MIT-fit-for-the-future-final

In association with
Fit for the Future
Seven steps to success in the media industry

Foreword
If you showed a publisher
or broadcaster from twenty
years ago today’s media
market, to say they’d
be shocked would be an
understatement.
2 COGNIZANT September 2012
If you took a publisher or a broadcaster from twenty years ago and dropped
them into today’s media environment, it would be an understatement to
say they’d be shocked by how the market has changed. While on the
surface there are many continuities, look a little deeper and the channels,
revenue models, technologies, partners, behaviours and platforms have
shifted to become totally and unexpectedly different.
The world’s biggest bookseller is also a publisher… and
sells everything from shoes and groceries to business IT
services. And yet it is only just getting around to opening
its first brick-and-mortar store.
A company known for making PCs is now the world’s biggest
music and video seller. Its catalogue includes 28 million
songs and millions of films and TV shows, but there’s not a
single CD or DVD on its shelves.
The video game industry is forecast to hit revenue of $70 billion by
2015 1 , bringing it almost on a par with the book trade’s current revenue 2
— in-game advertising will add $2.67 billion to that by 2017, plus more
for in-game purchases and cross-media tie-ins. Game publisher Valve
is even employing professional economists to manage the growth of its
“virtual economies”. 3
If you run a media business — publishing house, film studio, newspaper,
music label, TV station, distributor or retailer — how do you respond to
such large-scale disruption? That’s the question we set out to answer.
This paper is a summary of rigorous in-depth research conducted by
Gregory Gimpel and George Westerman at MIT’s Center for Digital
Business in collaboration with Cognizant’s Information, Media and
Entertainment consultants. In the following pages we outline seven
strategic principles that organisations like yours can follow to get “fit
for the future”: making brave and often counterintuitive choices to
navigate successfully through the dramatic changes that are reshaping
your industry.
We hope that it gives you some food for thought.
If you’d like to discuss how what we’ve learnt can be applied to your
business, speak to your Cognizant consultant or get in touch with us
direct — you’ll find our contact details at the back of this paper.

Contents
4. Step 1: Scan for change
8. Step 2: Disrupt yourself
9. Step 3: Co-opt threats
10. Step 4: Find your secret weapon
11. Step 5: Focus on your core value
13. Step 6: Build virtual value networks
14. Step 7: Plan for platforms
17. Are you ready for change?
September 2012 COGNIZANT
steps to success 3

The five digital forces
Platformisation:
new digital platforms are the
dominant way for media providers
and consumers to transact:
economics and intermediaries are
radically different.
Virtualisation:
businesses use collaboration
tools to work together as
agile value networks instead
of rigid structures:
competitiveness is the goal.
Figure 1
Step 1: Scan for change
What disruptions lie ahead?
Like all industries, media is littered with fallen giants that didn’t spot change
until it was too late. To avoid their fate, your first hurdle is identifying and
making sense of the changes that lie ahead.
We’ve categorized the most fundamental systemic supply and demand shifts in
the media value chain into five digital forces (Figure 1).
Five Digital
Forces
Prosumerisation:
amateurs have access to
professional-standard, but cheap,
tools to make and distribute vast
amounts of their own content,
bypassing traditional gatekeepers.
Further reading: learn more about the future of media industries
Globalisation:
consumers and providers buy
and sell on a world scale: new
competitors and markets
emerge.
Millennialisation:
empowered digital natives
use social networks to inform
their media decisions: they’re
not passive consumers.
See our other reports, including ‘A Brave New World of Connected Media’ and ‘Prepping for the New Age of Information Services,
Media and Entertainment’ (available on cognizant.com/information-media-entertainment) for more insights into how content
consumption habits are changing.
4 COGNIZANT September 2012

