TV’s Innovators Dilemma

For Christmas the TVN team got a copy of Clayton Christensen’s book “The Innovators Dilemma” (apart from the Singapore guys… as Amazon failed us. Sorry!). The thesis of Christensen’s book is that game changing innovations, fall into two categories: innovations which build upon one another (ie a sustaining innovation) and innovations that changed the ecosystem entirely (ie disruptive innovations).

– Sustaining innovations are based on customer feedback, such as developing technology that improves product functionality and improves the efficiency of the process etc. These innovations allow the company scale and become more efficient. When large incumbents employ these sustaining innovations, the benefits are compounded by the greater resources at their disposal, such as capital and expertise. Sustaining innovations build high barriers to entry, because they are backed by a cycle of continuous improvement.

– Disruptive innovations often occur when the incumbent is focused on listening to the requirements of the high end/high margin customers, ignores the innovations that appear in the low-margin bottom of the market. One of the most often cited examples is IBM, who focused on what their highly lucrative mainframe clients wanted and dismissed the opportunity of the cheaper and less sophisticated personal computer. It allowed desktop players Apple & Microsoft to step in and take a dominant position in this new cheaper/inferior product end of the market. Initially for the higher margin, superior product makers this is not a problem, because their customers don’t want that product. Over time as technology improves the product, they become good enough for the original high end customer and the incumbent provider is left with an expensive product that has been superseded by the new entry.

After a re-read I was left with a few thoughts:

  1. Buy the guys something a bit more light hearted next year
  2. Is programmatic trading a sustaining innovation or a disruptive innovation for the TV/Online Video industry?
  3. YouTube Google is the definition of a disruptive innovation for free to air TV broadcast. How do you defend against it?

My view is that programmatic trading is a sustaining innovation for traditional broadcasters. My reasons are:

  1. Traditional broadcasters will create greater operational efficiencies by reducing the overhead cost of a sales transaction. If my experience with TVN is anything to go by we reduced sales head count by 50% in the same year we grew revenue 40%. The economics are hard to argue with.
  2. It pains me to listen to the sell side talk about user data, when I know in reality for a great deal of video properties in APAC data is a scarcity. However, I would assume by following examples such as Channel 4 (4OD) in the UK who cleverly incentivized viewers to login to get access a greater VOD back catalogue with more refined content suggestion, data shortage could be a short-term problem. Once this is solved and ad impressions are enriched through the data, the result will be greater premiums for the broadcasters.

I do however; think there are clearly disruptive forces at play in the production of video that are probably dismissed a little too easily by TV executives. Specifically YouTube. The time spent on YouTube today and the level of investment by advertisers in it, does not strike much fear into the hearts of executives in the TV industry. It just feels really small right now. But if Christensen’s disruptive innovation theory is true for the media industry, then we will see the YouTube quality of production “cheaper” end of town improve over time. As this plays out, inevitably more people will watch and advertisers generally follow the eyeballs.

The theoretical solution Christensen offers in the Innovators Dilemma would be for free to air TV broadcasters around the world to start investing in a separate media offering, which focuses on the lower cost/long tail segment and continue investing in the premium end of town. I get the sense that investments in SVOD are seen by many executives as the defensive mechanism here, but I don’t believe SVOD to be the panacea. I would imagine over time SVOD will include an ad funded model and the customer will benefit from a slicker UI and improved discovery/recommendation of content etc. This will clearly be disruptive to the subscription TV market but it does not cut YouTube off at the tracks.

It is interesting to compare the acquisition strategies of the incumbent global free to air broadcasters to the digital players who have Google/YouTube fixed in their competitive sights, such as Amazon, Facebook, Yahoo, AOL etc. Disney’s acquisition of Makers studio and RTL’s acquisition of SpotXchange are really good examples of investing in a competitive threat to YouTube in the cheaper end of town. The major digital players have been busy acquiring a YouTube compete player. Twitch/Amazon, LiveRail/Facebook, Brightroll/Yahoo, Adap/AOL. The game here is simple build out the largest uber exchange of long tail and premium broadcasters in one place. Whoever wins this will also win the future TV advertising market.

It will be interesting to see how the incumbent broadcasters and publishers in Asia Pacific react to this innovators dilemma.

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