Integration is the most efficient facet to augment your business model
And not just for the giants of the industry
Last year, in December, I ran a piece that held the catchy headline “Cross-media partnerships hint at a deeper consolidation to come.” In it, I discussed the various business models that could be applicable to some of the giants of the industry as they move from the exponential growth of their services to more mature models which require optimisation of costs, cross-pollination of advertising and retention of customers within an ecosystem.
In the last year, many of my predictions have either come true or are of greater focus: Netflix has indeed moved into games, mobile and all, and is even experimenting with merchandise. AVoD has exploded as a tool of strategy with the acronym FAST being a regular feature of any strategy-focused conference panel. Cloud subscription gaming is increasingly looking to become part of a solid home-ent telco bundle, while Spotify continues to test and roll out more interactive features, looking at making more use of its dedicated user base (despite missing targets).
Now, at (hopefully) the latter days of the pandemic that shook the world, it is a good time to revisit this topic. Not just to look at what each part of the puzzle is, but also to discuss how they fit together within a single entity.
Not just the very large
One of the most striking developments I have noted over the past year is this: Not only are large entities looking to make the most of their franchises in this way, but many smaller companies have realised the benefits of targeting multiple vertices with a single franchise. Indeed, some smaller and more nimble companies have carefully designed their processes to take advantage of these efficiency gains.
In the run-up to MipCom I received a slide deck from the German company Kiddinx Media, and later had the pleasure of sitting down for a coffee with Karl Blatz, Head of International Business Development, and Carsten Schwarz, Head of Sales, outside of the Palais. Kiddinx has a number of franchised IP series, but their explanation of how they view the role of IP in their business really hit the nail on the head. With permission, I share their content ecosystem.
While Kiddinx is very obviously a kids specialist, it exemplifies the principles of a vertically integrated business. Not only has the company sold 10m videos, but it has also taken an 86% awareness among its target demo, and then doubled down by selling 20m birthday cakes.
Kiddinx has literally built the icing on its ‘IP cake’ using iced cakes.
The key takeaway here is not that every company should start selling confectionary, but instead, it is this: If, as a business, you consider the relationship with your end-user the product, and not whatever it is you actually produce, then new avenues of monetisation will open to you. Managing relationships in this way is not easy, it requires wider skills and a ‘fail fast’ mentality, but the results of a successful broadening of focus are obvious in terms of both margin and long-term resilience.
Telco bundle of the future
Telcos are a fairly obvious example of entities that thrive by deploying vertically integrated business models; the vast majority of them bundle multiple services to single consumers. For the last decade, many telcos have struggled with falling data prices, increasingly stringent regulation, and of course, unbundling stemming from the streaming revolution.
But Telcos continue to be the gatekeepers to what is now, for many, their single most important utility – data. Not only does it bring entertainment and news, but for millions across the globe, their telco now provides them with the means to work from home and earn a living. For this reason, telco’s will always be relevant and central to people's lives, and using this as their base, will always be able to bundle, upsell and, by virtue of asymmetric competition, in many ways outlast their rivals.
Much has been talked about in the role of telcos as increasingly agnostic aggregators, but often this suggestion is made mainly looking at bundling a greater quantity and variety of video services. This of course forms a logical core, but as sophisticated devices become cheaper and more compatible, there is no reason for this to be limited in such a fashion.
Consider cloud gaming; while solutions have been created which solve the technical demands for interpreting signals and processing games remotely – the last remaining pieces of the puzzle are mainly logistical.
Firstly, to sell cloud gaming, a relationship and trust with a user needs to be established to secure a subscription, and crucially this must be a long-term relationship, based on years, not months. Notably, in the gaming space, the platform Steam has long held the largest piece of the pie as a retail platform. To build trust and relationships, rival platform Epic Games Store is running a campaign that has offered free games every 2 weeks ever since the store’s launch in Dec 2018, increasing to every week since June 2019, just to ensure that users have sufficient reason to use, and trust the platform with their money and time.
Secondly, there must be a supply of low-latency information. While high bandwidth is great for downloading and streaming media, when a medium of entertainment is reliant on maintaining a response time in the fraction of a second between a user and their screen, most systems exhibit a major failing. This, in many cases, extends to wired broadband, fibre, or otherwise. To solve this issue, there are two options: 1. Deploy new technology that can provide the response times needed over an open network, or 2. Provide a managed network where capacity data for cloud gaming is supplied over private networks where possible. In both cases, telcos hold the solutions via ownership of wired networks and the ability to deploy 5G, with its inherent super-low latency where needed.
Look at who you sell to, not what you sell
I once attended a series of lectures on the basics of business strategy. In it, the guest lecturer, who was from Siemens Vai, asked the audience what kind of business Siemens ran, what was their goal.
A plethora of suggestions came from the audience: steel, technology, manufacture, industry etc... all of which were dismissed until eventually, the lecturer turned to his next slide – which was a single image on a white screen, the image being a large stack of dollar bills. His point: Siemens was in the money-making business, and a business that focuses on something other than making money, is a charity.
It is all too easy to get distracted by the quality of your product, the desire to keep your customers happy and the small intricacies that make your job fun, and indeed much of this is laudable and core to the sustainability of your business. But if the last decade is anything to go by, the businesses that are on top now are those who thought long term, outside the box, and were flexible. Those who rigidly stuck to the same business model that they began the last ten years with are often lagging behind.
Companies that have reinvented themselves many times over are among the oldest in the world (Nintendo, IBM, Remmington), while those that refuse to diversify, sputter and fail. Take Nintendo, which was founded in 1889 and was originally a manufacturer and retailer of handmade playing cards. Today, by following the customer relationship and need for entertainment, rather than focussing on its product (cards), Nintendo provides a huge range of hardware and software, and via its franchised IP; music, TV and film content.
IBM, another centennial company has evolved from a manufacturer of mechanical computing machines to providing a vast array of hardware, software and cutting-edge technology including true AI and quantum computing. These products and services are far from the company’s original core, but relate to the specifics of the consumer relationship and associated needs.
Vertical integration is a huge part of not only building an efficient business but also as the building blocks of diversification and sustainability. Looking at how your customers perceive your business is the first step, followed by using that understanding to design and supply complementary products and services.