Globalisation
Thanks to advances in technology and regulation, media companies now
have access to worldwide markets and their massive potential, and face new
worldwide competitors too. Globalisation has levelled many of the barriers that
limited access to staff and factors of production: companies can now recruit the
most innovative people and cut costs by capitalizing on labour rate arbitrage.
Organisations can also source components and business processes from other
countries to improve the quality of their offerings, cut their costs or both.
But note that globalisation doesn’t mean “selling the same product everywhere”.
It’s not a shortcut to unlimited revenue. Smart media companies know that
differences in language, culture, consumption patterns and the law may demand
significant localisation, which itself can be costly.
Millennialisation
Media companies are facing a new type of consumer, one that:
• Makes decisions based on recommendations from other consumers on
social networks. They trust peers more than experts, and certainly more than
adverts. Nielsen found that 92% of consumers trust social recommendations
above all other forms of advertising.
• Actively participates by creating their own content — everything from
comments on blog posts to full-length YouTube videos. And they consume
amateur, user-generated content alongside purchased media.
• Is more demanding than ever about getting immediate access to their
chosen content at a price they think is fair. If they are unsatisfied with the
offering or conditions from established providers, they will go elsewhere.
These characteristics emerged with the “digital natives” of the
millennial demographic. But now net-centric lifestyles have become
mainstream. People of all ages are consuming new kinds of content
accessed through non-traditional channels. This is a threat, but if
you can master new media and engage with consumers — play the
game on their terms — it’s also an opportunity.
Further reading: listening to the future
Nielsen found that 92%
of consumers trust social
recommendations above all
other forms of advertising. 4
Consumers have never given companies so much information about their preferences, location, consumption habits and
interests. Big data is a hot topic at the moment and for good reason: information from social media, when mined and analysed,
can give you vital insight into demand trends. Read our report ‘Advanced Media Analytics for the Digital Age’ (available on
cognizant.com/information-media-entertainment).
September 2012 COGNIZANT
5

6 COGNIZANT September 2012
Prosumerisation
People aren’t just putting funny cat videos up on YouTube; they’re funding
their own movies directly through Crowdfunder and placing their thrillers on
Unbound, bypassing traditional studios and publishers. Making a professionalquality
movie, book or album no longer requires capital-intensive factors of
production or even hard-earned specialist skills and knowledge. The hardware,
software and services to produce and distribute content is now readily available
to consumers — often for free.
Most prosumers aren’t going to sell a million copies — not least because they
won’t have the scale and marketing might of the usual summer blockbuster. But
when production costs are so low, they don’t need to sell many copies to break
even, and they’ve probably got a day job to pay the bills. The flurry of enthusiast
amateurs making niche content shows no signs of slowing, and the sheer volume
of goods they offer dramatically changes the overall competitive landscape for
traditional content owners — who in the past have relied on scarcity created by
high barriers to entry. And for broadcasters and other distributors, the channels
that prosumers use — print on demand, ebook platforms, YouTube and Vimeo
— pose a threat too. These channels aren’t exclusive to amateurs, they can also
offer professionals — particularly small or niche producers — a route to market
that bypasses traditional gatekeepers.
Virtualisation
In years gone by, powerful players tightly controlled industry value chains. Today,
ICT enables radically new levels of collaboration. Both enterprising upstarts and
established players can now form value networks, either for specific projects or
on a long-term basis, with partners on the other side of the world and work with
them as easily as with teams in the next building over.
By forming networks you can concentrate on your core value-delivering
competencies and key support processes, contracting other functions to
partners with superior offerings to improve overall quality. You can also use
the network to cut costs by leveraging your partners’ capabilities only when
you need them instead of bearing the expense of building and supporting a
permanent capability in-house. We’ll talk more about business virtualisation
and finding the core in Sections 5 and 6.
Platformisation
Digital, often cloud-based, platforms are the future system of engagement
between consumers and content. Platforms are everywhere:
• Books, magazines and articles: Kindle, Kobo, iBooks, Newsstand.
• Music: Spotify, Last.fm, Pandora, iTunes, Google Play, Amazon.
• Video: Hulu, iTunes, Google Play, Netflix, Lovefilm, YouTube, Vimeo, Amazon.
• Apps: Apple App Store, Google Play, Facebook, Amazon.
• Infrastructure: Amazon EC2 and S3, Brightcove, Akamai, iCloud.
• Payments: Mastercard, PayPal, Google Wallet.
For buyers, platforms are redefining how they find and consume media, offering
a single convenient venue and recommendation and reputation engines to help
filter the tremendous choice available. For sellers, platforms offer a ready-made
scalable and secure infrastructure for showcasing, distributing and selling
products, access to a ready audience, and additional revenue streams such as
advertising in return for a cut of the profit.

