The Internet and the Value Chains of the Media Industry

Abstract

The Internet has had a significant influence on value creation processes of companies. This applies not only to the electronic communication with suppliers and sales partners, but also to the Internet as a new channel to directly address consumers. While this development has led to more efficient forms of business processes, it has also had an impact on companies’ business models. This is particularly true for the media industry, in which these technology-driven changes have, on the one hand, sometimes led to declining revenues that have threatened the existence of many traditional players. Also the Internet has led to a convergence of media, since in the digital format all media types can be distributed and consumed over the Internet. Conversely, this has also enabled a long list of new ventures and business models. In addition, this development has caused changed market conditions and power proportions between certain players, which have an impact on competition as well as on potential collaborations between different firms. Overall, all of these recent changes fall into three categories that differ in the underlying drivers as well as in their potential impact. For the time being, none of these developments seems to have fully developed its potential yet, so media markets are likely to undergo further changes.

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Chapter Objectives

• This article provides an overview of the changes in media companies’ value chains that occurred due to the development of the Internet. In the following, we explain the technological and economic backgrounds and point out various key aspects, which we link to three trends. Each of the trends is further illustrated by practical examples from industry to enable a better understanding of the key issues. Throughout the article, our focus is on content of media products and services that are provided in digital format.

Background

Conceptual Background: Organizational View on Value Creation Structures

Michael Porter describes a firm as “a collection of discrete, but interrelated economic activities such as products being assembled, salespeople making sales visits, and orders being processed” (Porter 1991). These interrelated activities are common to a wide number of companies and are further referred to as the value chain. Porter originally concentrated on internal organizational processes, but currently a value chain analysis often takes all production and logistic activities into consideration, i.e., from the first sub-suppliers of the product to the distribution to consumers. Value chains are usually specific to the industry in which the firm operates.

The companies in the media industry are also referred to as media companies. This is a class of companies that provides content (whether for entertainment, information, or education) on public media (Schumann and Hess 2009). From the consumer viewpoint, the value proposition comprises the medium and the product or the service.

Media companies can be classified according to their fulfilled value creation activities. Thus, in a simplified linear model, they can be grouped according to the value chain stages: creation, bundling, and distribution of content (compare Fig. 4.1). At the creation stage, actual content is produced, which can be a photographer taking a photo, or a journalist writing an article. The resulting product is called a first module copy and usually involves a significant amount of effort and costs. The bundling stage involves the grouping of different content modules, leading to a final product that can be found on the market (also called first product copy). For instance, text and pictures can be combined in a final newspaper article, whereas several articles build a newspaper. Digital technologies have simplified the bundling and the reuse of content. The distribution phase includes everything related to the distribution of content to consumers (mass copies). Content in digital form can be reproduced at very little cost and can be instantly “shipped” to consumers over the Internet. At this, the Internet has not just led to an acceleration of the distribution process, it has also led to a convergence of media, as different media types (e.g., movies, music, and print) can now be distributed and consumed with just one channel and the same technological end user device (mostly a PC or a notebook).

Fig. 4.1

Traditional value chain in the media industry (Schumann and Hess 2009, p. 12)

Although media companies may cover all value chain stages, many focus only on one value chain stage and a small number of media. Especially the distribution stage (i.e., delivering products to consumers) may overlap with other industries that also provide digital products and services such as printing shops and telecommunication companies.

Within the framework of globalization and the increasing digitalization of commercial relationships, companies have to decide what activities should be handled internally and which by other market players. At this, we distinguish between vertical and horizontal integration. Vertical integration determines which firms are responsible for which tasks and how the different companies are coordinated within the framework of the overall value chain. Such decisions are normally taken from the transaction cost theory viewpoint, according to which relevant influencing factors include the specificity of the task, the underlying uncertainty, and the transaction frequency (Williamson 1973). By taking these factors into account, companies need to decide whether it is more efficient to create products or services (or parts of it) themselves or to outsource certain tasks to the market. On the other hand, horizontal integration determines how many companies there are on the same value chain stage (this is also relevant for the market concentration). The most important driver in the horizontal integration is therefore the realization of economies of scale and scope.

