Professor Charles Fine Co-Chair, Value Chain Dynamics Working Group Communications Futures Program http://cfp.mit.edu Ma

1. Value Chain Dynamics And the OIPs Professor Charles Fine Co-Chair, Value Chain Dynamics Working Group Communications Futures Program http://cfp.mit.edu Massachusetts Institute of Technology October 2009 charley@mit.edu

2. What is Value Chain Dynamics?

3. Mobile Phones PDAs Smart Phones SIM Pads Controls LANs Non-Circuit Component Manufacturers Device Manufacturers Circuit Board Component Manufacturers Platform infrastructure service Wireless infrastructure operator Wireless network operator Device value chain Service provisioning Billing Support Network value chain Wireless service provider PSTN/Internet component manufacturers Portals and Access Providers Voice and/or data consumer Cell switching component manufacturers Infrastructure Value chain Network Application Value chain Network equipment Base Station component manufacturers Application Developer Software application developer Content Value chain Sw. games messaging Voice,browsing, WAP Content Provider Hardware application developer Third party content Photo camera MP3 player, DVD Game consoles Content Aggregator User content Wireless Value Network Structure What is Value Chain Dynamics?

4. What is Value Chain Dynamics? Corporate Strategy Dynamics Regulatory Policy Dynamics Industry Structure Dynamics Technology & Innovation Dynamics Customer Preference Dynamics Business Cycle Dynamics Capital Market Dynamics Gears differ by size/speed Each has an engine & clutch

5. What is Value Chain Dynamics? THE DYNAMICS OF PRODUCT ARCHITECTURE, STANDARDS,AND VALUE CHAIN STRUCTURE: “THE DOUBLE HELIX” INTEGRAL PRODUCT VERTICAL INDUSTRY PROPRIETARY STANDARDS MODULAR PRODUCT HORIZONTAL INDUSTRY OPEN STANDARDS NICHE COMPETITORS INNOVATION & TECHNICAL ADVANCES HIGH- DIMENSIONAL COMPLEXITY SUPPLIER MARKET POWER PRESSURE TO DIS-INTEGRATE INCENTIVE TO INTEGRATE ORGANIZATIONAL RIGIDITIES PROPRIETARY SYSTEM PROFITABILITY Examples: IBM, Autos, Embraer/Boeing, Nokia, Small Firms Fine & Whitney, “Is the Make/Buy Decision Process a Core Competence?”

6. What is Value Chain Dynamics? ALL COMPETITIVE ADVANTAGE IS TEMPORARY Autos: Ford in 1920, GM in 1955, Toyota in 2000 Computing: IBM in 1970, DEC in 1980, Wintel in 1990 World Dominion: Greece in 500 BC, Rome in 100AD, G.B. in 1800 Sports: Bruins in 1972, Celtics in 2008, Yankees not lately :-) The faster the clockspeed, the shorter the reign

7. Willingness to pay By marginal adopter - New Entrant & Incumbent Innovation in Services & Applications + Market Saturation Loop + Value/User due To network effects User Population B1 + + + R2 + Network Externalities Loop Total expected Benefit to New adopters Network Capacity + R1 + + Price Competition + Service & Application Investment & Innovation Loop + Social Externalities + Customer Adoption Component Standardization & Outsourcing + Price Competition Loop - Network & Technology & InnovationInvestment Terminal Volumes + Terminal Scale Economies Loop B2 - + + R4 + + + - Network Usage - Network Revenue Per user Service & Application Revenues Terminal Prices Terminal Costs + + + Content Consumption Content Provided R3 Network investment Loop For-profit Content Generation Loop + R5 + + + B3 Network Revenue Piracy Innovations + + Piracy Innovation Loop Content Profit Opportunities Service & Application Profits - Free-Content Generation Loop R6 What is Value Chain Dynamics? Inductive System Diagram

8. THE CASE OF APPLE iPod/iPhone Creative Artists Applications Networks Content Music closed to non-MP3, non-Apple formats Closed to non- Apple apps; then explosive App Store Growth Closed to all but one carrier per region; slowly opening Content Publishers Content Marketing iTunes homepage App Store Content Sales iTunes Retail Stores iTunes Content Distrib. Listening accessories Content & HW Consumption iPod/ iPhone Open, then license

9. Media Value Chains: Sports Over the Air, On Cable, and On the Internet But first: A Brief Review of the oIP’s VoIP: Voice communication is alive and well. VoIP is part of the landscape. VoIP, so far, is a sustaining innovation; eBay overpaid for Skype.