The real disruption is that platforms serve as “great equalizers”: they let anyone,
regardless of their size, sell their wares. And they don’t respect traditional
media roles. Even a self-published author — who could never have won shelf
space in a major retail store — can sell books through Amazon and rely on a
few five-star reviews to lure buyers, without any marketing budget. Barriers
to entry haven’t disappeared entirely, but they have got lower. We’ll talk more
about platforms and how to use them in Section 7.
Tracking the impact of the five digital forces
Together these five digital forces are disrupting the nature of established
supply and demand power structures, breaking down the barriers to entry that
protected incumbents. Staying ahead of these trends and actively harnessing
their power is the first and most important strategy for adapting your position
in the industry.
When you’re confronted with dramatic market changes, it’s natural to turn to
your traditional strengths and focus on improving operational efficiency. But
optimising within traditional industry roles guided by familiar performance
metrics leaves you vulnerable to the effects of disruption.
For example, if you’re a newspaper, focusing on increasing circulation for your
print and digital editions seems the natural way to keep advertisers happy —
but advertisers now don’t just want the most eyeballs; they want targeting,
personalisation and granular tracking of not just who sees an advert, but who
eventually buys the product. Operational improvements targeted at traditional
metrics like circulation can only take you so far when the whole industry is
shifting. A careful externally focused look at the changing industry value chain
can help identify systemic changes in supply and demand and show the way to
how you can contribute value in the changing landscape.
Change is gradual — but you can’t ignore it
Avatar and the Avengers have set all-time box office records in
recent years — cinema is doing fine. 5 While the TV’s role is changing
as digital platforms and multi-screen viewing habits emerge, it’s
still the centre of the living room.
People are still listening to the radio. UK digital downloads only
exceeded CD sales in May 2012, and music sales generally are
holding steady — despite the supposed effect of piracy. 6 Cloudbased
subscription services such as Spotify haven’t taken off as
much as media coverage would suggest 7 — most people prefer to
own their media.
Books, magazines and newspapers are still selling with familiar
names and content. Only 3% of book sales in France are ebooks. 8
While globalisation is often written about, issues like copyright and
licensing agreements mean borders still have a very real presence.
So there is continuity in the market as well as change: media is so
much a part of society that it will never transform overnight. But
it takes time for providers to change, too — so just because the
change is gradual doesn’t mean you can afford to ignore it.
There’s continuity
in the market as
well as change:
media is so
much a part of
society that it will
never transform
overnight. But
just because the
change is gradual
doesn’t mean you
can ignore it.
September 2012 COGNIZANT
7

Radiohead rejected
traditional publishing
practices and released their
album online, asking fans to
pay what they felt was fair.
8 COGNIZANT September 2012
Step 2: Disrupt yourself
Innovation is inevitable: but will it come from you?
Many of the big names in media today arrived as startups from the IT industry —
and they’re disrupting your position: the channels, revenue and pricing models,
partnerships and products you offer. You have to constantly innovate — not by
making incremental improvements, but by solving new customer problems —
even if it means disrupting existing business models.
Disrupting pricing: innovating with “free”
Pricing is one area that’s ripe for disruption: the unusual economics of
digital distribution and the availability of free content has dislocated pricing
expectations. You’ll have seen bands like Radiohead reap the rewards of “name
your price” experiments, but niche artists can benefit too. Comedian
Louis CK offered a recording of his live show himself for download
for just $5, with no DRM. It went viral, selling 200,000 copies in 12
days. Now he’s avoiding Ticketmaster to run his own tour — making
$4.5 million in 48 hours.
Mobile app companies like Zynga have used the “freemium” model:
they offer the main smartphone app for free, and generate revenue
through in-app purchases (it now has 22 million daily users). Amazon
sells short stories and articles as “singles” for a fraction of the cost of a book
— it has even posited that in future books will be free, supported by ads. TV
shows and songs now sell individually instead of as albums or series. New rental
models are emerging, too.
Disrupting distribution: global, multi-channel launches
Timing is another opportunity. In a globalised world, where digital assets can be
distributed instantly for nearly zero cost, there’s no excuse in the consumer’s
mind why a film or TV show should launch in London three months later than
in New York. There’s no reason why they can’t watch the DVD they just bought
on their phone or tablet as well as on their TV, or have to pay twice for the
privilege. For many consumers, this is where piracy comes in. Some publishers
now launch films globally and on all media simultaneously, and sell “triple-play”
packs that include DVD, Blu-ray and digital versions of films for convenient use
on different players. But why let any delay get in the way of revenue? Magazines
can launch the digital version of an issue while the paper version is printing.
Authors can serialise their books to superfans as each chapter is written.
Experiment and throw away the rules
In some cases the only way to innovate involves creative destruction of the
current business model. Author Cory Doctorow makes all his books and stories
freely available online and encourages fans to translate them into new languages
to expand his readership. He found his print sales increased. Despite the free
copyright-expired books available on most ebook platforms, and free access to
a huge library through Google Books, multiple studies have found that e-reader
owners buy more books than traditional readers. These examples show that
although loss leaders and free samples are not new concepts, they can still be
counterintuitive — which makes experimentation critically important.

