Digital Content Disintermediation
Disintermediation is the removal of intermediaries in a supply chain, eliminating ‘middle men’ such that sellers can deal directly with buyers. This can reduce the cost to consumer of various goods and increase the diversity to those goods. Companies like Walmart effectively used this strategy to eliminate steps between the manufacturer and buyer and leave only one intermediary - Walmart. With the move to eCommerce, many speculated that this would lead to further unbundling and disintermediation as the manufacturers like P&G or Levi’s could sell directly to customers. But new intermediaries like Amazon emerged to dominate the landscape building on the high cost of shipping small items and providing quality customer service.
What then is the story of digital goods? TV, Movies, Books, Magazines? Well, all of these categories still have a majority of their revenues and distribution coming from their non-digital counterparts and so the model hasn’t fully been disrupted. Only roughly about 20% of the consumption of this content comes from the internet. But with certain types of content like News, internet consumption has now passed print and gives us a glimpse of what fate awaits other content producers.
The important thing to understand about Disintermediation is that it isn’t about having no intermediaries. It’s about having fewer intermediaries. And if history is an indicator, the destination is to have just one intermediary between buyer and seller. In a world where there is just one intermediary, what is the role of this intermediary?
The role of the digital intermediary is to host content (manufacturing), transport content to the consumer, create a marketplace to purchase content, and then make it easy to consume (watch/listen/read) the content that was purchased.
Content Viewer Software is bundled into the Marketplace
There is no separate market for content viewers anymore. Digital rights management have ensured that content that is purchased on one service stays within that service alone. The content player and the content marketplace have become inextricably linked. You only watch Hulu using the Hulu app, and Netflix using the Netflix app. There isn’t any intermediate “video” app that allows you to play video from multiple sources. Another intermediary has perished.
Content Hosting is bundled into the Marketplace
Unlike physical content before it like DVDs and CDs, Digital Content does not need to be remanufactured for each user. Content Hosting is the equivalent of printing the DVDs and sending them to the users. The content marketplace is expected to host the content (including past purchases) and provide it on-demand to the user. Another intermediary has perished.
Mobile devices are the new Content Marketplace
Content buyers like to buy content using the same device they use to view/consume content. This makes it necessary for the creators of digital marketplaces to participate in the physical world by creating best-of-breed content consumption devices that allow you to easily purchase new content. This is why Apple creates best-of-breed music players like the iPod and Amazon creates best-of-breed eBook readers like the Kindle. And this continues to be a key battleground with tablet devices on track to be the leading content consumption devices in the world. This is the reason that Amazon sells the Kindle Fire at-cost. The mobile device is the new marketplace. And the disintermediation continues.
Disintermediation through Vertical Integration
By looking at them through this economic lens, we can see that Apple, Google, Amazon, Netflix, Hulu, Pandora, Spotify and other tech giants are all trying to disintermediate and occupy a spot to be the your singular intermediary for digital content. Apple and Amazon have raised the bar on disintermediation by completing the chain from content hosting to content viewing. Is it going to be economically possible to compete with these vertically-integrated competitors by just focusing on the marketplace and not the device?
Vertically-integrated competitors can afford to squeeze the tube in ‘unfair’ ways. Amazon for instance reportedly sells its devices at-cost (zero profit) so that it can purchase customers for it’s content marketplace. Can hardware manufacturers survive such an assault? What if Netflix launches a subsidized TV and Pandora launches a subsidized car radio? More and more hardware manufacturers will come under pressure. Conversely, companies like Apple that make significant profits from their hardware businesses can choose to squeeze the tube elsewhere. What if they significantly discounted the content because it is only available for purchase from Apple hardware? Would the content marketplaces like Hulu, Amazon and others be able to withstand such an assault? One thing is clear, the power in the content economy is moving toward the vertically-integrated players. Everyone else needs to either vertically-integrate or die trying.
The biggest sellers in these digital markets are themselves intermediaries (book publishers, movie studios). If digital markets are so powerful in relentless disintermediation, why then do these book publishers and movie studios continue to exist even in digital marketplaces. They still have a lot of power due to the fact that 80% of content revenues still come from non-digital consumption. As the consumption of content moves to digital, the power of these intermediaries is slowly reduced.