Intermediaries can play a decisive role in this process. An intermediary is “an economic agent that purchases from suppliers for resale to buyers or that helps buyers and sellers meet and transact” (Spulber 1996). In the past, the main task of most intermediaries was to coordinate the supply and demand as this is done in the wholesale and retail trade for instance. However, in the case of media companies, not only the communication between firms can be effected in a digital format but, depending on the product or service, also the complete production and distribution process. Although digital goods do not have to be stored or warehoused in the normal sense of the word, intermediaries nevertheless continue to play a significant role in many media markets.

Owing to some market players’ concentration of market power, financial and structural dependencies between corporations can arise in electronics markets as well. For instance, various media companies have attempted to design “system goods” in order to bring supply and demand together at a central (albeit digital) market place and to control access to this.

In the following, we opted for a comprehensive perspective, i.e., we investigate the configuration of value chains. This includes a company’s choice of the vertical integration depth, although this is not the focus of this examination.

Technological Background: Two Generations of Internet

From a technological viewpoint, it is not only the development of the Internet (also the “Web”) as a whole that can specifically be regarded as the driver of the changes we outline. Rather, a well-differentiated viewpoint on the individual developments is required, especially in respect to the two “generations” of the Internet. Web 1.0 and Web 2.0 can be schematically subdivided, although the differences are not always clear-cut (compare Fig. 4.2).

Fig. 4.2

Web 1.0 and Web 2.0

The Internet was first utilized as a broadcasting medium; that is, as in traditional media, the content was generally compiled and distributed by one or more professional editors. The distribution was progressively perfected. This occurred, for example, through personalization, i.e., through adaptation of content to consumers, and through the push approach. In the latter, the producer proactively initiates the transmitted content, while the consumer remains passive during this action. During this period, the majority of end user technology equipment was rather stationary and the bandwidth rather narrow.

Although the label “2.0” could be interpreted as a completely new development, the technical innovations are limited. Web 2.0 is therefore normally regarded as an evolution rather than a revolution. A significant feature of Web 2.0 is the new function of the consumer, who shifts from being a passive subject to having an active role in the content creation process. The possibilities for consumers to interact have also increased, for example, in “Internet communities.” In this context both unidirectional and bidirectional communication are possible between pairs of consumers, as well as communications between the entire community of a service.

The Web 2.0 development is accompanied and supported by the proliferation of diverse mobile equipment (e.g., notebooks, smartphones, and tablet PCs). Driven by Apple’s success with its smartphone iPhone, and later with its tablet iPad, other manufacturers have also gradually profited from the trend towards mobile data communication equipment. During 2011, the number of smartphones first exceeded the number of PCs sold, including notebooks, netbooks, and tablets (Hamblen 2012). This would probably not have been possible without the simultaneous increase in mobile data services’ bandwidths. Whereas there were previously still relatively large differences between fixed connections’ bandwidths (e.g., in homes and within businesses) and those of mobile telephony, the current third and fourth generation (3G/4G)—such as UMTS and LTE—offer comparable bandwidths.

All these technological developments—and not just the mere invention of the Internet—made the following changes in media companies’ value chains possible and/or justified their need.

Trend 1: The Integration of Consumers in the Value Creation

Due to new technologies media companies have the possibility to actively integrate consumers into their value creation processes. By this they can exploit the consumers’ potential (usually at a very low cost or even for free) to create additional value. In the case of media companies, the integration can occur at any of the three stages of the traditional value chain, namely the content creation, bundling, and distribution. The corresponding possibilities are described in more detail below.

Value Chain Stage 1: Content Creation

Content was traditionally created by one or more professionals, who were either employed full time by a media company or self-employed. In this context, many specific professions evolved, such as journalists, editors, and reviewers. Normally, consumers had no influence on the creation of content. They could only reflect their (dis)approval through negative or positive consumer feedback or by changing their future buying behavior.