Step 3: Co-opt threats
You can’t stop progress
History shows that trying to regulate away or otherwise deter the emergence
of disruptive technologies is often ineffective. It didn’t stop radio, the audio
cassette or the videotape; it didn’t stop the sale of blank CD-Rs or MP3 players.
And despite the enormous and ongoing efforts to strangle file-sharing through
court action, ISP bans, deterrent prison sentences, massive fines, warning
stickers, unskippable DVD warnings and DRM, it’s not stopping copyright
infringement of games, movies, music and books, either.
In fact, embracing a disruption can create new opportunities for the organisations
that initially seem most threatened by it. Many media companies have done
very well from radio, cassette, VHS and even digital sales. And there’s no reason
they can’t turn other disruptive technologies into revenue opportunities too.
Turn threats into opportunities
For example, while millennial consumers rarely now sit watching TV without
an Internet device also in front of them, this isn’t necessarily a threat to TV
producers in the battle for the living room — using tie-in apps,
programme hashtags and other tools, programmers can increase
their audience engagement by promoting social viewing (companies
like Zeebox, which bills itself “your TV sidekick”, are already tackling
this trend).
Broadcasters facing threats from users uploading copyrighted
material to YouTube, for example, can react not by issuing takedown
notices, but by automatically monetising their copyrighted content
using features like YouTube ContentID (which AMC used to monetise
user-uploaded Mad Men clips) and myvideorights.com (which the BBC uses).
Broadcasters can also host their own advertising-included streams on their
own sites and apps. Users get a convenient experience through their choice of
venue, and the broadcaster still gets advertising revenue.
News organisations concerned about their content being viewed for free online
have two options: they can lock their content behind a paywall like the UK’s
Times, or go all-out for social media referrals like the Daily Mail, which has
become the world’s most-shared news site. And in competition with live, global
networks like Twitter, they can choose to stay a strictly professional news
organisation or embrace reader participation and citizen journalism. Some
newspapers, like the Guardian, have made reader commentary a core part of
the value that their websites add.
Don’t fight the future
Incumbents have as many opportunities as startups to redefine the competitive
landscape. You can’t fight new technologies or disruptive behaviour — so instead
devise a strategy that embraces it and leverages it in your favour.
Further Reading:
In ‘Online News: to Charge or not to Charge?’ we tackle the thorny issue of how to
handle “free”
Social viewing tools like
Zeebox, which bills itself
as “your TV sidekick”,
can increase audience
engagement.
September 2012 COGNIZANT
9

Step 4: Find your secret weapon
Your foundation for getting fit for the future
So you’re ready to innovate and disrupt. But you’re not starting from square
one: you have infrastructure, processes, relationships, business models —
much of which may be valid despite the chaos around you. It can be hard to
work out what’s still relevant and important, and what’s weighing you down.
The Valuable Rare Inimitable Non-substitutable (VRIN) model 9 (Figure 2) can
help you impartially assess which assets will be useful in the future. In some
instances, the resources that brought you success in the past may provide little
strategic value in the future.
The VRIN model helps diagnose sustainable competitive advantage
V
Valuable
Figure 2
No matter how much it cost to acquire,
an asset is strategically worthless if it
doesn’t support your objectives. And
even critical assets can lose their value
— Blockbuster’s extensive network of
stores was vital when physical media
was too big to fit through letterboxes and streaming
was too slow — no more.
I
Inimitable
To be strategically valuable in the
long term, a resource must be hard to
imitate perfectly. Reputations (like that
built by the BBC or La Monde), patents,
contracts (with authors, movie stars or
charismatic executives), and licenses to
operate can be extremely hard to challenge.
Is data your most powerful VRIN tool?
Resources only drive advantage when
R
scarce. When evaluating the rarity of
a resource, it is essential to include
Rare not only current competitors but also
companies that could enter the industry.
Many common resources are important
— you cannot transact without them — however, don’t
confuse these “table stakes” with truly rare sources.
N
Non-substitutable
for the same listeners.
Even if competitors can’t imitate your
resources, assets that seem unrelated
can serve as a strategic substitute. For
instance, while none of the online music
services have broadcast licenses, they
compete with traditional radio stations
Rebuild around VRIN assets and activities
We recommend you evolve or rebuild your strategy around the VRIN core
you identify (along with essential support functions). You can shed many of
the other business functions to create a leaner operation, or outsource to
a strategic partner that can be more efficient at them. Plan to reduce your
dependence on resources that are currently VRIN but that are declining in value.
For instance, as digitisation continues, print-related skills, infrastructure and
facilities will decline in value. For directory services like Yell and Pages Jaunes,
it may not be long before paper directories disappear entirely. The VRIN part
of these businesses will be the trusted brand, processes and relationships for
categorising and dealing with thousands of local businesses nationwide.
Amazon can track exactly how long Kindle users spend reading each page, when they give up on
a book, or which kinds of sections they find most interesting. In aggregate, this data is incredibly
valuable to commissioning editors and authors trying to find an audience. Detailed analytics about a
book’s impact takes away some of the guesswork involved in publishing.
10 COGNIZANT September 2012