10. A Brief Review of the oIP’s VoIP: Voice communication is alive and well. VoIP is part of the landscape. VoIP, so far, is a sustaining innovation; eBay overpaid for Skype. 2. MoIP: Music consumers seem pretty happy. Traditional music companies mildly(?) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple.

11. A Brief Review of the oIP’s VoIP: Voice communication is alive and well. VoIP is part of the landscape. VoIP, so far, is a sustaining innovation; eBay overpaid for Skype. 2. MoIP: Music consumers seem pretty happy. Traditional music companies significantly (?) disrupted. Big win for Apple & Users. 3. TVoIP: Trying not to follow music? Disney keychest; Hulu by NewsCorp, Disney & NBC; Comcast w/ TV Everywhere; Sony w/DECE (Digital Entertainment Content Ecosystem,)

12. A Brief Review of the oIP’s VoIP: Voice communication is alive and well. VoIP is part of the landscape. VoIP, so far, is a sustaining innovation; eBay overpaid for Skype. 2. MoIP: Music consumers seem pretty happy. Traditional music companies mildly(?) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. 3. TVoIP: Trying not to follow music. 4. NoIP: In USA, newspapers declining rapidly; Can bloggers and an army of “volunteers” fill the gap?

13. A Brief Review of the oIP’s VoIP: Voice communication is alive and well. VoIP is part of the landscape. VoIP, so far, is a sustaining innovation; eBay overpaid for Skype. 2. MoIP: Music consumers seem pretty happy. Traditional music companies mildly(?) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. 3. TVoIP: LoTrying not to follow music. 4. NoIP: In USA, newspapers declining rapidly; Can bloggers and an army of “volunteers” fill the gap? 5. AoIP: Is “consumption” of the arts different? Important distinctions among the arts? Classical, Contemporary, Performing, . . . ?

14. A Brief Review of the oIP’s VoIP: Voice communication is alive and well. VoIP is part of the landscape. VoIP, so far, is a sustaining innovation; eBay overpaid for Skype. 2. MoIP: Music consumers seem pretty happy. Traditional music companies mildly(?) disrupted, or, perhaps disrupted in slow motion. Big opportunity for Apple. 3. TVoIP: Looks to follow music? 4. NoIP: In USA, newspapers declining rapidly; Can bloggers and an army of “volunteers” fill the gap? 5. AoIP: Is “consumption” of the arts different? Classical, Contemporary, Performing, . . . ? Museums vs Websites; Venues vs Streaming 6. SPoiP: Sports as a fast-clockspeed performing art; Time shifting reduces value . . .

15. Sports/Video Dynamics Model (work in progress, w/Emmanuel Blain, MIT MS student) • Research: •  Modeling value dynamics is feasible for the media/communications value chain •  We seek to quantify the effects of Internet channels on overall system performance (e.g., value dynamics in the sports/media value chain) • 2. Hypotheses: • • Internet viewing can grow the size of the viewer base,but may also reduce revenue opportunities for some value chain members. • • All the oIP’s grow the pie for communications service providers. • • Innovative business model design is big opportunity. • • Regulations could play a crucial role • 3. Questions: • • Will the advertisement revenue model change with WebTV? • • Will new sources of revenue be created? • • Who will capture most of the revenue flow: Traditional broadcasters, service providers, Google, Apple, MLB, Players ??? • • What are the best strategic plays for network operators?

16. All Conclusions are Temporary Clockspeeds are increasing almost everywhere Value Chains are changing rapidly Assessment of value chain dynamics Build Strategies and Roadmaps