The second-generation Internet changed this situation fundamentally. From then on, semiprofessional and nonprofessional consumers have also been able to create content—also called user-generated content (UGC). This change was due to the low barriers that the users now encountered. On the one hand, the creation and publication of UGC is associated with low costs because the producer does not need special tools and the publication itself is usually gratis. On the other hand, users currently have a choice of many platforms on which they can publish their content without extensive quality control. Normally, users make their self-produced content available to the entire platform, which can thus be regarded as mass media dissemination. Due to the advent of Web 2.0, other users can generally rate, comment on, and share content with other users. In addition, direct contact with the originator of the content is mostly possible, which changes the original mass media communication to bidirectional individual communication.

Since users can now also create content, the traditional understanding of the user’s role is transformed from that of a true consumer to a so-called prosumer (combining producer and consumer). However, consumers are not obliged to contribute to particular platforms—and many do not. The fundamental principle for the evaluation of user activity is the participation inequality rule, which is also called the “90–9–1 rule” and states that 90 % of users contribute no content, 9 % contribute a small amount, and 1 % of users contribute frequently. It should, however, be noted that this distribution of user activities varies strongly with regard to the type of website and other factors and that therefore the participation inequality rule only serves as a rough estimate. More recent approaches state that in small-scale, limited social networks, the distribution is nearer to 50–30–20 (Brandtzaeg and Heim 2011).

The involvement of users in content creation could be ascribed to various motives (Stöckl et al. 2007). These vary from the user’s intrinsic motivation or the wish to make contact with others to immaterial incentives (e.g., in the form of a social ranking system within the community). In a few cases, these motivations are due to direct financial incentives, i.e., a direct payment for the content creation. A lack of user-generated content could, from a users’ viewpoint, mostly be due to the amount of time required, a lack of interest in the work itself, and concerns regarding data privacy.

It is still unclear in which areas professionally generated content (PGC) and in which user-generated content (UGC) will prevail. One should also distinguish between “traditional” (valuable artistic or journalistic content) and more “modern” content. More modern content, such as personal profiles and product assessments, can only be produced by users. Although the data are still incomplete, on the basis of traditional content in many areas, one can see that user-generated content has indeed contributed to the broadening of the offering (also referred to as the long tail). However, high-demand content is rather created professionally (Anderson 2006; Silver 2011).

Currently, there are quite a large number of websites, where professionally generated content is combined with user-generated content, whereas pure UGC-based platforms for traditional content, such as Wikipedia, are the exception. This may be due to the challenging quality control. Another factor is that services that are based entirely on user-generated content are very dependent on their users’ voluntary participation. This is particularly crucial in the case of time-critical content, such as those on social news platforms. Since the user has no contractual obligation to contribute anything further, the community operators have no choice but to use professional editors to produce content if there are insufficient user activities. If they fail to do so, the platform will inevitably lose appeal due to its lack of new content. However, involving professional and remunerated editors is not always reconcilable with many services’ user-driven ideology—also because the incurred costs do not fit with the community operator’s business model.

Value Chain Stage 2: Bundling of Content

Not only the creation of content, but also the selection thereof was normally left to professional actors in the traditional realm. They chose from the given content—which they had created or purchased for this purpose—and bundled them into an offering for clients. They based this offering on their assessment of the clients’ needs and often also included their own objectives, for example, with regard to political communication. The consumers had no actual direct influence on the choice of content that they would receive—the choice of content thus lacked transparency and was not very interactive.

The use of traditional personalization and recommender systems (software-based) has not substantially changed this situation. By means of the manual capturing of user&s (explicit) preferences (e.g., ratings), or by means of the automated capturing of their behavior (= implicit preferences, e.g., surfing behavior), an attempt is made to select and present the content that is likely to be the most relevant for them. This can be considered as support to master the increased variety in content and to present users with content that they would not otherwise encounter. Recommendations may be based on the similarities between product characteristics and the user&s preferences (content-based filtering). In this case, users may state that they are particularly interested in science books and crime thrillers, and therefore receive recommendations of books in these two genres. Another approach is to make recommendations on the basis of similarities between users (collaborative filtering). According to this approach, users, who have many purchases in common, are more likely to enjoy the same books that similar users will buy in the future. There are also various hybrid methods that attempt to combine the two basic techniques’ advantages. Nevertheless, there is no fundamental change in the provider’s intrinsic orientation and in the selection of content—the user is not really taken into consideration. In addition, these personalization and recommender systems are under fire because consumers are normally not aware of the underlying algorithms. Therefore these systems could be misused to lead them to buy slow-moving items or high-margin goods.