Leverage VRIN to grow your business
VRIN resources don’t just support primary operations: they can create secondary
revenue. For instance, media providers often have exclusive and detailed data
about their subscribers’ consumption habits, gathered during service delivery.
As well as using this to improve their service, they may choose to sell the data
to advertisers, to help them target viewers better. Media providers can give
advertisers granular data about advert results, and even correlate viewing
habits with the sites that logged-in users chose to visit on their tablets or
smartphones — Brightcove announced just such a dual-screen solution based
around Apple’s AirPlay. For advertisers trying to get closer to consumers in a
multi-screen home, this kind of data is incredibly valuable. While offering such
capabilities may require new investments in data warehousing, master data
management, identity-management and analytics capabilities, they provide an
opportunity to leverage a VRIN asset and make the move away from non-VRIN
activities less painful.
Step 5: Focus on your core role
VRIN is a great tool for assessing the value of assets. But what about assessing
your overall strategic position in the market? The PSD framework lets you look
past existing structures to diagnose how you really provide value.
What is PSD?
Organisations do not exist in isolation, but as a node in an industry value chain
or network, performing one or more functional roles. Profit ultimately comes
from reducing inefficiencies — friction — during these transactions. And doing
that adds value for customers and creates a competitive differentiation. There
are three basic roles in these industries. (Figure 3):
The PSD model
PRODUCTION
The act of creating content (a
novel, album or TV show) and
the manufacture of physical
or digital media.
Figure 3
SEARCH
Matching different parties
together so they can trade 10 :
including consumers with the
right product, advertisers
with media, and information
goods with distribution
channels and platforms.
These are the basic ways that you create value, and you’ve probably tried to
optimise them to reduce friction: perhaps through vertical integration, where
your company handles as many activities as possible in the value chain; joint
ventures, consortia or alliances; or simply getting better at coordinating with
other players in the value chain.
PSD changes affect competitiveness
DELIVERY
Even if you continually improve your effectiveness at managing a given type
of transaction cost, your role can come under threat. Technological innovation
may allow a radical new way of performing your specialist function much more
The movement of goods:
whether paper or bits and
bytes. We also include
physical and digital storage
here.
September 2012 COGNIZANT
11

Six questions to define your PSD position
To which function do you add
value?
efficiently, or make a different function the critical source of value in your
market segment (see “Shifting the value core: Demand Media”). For instance,
the advent of digital book publishing has entirely changed what production,
search and distribution means in that context. And as we will discuss in Section
7, new platform-owning intermediaries like Apple, Amazon, Hulu and YouTube
are inserting themselves into the search and delivery role of all kinds of digital
information and media goods — and once dominant there, are even taking on
commissioning production roles.
Examining your business with PSD
As markets change — offering new ways to manage production, search, and
delivery — organisations must reevaluate their sources of competitiveness.
Using the PSD framework to analyse how you create value and manage
costs helps identify potential disruptions, like the ones we’ve just discussed,
even if they come from formerly unrelated industries. Thinking in terms of
essential roles focuses attention on how a business creates value at the most
fundamental level. You can use PSD to identify and separate core revenuegenerating
transactions from supporting activities — a distinction that can
become blurred after long periods of stability. Assess your position using the
While companies may perform multiple tasks, often one function is the core revenue
six categories in Table 1.
generator, which the others support. Can you remove some of the non-core roles and
focus more on the profitable ones? Which PSD roles do each unit in your organisation
play? How does each role reduce transaction costs within the value chain?
How is your function changing? Is your company’s role defined by a specific process or technology? How is that technology
being affected by current realities? How can you continue to reduce friction? Will two roles
that are currently integrated remain integrated in the future?
Who else can perform a role
better than you can?
What opportunities do you
face?
Do competitors inside or outside of the traditional industry boundary offer similar
functions and value? Can new technologies or business models offer greater efficiency?
Can you perform a new role for customers or other companies, either by yourself or
through an alliance or joint venture?
What threats do you face? If up- or down-stream links in the value chain disappear, will you remain relevant?
Can you add value by
performing multiple PSD roles?
Figure 4
Shifting the value core: Demand Media
In the world of “how to” books, Demand Media realized that the key value to consumers is not
producing or delivering the content (the traditional focus of publishers), but reducing consumers’
cost of searching for answers to their questions. The organisation manages search by crawling the
Web to learn what topics interest consumers. Production itself is outsourced to low-paid freelancers,
because for a large segment of the market, content only has to be “good enough”. It optimizes for
search engines so that people can easily find their content. Finally, it matches advertisers with people
specifically interested in topics closely related to what the advertiser is selling. In short, Demand
Media has changed the PSD emphasis of the segment to centre on easy, relatively frictionless search.
12 COGNIZANT September 2012
Is your competitive advantage derived from the synergy of performing multiple PSD roles?
If one of your roles is disrupted, will your other roles still manage transaction costs more
effectively than other companies?

