a roadmap for M&E
executives that can help them compete successfully in the on demand world – with-
out having to work 30-hour days of their own.
$140,000 6%
$120,000 4%
$100,000 2%
$80,000 0%
$60,000 -2%
$40,000 -4%
$20,000 -6%
$0 -8%
1998 1999 2000 2001 2002
Revenues
Return on assets
Note: (A) Top 10= AOL, Disney, Viacom, News Corp, Clear Channel, Reed Elsevier, Thomson, Pearson, Gannett, Reuters.
(B) ROA = Earnings before interest and taxes/assets.
Source: Company financials; IBM Institute for Business Value analysis, 2003.
While the stalling economy certainly played a role in this decline, some other fac-
tors have been at work – and these won't go away when the recession eases.
Technological advances have exploded the range of available content distribution
methods, and thus the range of entertainment and information options that are
available to consumers. Despite the recent mass successes of the reality show
format, average audiences for many media properties remain in slow, long-term
decline as media markets continue to fragment – keeping their revenue and profit
potential under pressure. Meanwhile, operating costs have continued to grow as
more and more channels require production and content, yet most M&E companies
are locked into siloed organizational structures with little integration and few shared
resources across the enterprise.
Network-based
Digital
Broadband/internet LAN/WAN networks
streaming: VPNs
• Simulcast Bluetooth
• Internet-only
• Rebroadcast
WiFi Broadband/internet
download:
Digital • Subscription
cable • Peer-to-peer
Analog (legal and illegal)
PC hard drive
3G Wireless playback
PVRs Analog
Digital satellite cable Harddrive
Low earth orbit AM and FM HiFi
constellations radio MP3 players
Vinyl
HDTV Terrestrial TV Embedded
Cassette playbacks in
Digital sideband Analog satellite PDAs/phones
CHS/Batamax
broadcast
Microdrives
DRAM
CD-R
Sustained financial pressure. The baseline outlook is far from rosy: most experts
project sluggish aggregate demand growth for the M&E industry. And fragmenting
delivery environments will add to the problem. The audiences, and thus the eco-
nomics, of individual titles and shows are in most cases declining as audiences'
options proliferate. At the same time, there is strong upward pressure on costs as
the business complexity required to serve the increasingly variegated distribution
environments increases. Further compounding the problem is a hesitant investment
climate created by investors who remain leery of betting heavily on the M&E sector.
The result is an unforgiving economic context in which sustained financial pressure
will be the norm, rather than a temporary trough.
Greater unpredictability and risk. M&E businesses are entering an era of unprec-
edented exposure. New delivery technologies risk failing and leaving early adopters
with the bill. Hackers see M&E firms as prime targets. The digitization of media and
the rapid expansion of consumer-end bandwidth and storage can expose most
entertainment segments to piracy on an unprecedented scale if effective security
measures are not agreed upon and deployed.
The section that follows details what these characteristics could mean for media and
entertainment companies.
Variable. On demand M&E businesses are able to adapt their cost structures and
business processes flexibly to respond to market changes and reduce financial and
business volatility. Variability requires a new level of flexibility across the value chain
as companies match operations to demand fluctuations. Variability means having
the ability to cost-effectively target new audiences and platforms rapidly as market
requirements dictate. And variability is about having external partners in place that
support the business through variable pricing and supply. This approach could be
readily applied to any new media venture in which technology partners can assume
the fixed investment and then charge for it according to success. This capability
allows M&E businesses to manage risk by reducing investments in inefficient assets,
reducing debt burdens by decreasing the financing requirement for new ventures
and driving greater financial predictability.
2) Integrate operations
Moving on from overhead to the core content creation and distribution functions of
an M&E business, integrating operations can dramatically reduce cost and increase
responsiveness at each stage of the value chain. For example, integrated rights
management, content management and supply chain operations can serve new
demand rapidly and enable realtime decision-making on issues such as promotions
or production volumes. Integrated content production operations can create video,
game and Internet content simultaneously with integrated teams – at lower cost and
with enhanced consistency of look and feel.
Lastly, an on demand M&E conglomerate could reduce operating costs and improve
management information by merging overhead functions such as Finance into lean,
shared services structures. It could further reduce costs by outsourcing any non-
core functions that could be managed better by a third party – for example, HR. It
could increase responsiveness to major advertisers by integrating customer informa-
tion across its divisional advertising sales forces. And it could enhance revenues by
integrating and coordinating the management and sales of its most important assets
– content rights and brands – across the whole enterprise.
Value-net
Business process sophistication
optimized
Integrated
enterprise model
Enterprise
optimized
Traditional
nd
business model ema
Process Ond
optimized
IT sophistication
Achieving the next step – integrating the business externally into customer and part-
ner business processes to form "value nets" – requires more thorough transformation.
It will probably involve rewriting business rules and transforming the economics of
established operations. For example, an independent record label, after integrat-
ing its internal operations into on demand models, could decide to stop producing
physical media and shift to an automated, all-digital, on demand supply model. Such
a transformation would require tremendous organizational commitment at a level that
can only be attained by progressing through a specific lifecycle: first, building the
foundations for change, next defining the business value and then creating a clear
vision of the new business rules (see Figure 5). It's important to stress that success-
ful transformation on this scale requires prior execution of simplified and integrated
internal business processes to succeed.
Crossing the business value chasm Crossing the business rules chasm
Create an adaptive
Build platforms operating Open Integrated Virtualized Autonomic
environment
Focus efforts
It is essential not to define on demand too broadly. Since only specifically targeted
efforts can be executed with the right speed and quality, picking your battles is
essential. This involves a few key steps:
• Think big – M&E business managers need to have a shared vision of where their
part of the industry is going, where on demand plays in that vision, what the
business's role will be, and, perhaps more crucial, what it won't be. Without this big
vision, it will be hard to prioritize and coordinate efforts across the organization,
and harder still to marshal the organizational energy required to drive change.
• Carve out some bite-sized components – Define the areas from the vision that
offer the most achievable value and start there. These starting components could
be individual processes, customer groups, organizational layers or particular busi-
ness capabilities. Success with these can demonstrate the value that’s possible
from the on demand journey and generate savings that can then be invested
in broader, bolder moves. Look in particular at shared services or outsourced
approaches to overhead as possible starting points that can rapidly deliver valu-
able productivity increases.
Though the vision may be grand, becoming an on demand business need not be a
daunting challenge. There are proven, incremental approaches to managing risk and
change, as well as some simple and pragmatic starting points for the journey. The
IBM on demand vision provides both a roadmap and toolkit for achieving the trans-
formation, to arrive at an on demand level of operations that can continue to delight
audiences - 30 hours a day, ten days a week and 500 days a year.
ibm.com/bcs/media
G510-3306-01