Crowdsourcing is an innovative concept allowing different tasks to be outsourced to an unknown number of individuals. This neologism was formed from the two concepts “crowd” and “outsourcing” (Howe 2008). The crowdsourcing principle is based on the theoretical concept of combined wisdom or the collective intelligence of the mass. This implies that, under certain conditions, large groups of humans may be more intelligent than individual experts (Surowiecki 2005). Various forms of crowdsourcing have evolved in recent years, for example, crowdwisdom (problem solving), crowdcreation (content production), and crowdfunding (financing). Crowdvoting can therefore be regarded as a new philosophy for traditional recommender systems, which allows for a content selection driven by users’ aggregated opinions.

Value Chain Stage 3: Distribution of Content

Specialized companies that mainly take over individual tasks operate on this stage of the value chain. In the printing industry there are, for example, printing shops and logistics companies, while in the TV/Internet industry there are various types of network operators. Often there are regional dependencies between the individual companies, and media companies are responsible for integrating the various suppliers into one corporate network.

The Internet has had a major impact on the distribution of content. It comprises individual subnetworks and currently connects billions of computers. New technologies can store content on all these computers as part of a decentralized network, which allows this content to be made available to other users. Individual users then normally allow downloads and uploads to and from other computers. During these processes, individual computers normally have equal rights and this method is therefore called Peer-to-Peer (P2P) networking. P2P technology has been frequently used for the illegal exchange of proprietary (with copyright) content. Napster is a well-known example of an organization that had previously largely distributed music illegally, but later converted to become a legal Music as a Service provider. However, due to the higher data transmission speeds and better compression methods, P2P is presently more often used for videos and software. In pure P2P networking, identifying an to exchange partner, who holds specific content, is frequently a problem because there is no centralized server to match supply and demand. In such exchanges, individual peers operate autonomously, i.e., they themselves decide when they want to be part of the network and what files they will make available. This leads to the available computers and files changing perpetually. In turn, this requires a dynamic administration and increases the complexity. Consequently, a hybrid form between a pure and a traditional client–server architecture is sometimes employed. In this form, the central server is used to administer the organization and the users’ computers are employed for data storage and distribution.

These days, usally a few rather young and small businesses still frequently utilize P2P and, thus, their consumers’ resources to distribute their content—especially if the content comprises large amounts of data. An example of a well-established company relying on such technologies is the Voice over IP (VoIP) provider Skype, which now also belongs to Google Inc.

Trend 2: Four New Types of Gatekeepers on the Internet

New technologies have had an impact on the different stages of the value chains in the media industry. They have also changed the distribution of market power with some players leaving the market and others appearing, so that electronic markets no longer resembles previous brick and mortar markets.

However, all companies that focus on B2C have one thing in common: they strive for access to consumers. Simultaneously and for the sake of competition, media companies have an interest in restricting other companies’ access to consumers. Companies that manage to build up a position that allows them to grant other companies access to consumers and charge a royalty for this are called gatekeepers (Hess and Matt 2012). This term originated from communication and organization sciences and describes a role that enables a market subject to control access to information (White 1950). The main idea can also be applied to economic circumstances and generally denotes any economic subject that controls access to another economic subject.

In the field of digital media products four different types of gatekeepers can be identified, and that try to restrict different stages of the value chain (compare Fig. 4.3).

Fig. 4.3

The four types of new gatekeepers

Gatekeeper Type A: Interface to Consumers

Technology-driven interdependencies between complementary products or services are the main cause for the appearance of this gatekeeper type. For example, Internet users need application software, system software, and hardware to access content on the Internet (compare Fig. 4.4).