Step 6: Build virtual value networks
Is your structure holding you back?
Using the VRIN and PSD models you can identify the assets and capabilities
that are truly valuable in your current market environment, and clarify the
core value role you play in the industry value chain. But chances are that your
business isn’t optimised around those assets and that core role today. Many
businesses are rigidly structured around their processes and activities, rather
than value creation, leaving them vulnerable to disruption as industry value
structures shift: unable to move between the production, search and delivery
stages, or to pursue alliances and partnerships in search of value creation.
Introducing business virtualisation
This is where the concept of business virtualisation comes into play. Business
virtualisation means stopping defining yourself by your existing structures,
and instead focusing on how you can leverage core VRIN resources to improve
production, search and delivery. You can keep core and key supporting
functions while shedding peripheral activities and forging alliances, creating a
virtual organisation, value network or ecosystem that covers every link in the
value chain with maximum competitiveness. Vertically integrated companies
might find that they achieve better PSD value chain synergies by matching
internal business units with external partners rather than aligning them with
less competitive units that happen to be part of the same ownership structure.
Virtualisation can encourage innovation within components of the value chain,
and can enable companies to be more agile in adding new components to their
offering to capture new revenue channels. It can also prevent companies or
units with affiliated ownership from suppressing innovation simply to protect
current revenue streams — such as discouraging a video streaming unit from
expanding its offering in order to preserve DVD sales.
How to adopt virtualisation effectively
• Focus not on the organisation, but on adding unique value and managing
transaction costs within the industry — the goal is value creation.
• Concentrate on core competencies and key supporting functions while
shedding peripheral activities.
• Partner with other companies to make a complete, end-to-end value network
— virtual integration, not vertical integration.
• Ensure that each organisation in the network brings VRIN assets or
capabilities, and that the network as a whole is VRIN within the wider industry.
• Continually scan for disruptive threats that require coordinated responses
from multiple network members — virtualised value chains tend to focus on
optimising each component independently unless there is active coordination.
September 2012 COGNIZANT
13

Networks effect mean that
most platforms tip toward
just a few major platforms,
such as iOS and Android in
the smartphone market.
14 COGNIZANT September 2012
Step 7: Plan for platforms
Platformisation is here to stay
Platforms are foundational technologies that serve as gateways, reducing
inefficiencies and friction between users who want to interact or transact
business with each other. They make transactions happen by:
• Connecting: offering the mechanism by which business is done — for instance,
Amazon Marketplace taking orders from customers on behalf of sellers.
• Expanding: providing a variety of content in one place. GQ magazine UK found
that iPad users were buying back issues because the platform made it easy to
find them — enabling GQ to monetise its archive.
• Matching: Facebook matches advertisers with appropriate consumers.
Amazon recommends related products.
• Pricing: Platforms can set prices within their ecosystem, just as iTunes
standardised prices for music and video. 11
Whereas ‘value chain’ implies a linear structure, the concept of
platforms recognises the true complexity of modern business. Users (such as
developers, rights owners, and consumers) transact with each other across the
platform — on YouTube, video creators, viewers, advertisers and rights owners
all interact. 12 And participants can simultaneously play more than one role — on
eBay you can be both buyer and seller.
Network effects cause platform consolidation
The most critical characteristic of platforms, whether eBay or Facebook, is that
they are subject to network effects, for both buyers and suppliers. 13
The more consumers that join, the more valuable the platform
becomes: generating content, reviews and ratings that add value
for members. A larger base is attractive for suppliers too, as it
grows the revenue opportunity. For example, Facebook is useless
to you if your friends aren’t on it. But once they’ve joined and the
network reaches critical mass, it’s much more valuable to you —
and to companies like Zynga that offer games to Facebook users.
Network effects can be negative, too: it’s hard to stand out when thousands of
developers or sellers are competing for the same customers. And size is not a
guarantee of continuing success, past a certain point additional users add little
value. Network effects by themselves do not necessary provide a sustainable
advantage: users may migrate from a dominant platform to a newer, more
exciting one — as happened to MySpace when Facebook emerged.
Considering your platform role
Your company, or the virtualized network that you’re part of, can take a number
of different roles in platforms. 14
You can choose to supply content to another company’s platform — for instance,
you might be a book publisher that loads content onto Kindle. There are two
ways of affiliating yourself with such platforms: the first is via an exclusive deal,
where the platform owner demands that you only use its platform (this happens
a lot in video games). Or you might take a platform-agnostic approach, using
many platforms — apps are often available for iOS, Android and BlackBerry OS.

