Three Longs & Three Shorts

Distribution and Demand

Author: Ben Thompson
Source: Stratechery (https://stratechery.com/2021/distribution-and-demand/ )

Last summer, following Jio’s slew of deals with global investors and tech companies, Ben Thompson, one of the more independent thinkers about the business of modern day technology, put out this piece connecting Jio’s telecom infrastructure to the layers of services including media content, built on top of it. In his latest piece, he analyses the takeaways from AT&T’s decision to hive off its content business – WarnerMedia and instead merge it with Discovery to form an independent content business (AT&T had acquired TimeWarner in as recently as 2018, with the view to monetise its telecom subscriber base beyond just tariffs for voice and data). This decision to hive it off, as Ben puts it, deems that acquisition as a failure of sorts. Ben explains why – highlighting why distribution alone doesn’t hold the cards in today’s tech world. Instead he cites content (or equivalent, like ‘Search’ in Google’s case) as the key to customer stickiness and to maximise value of the content, you can’t be restricting the customer base to just one network.
He quotes from a WSJ article:
“Cable mogul John Malone, a major Discovery shareholder, said that although he believes Time Warner is doing fine, merging content and distribution usually doesn’t make sense. “I think that the technology of connectivity and digital technologies are one focus, and creating content that people get addicted to is another focus,” he said. “And you seldom would find both of those in the same management team.”
…AT&T, on the other hand, acquired highly differentiated content with its acquisition of Time Warner (which it renamed WarnerMedia). The problem for AT&T is that differentiated content has a business model that is orthogonal to AT&T’s core business. Whereas AT&T competes for customers in a zero sum game, content is best leveraged by reaching as many customers across as many distributors as possible. That means that what would have been best for AT&T’s core business — being the exclusive way to get access to WarnerMedia content, thus giving a reason for customers from Verizon or T-Mobile to switch carriers — would have been value destructive to WarnerMedia, because the cost of producing its differentiated content would have been amortized across fewer customers.
AT&T instead went in the opposite direction: by creating HBO Max, WarnerMedia stopped selling content to the highest bidder and instead started bidding for content itself, which was the worst of all possible worlds, at least in the short run. HBO Max content was limited in reach — it was only available to HBO Max subscribers — which meant that its content was leveraged against an even smaller base than, say, AT&T’s customers. The potential payoff, of course, was a service like Netflix, which reaches everyone everywhere, no matter their carrier or cable provider (which, of course, raises the question as to what strategic benefit would have accrued to AT&T’s core business even in the best case scenario).
This is where it is important to be precise about the meaning of “distribution.” For Netflix, distribution is the Internet, which is to say it is completely commoditized. You can watch Netflix on your phone, on your TV, on your console, on your computer, on your set-top box, basically through any device that has an Internet connection.
….In fact, everything that is distributed via the Internet is effectively free. Netflix, Oath, HBO Max, Google, Facebook, Wikipedia, Spotify, YouTube, Stratechery — all are effectively free to access for anyone from anywhere. This is why I get so confused when companies or regulators complain about Google or Facebook controlling distribution; neither company controls the cables or routers or switches that deliver content. They have zero control of distribution. Rather, what those companies control is demand.
…What makes Google and Facebook so successful is that they are the linchpin upon which these massive markets pivot, in large part because both services increase in functionality with scale: more sites and more links mean better results in Google, which drives increased usage, which provides a feedback function allowing Google to refine its results; similarly, more people and more content mean stronger networks and more engagement on Facebook, which drives increased usage, which provides a feedback function improving the recommendation algorithm.
…Notice how much different this kind of competition is from that engaged in between true distribution companies: AT&T and Verizon spend a lot of up-front, but the payoff is physical lock-in; Google and Amazon, meanwhile, spend massive amounts of money on fixed costs, but they don’t have any lock-in at all: they win not by limiting customer choice, but by being the top choice in a world where alternatives are easily accessible. At the same time, while a dependency on physical infrastructure limits AT&T and Verizon’s scale, companies like Google, Amazon, and Facebook have free distribution — remember, they’re on the Internet! — which means they can serve anybody.”
It will be interesting to see how the dynamic between distribution and demand plays out here in India.