Fig. 4.4

Interdependencies within system goods

Companies attempt to control access to consumers, such that when they grant other companies access, they can claim the associated commission. In such cases system goods have evolved. They are characterized by the simultaneous or later utilization of the capabilities of the same system’s technologies. From an economical perspective, system goods depend heavily on network effects and, in the local case, mainly in the form of indirect network effects (Stango 2004).

With direct network effects, the consumer’s benefit from using a product increases with the total number of consumers using the same product. For instance, the utility of being the only user of a telephone network seems to be rather small, if one cannot call anyone else. With indirect network effects, the utility increase is mainly due to an increased offer of complementary goods (e.g., the more users there are of a particular game console, the more games there will be for that console). Lock-in effects are often linked to network effects because a change in technology does not merely lead to a substitution of the device, but also of other related components of the system good in question.

Standards are crucial for the development and specification of lock-in effects and an important competitive and strategic tool for corporations (Besen and Farrell 1994). Standards enable compatibility between systems, but can also reduce it. The more open the standard of the utilized system good, the simpler it is to exchange individual elements with other goods. Conversely, proprietary (i.e., closed) standards lead to a (mostly wanted) bond with the manufacturer and make it difficult for consumers to change to another good. A company’s choice of an open or closed standard is usually dependent on the particular product and market, as well as on the competitive pressure in the market.

Apple is a good example of a company acting as Gatekeeper Type A. The company took advantage of the growing interest in legal sales of digital music and built up its for iTunes Store, which offers products from many music labels. The iTunes Store sells music in the proprietary format ACC, which in turn promotes the sale of Apple’s own MP3 player, the iPod. Furthermore, the iPod is based on Apple’s own media player and management software (also called "iTunes"), which makes shopping at the iTunes Store very easy, resulting in a sequence of wanted dependencies. Apple also used this approach when introducing its iPhone, which is also already set up to buy music from the iTunes Store (Dörr et al. 2009). All of this fulfills the characteristics of a gatekeeper at the interface to consumers and led to Apple being the market leader in the sales of digital music.

In general, hardware manufacturers have until now mostly assumed the role of gatekeeper Type A. It remains to be seen what the impact of the Android operating system, which is primarily promoted by Google, will be. Google was not a traditional hardware manufacturer but was primarily focused on bundling content. However, Google later entered into cooperation agreements with hardware manufacturers (e.g., HTC and Samsung) to support the distribution of Android and marketed special Google smartphones. Google’s next step was the acquisition of the mobile telephony division of Motorola, which underlines Google’s efforts to diversify its business activities and to further promote the Android operating system.

Gatekeeper Type B: Transmission Networks

Content is transmitted from the producer to the recipient via different forms of media. By their position in the communication process, the operators of transmission networks are natural candidates for taking a role as a gatekeeper. Traditionally, Internet service providers (ISP) had established a commitment to ensure the unrestrained transport of data packets, regardless of the content and its sender or recipient (“best effort” principle). This also includes the prevention of restrictions on specific sites, platforms, or types of hardware equipment. Thereby the Internet service providers had deliberately waived their possible role as a gatekeeper. This approach and the resulting discussion are also referred to as net neutrality.

However, in the following years, this approach has been questioned. The specific aim of many Internet service providers is to request different quotes for their services depending on the transmission speed (and reliability), and thus to differentiate their offer. The central justification for this is the upcoming major investments to expand their transmission networks, which by conventional tariffs could not be financed, as Internet service providers claim. However, critics believe that such an action could potentially harm the open character and the economic importance of the Internet.

In most countries, the debate is still ongoing, but various cases where Internet service providers restricted access to specific services have already occurred. In the USA the most prominent one is probably the cable network operator Comcast, which intentionally slowed P2P communications and traffic. In Germany, several mobile network operators have restricted the usage of Voice over IP services to protect their business model. However, it remains unclear whether and how regulatory bodies will intervene in the future.