Alternatively, you can create or sponsor your own exclusive platform, as
Microsoft does for the Xbox — where you control who can join the platform and
what offerings can be transacted on it. You can of course run a platform and
provide the content for it yourself, or collaborate to:
• Create a shared platform: compete with each other by offering differentiated
but compatible versions of the platforms — for example, ten companies
collaborated to develop the DVD platform, after which they competed against
each other by making DVD players.
• Develop a joint venture platform: jointly create a new entity — for
example, UK TV companies are working together on YouView.
• Adopt a licensor platform model: develop the platform and then
grant use licenses to others — for example, Sony licenses its Blu-ray
platform to hardware manufacturers and video companies.
Platform strategy
How do you choose between the different kinds of platforms, roles and affiliation
strategies available to you? It’s complex. A sustainable platform strategy must
be built upon the PSD roles you play, leveraging VRIN resources. But your choice
may be limited if a few platforms already dominate your market. The following
sections show how to make the decision.
Evaluating joining a platform
This is often the default choice when a massive platform, such as Kindle or
iTunes, presents a ready-made route to market. That’s why Waterstones chose
to work with Kindle instead of building its own ebook platform. But scale is not
the sole determinant of success — value creation through the PSD framework is
what attracts and keeps users. So consider:
You also have to choose your affiliation. Making an exclusive commitment —
even if forced into it by the sponsor — may help the platform sustain its market
position, and means you avoid the cost of dealing with multiple platforms. But
it also ties you in to the platform’s fortunes, and can mean you sacrifice shortterm
revenue that you could have gained by participating in other platforms.
Creating a platform
The main reason to create a platform is to avoid being at the mercy of other
platform owners. Although you will have to shoulder the costs of creating,
running and marketing the platform, you avoid paying any money to Amazon
or Apple, and keep hold of your brand, pricing schemes, terms and conditions,
the usability of the product or service, partnerships, user data, and user
relationships. That’s why the Financial Times chose to abandon its iPhone app
to move to a Web application over which it has complete control.
Value, VRIN and PSD are still the most important factors in success. JK Rowling’s
Pottermore can go up against Amazon because it has the Harry Potter brand.
The BBC can make iPlayer work because it has a vast amount of content. But
for most providers the biggest challenge will be gaining the sustainable network
effects in a contested space.
If you create a joint venture
network, increase network
effects by keeping it open
to new suppliers.
September 2012 COGNIZANT
15

The main reason to create
a platform is to avoid being
at the mercy of other
platform owners.
Does the platform offer
a compelling VRIN value
proposition?
How can you improve your chances of success?
You can work to overcome the barriers to entry facing a new platform by creating
a platform as part of a virtualized network with other partner companies. If
leading incumbents form a virtualized value network through a joint venture,
they can control key VRIN relationships, such as marquee content (the backcatalogue
of major movies, albums and books, for example) and superior search
and delivery technology that will attract consumers. A joint venture model will
avoid the damage of competition and spread the costs of development.
New platforms succeed by offering greater PSD value and lower
friction than dominant platforms. One way to increase the value
of the platform’s offering is to offer marquee content exclusively
through it. For example, if a joint venture bookselling platform
sponsored by the major book publishers offered exclusive early
access to books by popular authors, this would be a VRIN proposition
that Amazon and other platforms would have difficulty matching.
Regardless of the value your platform offers, you’ll need to consider how to
break through in the face of competitors like Amazon, Netflix, YouTube, Apple
and Spotify. These organisations hold strong positions in markets that will only
support a few strong players. To succeed you have to overcome network effects,
15, 16, 17
build demand for differentiated offerings and mitigate multi-homing costs.
Overcoming network effects
Five questions to ask when joining a platform
How might the platform’s value
proposition change?
Will your offering be VRIN
within the platform?
What opportunities can you
create?
How does your PSD role
add value to the platform
ecosystem?
Figure 5
16 COGNIZANT September 2012
There are three strategies for reducing the strength of network effects:
• Compatibility: Compatibility with users’ data and existing tools overcomes
lock-in. The Financial Times mobile Web app works on all devices.
• Bundling: Sony increased adoption of the Blu-ray platform by making the PS3
a Blu-ray player creating an installed base.
• Inimitable benefit: Users will try a new entrant if it offers an unmatched
benefit — such as exclusive content from your favourite band.
• Superior offering: Craigslist offered cheaper, faster, photo-based ads which
caused users to switch away from newspaper classifieds.
What makes the ecosystem VRIN with you as a member? Size alone is not a sustainable
competitive advantage: iOS and Android quickly stole market share from Symbian and
BlackBerry, despite their scale advantage.
What if one of the key technology or content suppliers withdraws? How will you be affected
if another provider joins the platform?
Do competitors inside or outside of the traditional industry boundary offer similar
functions and value? Can new technologies business models improve your offering?
You don’t want to be an expendable part of the network that can be replaced or excluded
from participation at a later date. Do you have marquee content or other unique asset that
will attract large numbers of users to the platform?
Do you produce content that will draw customers to the platform? Can your
search technology integrate with the existing platform to reduce search costs, thereby
giving the platform a competitive edge? Do you offer a delivery method that will streamline
or expedite the delivery process in some way?

