Posted by: hdemott | April 15, 2010

What’s The Perfect Media Business Model?

Last night at dinner I was debating with some friends about business models – and what prevents one business from being disrupted while another business soldiers on minting cash.

The media world is a perfect place to look at this question given the extreme level of disruption. Look around at most industries – and there’s not all that much earth shattering change happening. Mining companies are still digging up the earth and retail sales (despite an enormous growth in online retail) are still over 90% terrestrially based. compare that to media where business have gone from hero to zero and you see that the media world really is a world of disruption.

First lets look at disruption. I would look at a disruptor in the media world as a company that enters a space and fundamentally changes either the way media is produced, distributed or consumed. Craigslist did all three – it is almost the ultimate disruptor. But not necessarily the best one – because there is still no real moat around their business (perhaps calling this a business is a misnomer – because it doesn’t necessarily act like one – and it does have a moat – which is its enormous network effect). A competitor could come in and pick away at Cragislist at the edges – and if they figured out how to do certain things better (better screening, better pictures, better search etc…) perhaps they could dethron them sooner or later.

The perfect disruptor, in my mind, does two things: it disrupts incumbent companies in a way that makes it difficult, if not impossible, for the incumbent to change business models – and even more importantly, it makes it too painful for others to become fast followers – either because of a significant technological advantage, a sufficient network advantage, a cost impediment  or some other factor.

I view Pandora as one of these companies.

Radio companies have high margins and are, by the nature of their broadcasting license, unable to do personalized services. They are hidebound and are fundamentally unable to make a lot of changes in their business models – even if they wanted to. Pandora comes into this void (after Sirius and XM came in and took share) and started to take share – just as other music services took share. At this point – the odds of the broadcasters changing business models and using their capital to build a real competitor to Pandora is almost impossible to conceive. Even better, Pandora’s online competitors are falling by the wayside. As any VC’s these days for money for a new music service and you will hear crickets – it has been a graveyard for capital. So why would anyone want to follow Pandora at this point – it will cost a ton of money to truly characterize music – and even if you manage to do that – royalty rates are currently ruinous – so the barriers to success are incredibly high. On top of that, people are spending more and more time with Pandora creating lock in with personalized stations and engineering all of this into every possible wired or mobile form factor mkaes the barrier even higher.

Pandora is one hell of a disruptor.

So what makes the perfect media business model?

The inverse of the perfect disruptor: a business that cannot be disrupted by competitive incumbents and one that is too painful for anyone to throw money at to try and compete from a new company basis.

Cable companies might fit this mold. The CAPEX required to wire every home in America is just too high for anyone to invest in – and while there is competition – it is rational and everyone in this business makes a lot of money. The only way to disrupt the video side of the business is to go to an IP based system around the cable guys – but even there, they ultimately win – as they are the only guys with a big enough pipe to get those streams through. So if you really want to replace your TV with IPTV, you are likely going to have to trade your $60 per month cable subscription for an incremental $50 data subscription – which carries a margin of over 90% versus under 50% for the video service.

Google is a pretty good example. How do you compete in search at this point? They were a disruptor, but their scale and reinvestment in the business makes it extremely unlikely that someone is going to find a better algorithm. It’s not possible, but the barrier is high – how would you like to fund something like that?

As a media investor, you are always looking for a business where you have an sustainable advantage in either the production, distribution or consumption of the media you are dealing in – or preferably all three.   And that’s the perfect media business model.

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Responses

  1. Driving down the road yesterday, I looked at my iphone streaming Pandora into my car stereo through 3G and decided to cancel my XM. And I love XM. Now that is a disruption…

  2. Pandora is definitely the quintessential disruptor – Chas’ comment pretty much sums it up – they are disrupting disruptors now!

    Reading one of your more recent posts about the moat they have created (licensing, technology/database, etc.), they are in a great position to continue to eat others’ lunch.

    At the opposite end of the spectrum, is a model whereby you’re helping the incumbents compete with/disrupt the disruptors by providing a platform and a community brand, which is the tack that we’ve chosen to take.

    Two radically different approaches, but IMO, some of the best that are out there at this time.


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