Gatekeeper Type C: Industry Platforms

Industry platforms serve as a basis to aggregate complementary goods (not necessarily created by the provider of the platform) and in order to match supply and demand. With two-sided platforms, the platform provider connects two different parties (here, usually content providers and consumers), whereas each of the two groups benefits from the increased participation of the other group (Evans et al. 2006). The attractiveness of an industry platform increases with a higher number of complementary goods, but content providers are at the same time more likely to offer more products if more consumers use the platform. Industry platforms therefore depend on indirect network effects on both sides. In order to reach a critical mass of consumers, platform providers may subsidize content providers to encourage the provision of more content in order to increase the attractiveness of the platform. As compensation for running the platform, the provider usually receives a fee, which can depend on the price of the traded product, or comprises a subscription fee, or a lump sum payment. Dependent on the platform’s popularity with customers and the competition with other platforms, the platform provider may impose higher or lower royalty fees that can be charged from consumers, from content providers, or from both (compare Fig. 4.5).

Fig. 4.5

Value creation in platform-based ecosystems (Hilkert 2012, p. 9)

Since industry platforms usually incorporate different kinds of market subjects, which are involved in the production and distribution of products or services that are dependent on each other, they build the basis of a so-called business ecosystem (Moore 1993). In some cases the platform provider may define certain standards and restrictions for products to be listed on the platform.

In addition to the previous practical example of Gatekeeper Type A, Apple’s iTunes store also serves as an example for an industry platform. There exists a reciprocal dependency between Apple and the music labels. Music labels need to provide their products to the iTunes platform if they want to address the consumers of Apple products. However, as the platform operator, Apple also needs the music labels to be able to provide its customers with an appealing offer. Besides strengthening its market power through its platform, Apple also receives a commission on all transactions. Therefore Apple has an interest to prevent its platform from being bypassed, or to at least make bypassing difficult. An important point is that, as the actual manufacturer of the underlying hardware (the iPhone), Apple is not only interested in its profits from its hardware sales anymore, since a substantial amount of revenues now comes from its own content platforms. Achieving a critical mass of hardware users is therefore necessary to exploit the indirect network effects. It could therefore be worthwhile to sell its hardware (the company’s previous main product) very cheaply (or even at a loss) to ensure the sufficient diffusion of the industry platform and to realize profits with other platform-related revenues at a later stage.

Gatekeeper Type D: Navigation Hubs

Besides the dependencies due to rather technical circumstances, actual gatekeepers have also emerged due to a natural bundling of user interests-internet search engines play a major role in this respect. A plethora of users employ Internet search engines several times daily. Google and other search engine providers primarily utilize their market position to earn advertising revenue. Together, they receive approximately half of the total advertisement expenditure on the Internet and are often responsible for 50–70 % of the traffic on many websites due to the large number of page hits occurring via search engines (Statista 2012).

Google is the market leader in the realm of search engines. Whereas Google handles about 60 % of all search queries in the USA, this figure is more than 90 % in some European countries (LSF Interactive 2010). The primary reason for Google’s market strength has been its supposedly superior search method, which was, and still is, very scalable. In contrast to previous search engines, the Google PageRank method bases the sequencing of hits not only on keywords’ agreement with the content of web pages, but also on the importance of specific websites, which is based on the number of links between individual pages and the significance of the individual links.

Certain dependencies have arisen from Google’s market strength. Abuse of its market strength is therefore constantly being scrutinized. Google is, for instance, accused of not only prioritizing according to an objective algorithm. This issue has become more controversial as Google has increasingly penetrated other business areas, such as its recent acquisition of the travel software specialist “ITA” and its integration of product price comparison and purchase options on the Google website.

The same development could occur in the social networks. After all, Facebook presently has a user base of over 900 million users (CNBC 2012). It is already integrating the content of external sites and plans to further expand its search activities—a convergence of traditional search methods enriched with social factors thus also seems possible and could pose a danger to Google’s market dominance. Consequently, Google’s social network Google+ can be regarded as an attempt to diversify its product portfolio and to profit from the same area to ensure its market strength.

