Monday, August 07, 2006

Value Migration & Convergence

Adrian Slywotzky, of Harvard Business School, wrote a great book in the 90s, called Value Migration. I rate it as one of the top 10 business books I've read. The core premise of the book is that value (as measured by capital markets) migrates, from company to company, from industry to industry and from business model to business model.

The reasons for value to migrate may be many. Technology change is a common theme. Another is blurring of industry boundaries. And the pattern of migration may also differ. Blockbuster migration, from products to services/ financing, disintermediation and re-integration are some examples. Slywotzky says that like good chess players presented with a picture of a game in progress, people who have spent enough time understanding value patterns in industry can identify patterns in play by looking at snapshots. This is useful as you can stay ahead of competitors by predicting and staying ahead of such shifts. Also, if you understand the reasons for the shifts, you can obviously take early action.

The reason I'm reminded of this, is the shifting value pattenrns across much of the telecom, media and entertainment industry. Here are some current examples.

The WSJ reports today, that there is a marked trend of value shifting back towards the cable companies in the US. Cable subscriptions are growing and they've gone back to levels last achieved at the turn of the decade. A key reason for this is, of course, the ability of cable companies to offer triple-play services, which Satellite companies cannot do easily. There's a long shadow over satellite companies in general - leading to questions about the Satellite side of the News Corp Business, across the World (DirecTV, BskyB, Sky Italia and Foxtel). Though BskyB's purchase of Easynet and launch of the Broadband service suggests a counter strategy is already in play.

Of course for News Corp, there's the upside of MySpace. For those wondering about how MySpace was going to return the 600 million odd dollars NewsCorp paid for it, Google has signed up to be the exclusive search provider on MySpace for the sum of approximately $ 900 million. This is value shifting into search advertising (or so Google is hoping) which will come at the expense of other advertising budgets. Brands like Fosters are experimenting with Web-only marketing campaigns. Are we getting the drift of Value Migration again?

Where's this budget coming from? Well Print and Radio are still fighting with their backs against the wall. Newspapers have been in decline over the past 10 years and anybody who says this isn't true is either deluded or using intentionally specious arguments. The Wall Street Journal has recently started selling ads on its front page. Trinity Mirror has just announced a strategic review. Some French dailies are demanding government subsidies for survival, against a backdrop of the top 4 national dailies in France losing collectively over 5% circulation in the past year alone. (See FT Article: French Dailies Struggling to Survive.)Though some groups such as Dow Jones and Pearson have announced strong results, it's clear that these are businesses which have strong technology plays and also are providing business information as much as general news. Technology change has played a huge role in shifting value from paper publishing to online publishing. The Huffington Post, a collection of bloggers (assimilated by Arianna Huffington) with their own following, and started in 2005 has just raised $ 5 m in venture capital from Softbank and others.

It's not just media. MGA Entertainment, makers of Bratz dolls, has now invested over $20m in creating the first of 5 technology enabled toys (Miuchiz). A handheld console with characters for playing solo, or using infra-red with other consoles, or plugged into PCs to become a part of an online community (Planet Mion). Traditional toy manufacturers and retailers have seen their value erode for some years now, and again there are some signs of where they are going to. See graph alongside for Hasbro - Source: YahooFinance.

The technology quotient of most businesses seems to be on the rise and this is increasingly being rewarded by the market. Though, a closer look might show that rather than just technology, it's technology which drives relationships which is capturing much of the value today. Where are you in this migration?


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