Building demand
To take users away from a clear market leader in a mature market, you need to
find ways of generating demand for differentiation. There are three strategies:
• Target niches: Crashpadder (now owned by AirBnB) and CouchSurfing took
on general online classified sites by targeting specific niches. Qooq is a Frenchonly
tablet designed specifically for use with recipes in the kitchen. Nintendo
targeted the enormous, untapped casual gaming market with the Wii.
• Build preference awareness: Clear marketing can awaken consumer desire
for a product by educating them about a dormant need they have. People
were happy downloading MP3s until streaming services gave them access to
unlimited music from anywhere with a net connection.
• Introduce differentiation: You can compete by introducing something new.
For example, the Wii suceeded in the video game space by introducing a
revolutionary new controller; Microsoft later responded with the Kinect.
Reducing multi-homing costs
Markets tend to “tip” to a handful of platforms when multi-homing costs — the
costs of belonging to multiple platforms, financial and inconvenience — are high.
Three strategies can help you to overcome this barrier:
• Penetration pricing: Low prices can encourage users to take a chance. Many
services offer their platforms free and charge advertisers to cover their costs,
or bear the cost of a free trial to stimulate demand. Penetration pricing can also
lure supply-side users to a platform — for example attracting developers with
favourable revenue-sharing models.
• Compatibility: You can attract users by making it easy for them to migrate
content from their current platform, or to use your platform with a wider range
of devices, services and content than other platforms offer. For example Blu-ray
players are backward compatible with DVD.
• Bundling: You can use an attractive device, service or other platform to drive
demand for a new platform. Consumers were indifferent to the high-definition
successors to the DVD, but Sony got millions of Blu-ray into homes by including
them in its popular PS3 console.
Are you ready for change?
You can’t ignore the changes that technology is making to the supply and demand structures in
your industry. The future is digital, filled with unpredictable innovations that usher in new modes of
production, search and delivery. Some of these innovations, such as platforms, will fundamentally
change the industry, and all media players must decide how to deal with the disruption they create for
your infrastructure, channels, pricing and even ownership structure.
The seven principles we’ve outlined in this paper will help you navigate through the maze, making
brave and often counterintuitive choices about how you will react to new entrants and reshape your
organisation to offer value to customers. Whether you’re an incumbent or a new entrant, your success
will depend on a carefully crafted strategy that always emphasises the core PSD role you intend to
play, the quality of the VRIN assets and capabilities you bring to the table, and the agility with which
you can innovate and react to change. The future is now. Are you ready for it?
If you’d like to talk more about the ideas raised in this paper, and how your business can adapt, contact
Neil Dowling (neil.dowling@cognizant.com).
September 2012 COGNIZANT
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18 COGNIZANT September 2012
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About Cognizant
Cognizant knows your industry and the challenges you face. We have 7,000 associates
with many years of industry experience, dedicated to information, media and
entertainment clients. We work with four of the top 10 global media companies and
all of the major entertainment studios, offering many of the technology solutions that
can help you transform and get fit for the future: such as media asset management,
master data management and rights management. To stay on the forefront of trends
in the industry we run a dedicated digital media lab, media mobility group, media
innovation group and technology delivery group. You can find out more about our
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About the MIT Center for Digital Business
Founded in 1999, the Center for Digital Business (CDB) is the largest research center
focused on digital business in the world. We are supported entirely by corporate
sponsors, like Cognizant, who we work with closely in directed research projects.
The CDB is focused on understanding the impact of technology on business value,
and developing tools and frameworks to help our sponsors maximise competitive
advantage. To learn more, please visit http://digital.mit.edu.
September 2012 COGNIZANT
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