The development of social networks benefits especially from direct network and lock-in effects: the more active users there are in a social network, the more interesting the network becomes for the individuals, and the greater the effort that an individual has invested in the network, the more difficult it is to change to another network if the existing profile data cannot be transferred easily.

Trend 3: The Changing Role of Intermediaries

From an economic perspective, intermediaries are needed if they can make the product exchange process between suppliers and consumers cheaper. This consideration is essentially based on the transaction cost theory (Williamson 1973). The associated cost-saving possibilities through intermediation were already shown in an early theoretical model (Baligh and Richartz 1964).

In the physical world the objective of many intermediaries used to be the trade of physical products. In many cases, this happened because many suppliers of media products did not have the money to open their own shops. However, producers of digital content modules can now directly distribute their goods over the Internet. Thus the question arises whether intermediaries are still necessary. In the early years of e-commerce, this was challenged by some researchers, but newer insights show that intermediaries are required or at least useful in certain markets and in certain market situations. Thus, we will discuss two new approaches that examine the question whether intermediaries are still necessary in markets for digital media products.

An analysis of the functions of content intermediaries is one way to take changed market conditions into account and to classify intermediaries’ usefulness according to their duties (Hess and Von Walter 2006). In this sense, the bundling and the distribution of content can be regarded as intermediaries’ main competencies, which can be further differentiated into specific functions (compare Fig. 4.6).

Fig. 4.6

Functional analysis of intermediaries (Hess and von Walter 2006)

A functional analysis provides a qualitative assessment of the importance of single functions and the changes that may have occurred through the use of new technologies. For example, in the music market the function used to be performed by music labels, which bundled different music tracks on a sampler. However, currently, many online intermediaries (such as the Apple iTunes Store) now possess the right and the technological know-how to offer consumers individual bundles of songs that are not available from music labels directly. This also illustrates that intermediaries and the “original suppliers” of media products may not always be easy to differentiate.

The “reproduction” function is another example where a technological innovation change led to a change in intermediaries’ competencies. Whereas music labels and press shops used to reproduce physical music samplers, online intermediaries can now reproduce digital music products almost right away and no longer need classical stock keeping.

For the time being, no clear statement can be made in respect of potential changes in the form of the functions and who will cover these in the future. Technological competencies do, however, seem to play a large role. If intermediaries manage to further cover certain functions that used to be content producers’ exclusive tasks, this may be a significant threat to classical media companies. For instance, nowadays, Amazon also publishes books and approaches authors directly. In many cases Amazon offers higher royalties, as well as easier international sales opportunities than most publishing companies do.

The second approach to analyzing the benefits of intermediaries focusses on the consumer viewpoint and takes consumer purchase decisions into account (Matt and Hess 2012). The previous functional approach primarily takes an intercompany perspective and does not explicitly integrate consumers into its model. However, regardless of the circumstances of the prevailing market, the ultimate purchase decision is always made by consumers and other, especially behavioral, aspects may therefore play a large role. Analyzing consumer behavior when deciding between intermediaries and suppliers online shops can therefore lead to new insights into which environmental or transaction-based parameters have an impact on this decision. In turn, this will also allow suppliers and intermediaries to better align their product offer to consumers’ needs.

The first results indicate that in many markets suppliers cannot substanitally exploit the newly emerged direct sales opportunities, since consumers prefer to purchase from large intermediaries. One of the main reasons for the failure of numerous supplier online shops may lie in intermediaries’ larger product range and, thus, in consumers’ lower search costs. The current strong market strength of certain intermediaries also leads to an enormous financial dependency for many media companies' online businesses. For instance, if Amazon does not sell the products of a specific publishing house anymore, this would probably lead to a massive decline in overall sales of the publishing house. For the time being, no weakening of the large intermediaries’ dominance in certain media industries is currently foreseen.

Conclusion and Outlook

The progressive improvement of Internet technologies has had a significant influence on media companies’ value chains; this can be categorized into three trends (compare Fig. 4.7).

Fig. 4.7

Overview of the changes of value chains in the media industry

In the following, we summarize the three trends to which the changes can be attributed:

• Trend 1—The integration of consumers in the value creation: owing to Web 2.0 technologies, media companies have the chance to integrate consumers into their value creation processes. Instead of the passive beneficiaries who previously had little to say, consumers can now create and distribute their own content without major technical efforts.

• Trend 2—Four new types of gatekeepers on the Internet: new gatekeepers emerged specifically with the bundling and distribution of content. In the case of bundling, these can be search engines or content platforms serving as a central point of contact for many Internet users. In respect to the distribution, the creation of system goods plays a large role, involving wanted dependencies between different components of system goods and approaches to restrict other companies’ access to consumers.

• Trend 3—The changing role of intermediaries: new market constellations and sales opportunities have had an influence on the position of intermediaries. Although media companies now have the possibility to directly deliver their products and services to consumers via their own online shop, intermediaries have captured a leading position in many media markets. Nonetheless, intermediaries’ exact benefit for customers varies with the market and the specific product or service, and may be analyzed in various ways. However, the concrete benefit cannot as yet always be measured accurately.

For the time being, these three trends are still developing and further changes are likely to be seen. Therefore we chose practical examples rather than abstract general implications to illustrate our findings.

However, what will media companies’ position in future value chains be? The previously illustrated examples demonstrate that single players may well be able to significantly change value creation structures for an entire industry. As happened in the case for industry platforms and business ecosystems, the traditionally linear organized value chain may be replaced with new models of value creation structures.

In the future, it appears conceivable that, primarily driven by a further increase in user-generated content, media companies will increasingly specialize in the bundling of content offerings and will deliver this directly to customers. Media companies could therefore increasingly separate themselves from traditional content production and act as content intermediaries, thus mediating between producers and consumers. Internet service providers would then assume the pure digital transport of preliminary content from the producer to the media companies and transport of the finished goods from the latter to the consumers. The continued existence of media companies could be justified by the matching of the supply and demand, for example, over suitable digital platforms. In this context, another interesting question is: to what degree will the Internet lead to a horizontal integration of value chain stages? One driver for this could be that high investments for small suppliers’ technical support (such as a complex CMS for extensive cross-media concepts) can no longer be borne single-handedly and that economies of scale must be utilized by media companies to survive.

Appendices

Exercises

• 1. Describe the different stages of the value chain in the media industry and mention some examples of concrete functions at each stage.

• 2. How can vertical and horizontal integration be distinguished and what are their underlying motivations? Mention different examples of such integration in different media industries.

• 3. What is an indirect network effect and why is this of relevance to the media industry?

• 4. What are the main characteristics and differences between the two “generations” of the Internet—Web 1.0 and Web 2.0?

• 5. How can media companies integrate consumers into their value chains and what is the impact of consumer integration on media companies?

• 6. Identify the differences between user and professionally generated content, and mention consumers’ motives for and objections to creating user-generated content.

• 7. What kind of new gatekeepers have arisen on the Internet and at which stages in the value chain do they operate?

• 8. Mention examples of each type of gatekeeper and explain which stakeholders are involved in the respective transactions.

• 9. Explain what intermediaries are and what their potential benefit is for certain media markets.

Reflexive Questions

• 1. Envision the consequences for media companies if a further increase in the production of user-generated content occurs. How should media companies deal with this—is it an opportunity for them or a threat to their business model? Is the suitability of user-generated content and its potential acceptance by consumers dependent on specific media (music, books, movies)?

• 2. Assuming that user-generated content will grow, will the value of brands in the media industry further increase or decrease? What is the value of media brands today? Also consider current content aggregation platforms such as Google news.

• 3. How can producers of content cope with the increased market power of certain gatekeepers on the Internet (such as iTunes)? Should they focus on maintaining good relations with these gatekeepers, or rather invest in their own online shops to sell more products and services directly?

• 4. At what stages of the value chain should media companies focus in the future? Should they try to cover a large number of value chain stages or/and media types, or rather become a specialist in certain areas?