If you were at this year's Consumer Electronics Show in Las Vegas, you might have seen Cisco (CSCO), a manufacturer of networking equipment, unveil its ambitious plan for new software to integrate consumers' home networks; or chipmaker Qualcomm (QCOM) unveil its own prototype consumer device, a "pocketable" computer; or Comcast (CMCSA), a cable television provider, inaugurate a Web site that offers almost 3,000 hours of free television programming and the ability to program a digital video recorder from any location.
A decade ago we might have talked about these kinds of deals using terms such as vertical integration, where a company adds a business that specializes in a different area of the creation of a final product—say, when Time Warner (TWX) bought AOL. Or we might have explained a transaction as a case of horizontal integration, where a company merges with a rival to gain scale, as when Sprint (S) combined with Nextel.
These days, many corporate moves are being discussed in terms of a struggle between "open" and "closed" systems. On one side are such concepts as unlimited music, open software, and free video available on multiple Web sites. On the other are arrayed "locked" phones, proprietary software, and so-called walled gardens.
But the open/closed debate obscures a more compelling way to understand current technology and media trends. Those trends are part of the creation of what we call the Broadband Value Circle, where the individual customer, who both consumes and creates content, stands only a single step away from the plethora of businesses that contribute to the complete broadband experience. These include software developers, network operators, device manufacturers, and Web site owners.
One Degree of Separation
This is a profound change. Think of the Euclidean distinction between a straight line and a circle. If you stand at one end of a straight line where point A is at your end, you're a little farther from point B and very far from point C, at the opposite end of the line. But if you stand in the middle of a circle, you're precisely the same distance from points A, B, C, and all others that lie on the circle.
Likewise in the Broadband Value Circle, consumers stand in the middle of the economic circle, with only one degree of separation from the various parties. It used to be that value reached consumers through a straight line, in what's known as a vertical value chain. For example, company A builds a windshield and sells it to an automobile company B, which in turn sells a finished car to the consumer, C.
That's not how it works anymore. In the era of the Broadband Value Circle, everyone can compete in everyone else's market. Your supplier today may be your competitor tomorrow, and you may find that you are simultaneously that company's supplier.
Consider the creation and distribution of short videos. A consumer uploads a home video to YouTube that, in effect, competes with NBC's (GE) own Web site, which in turn distributes video snippets of The Office, all of which are religiously watched by the consumer. One person is simultaneously a creator, competitor, and consumer.
Now consider the new paradigm from the perspective of a wireless device manufacturer. A cell phone maker—say, Nokia (NOK) or Motorola (MOT)—acts as the provider of devices that operate on a wireless network. But as illustrated by Apple's (AAPL) iPhone, a device manufacturer can also establish a direct, brand-intensive relationship with consumers, almost circumventing the network operator.
And when Nokia announced near the end of 2007 that buyers of its high-end phones will get 12 months of free, downloadable music from Universal Music Group that can be played on either the Nokia device or a personal computer, the Finnish phonemaker moved directly against Apple as a distributor of other people's content. Again, one player takes on multiple distinct, simultaneous roles. In this case, the manufacturer is a supplier of devices, creator of brands, and distributor of content.
Finally, there's the Google (GOOG) strategy. Like Apple, Google wants consumers to think of the device they carry in their pocket not merely as a phone, but as a computer that communicates. By announcing plans for open software standards that will let developers anywhere create wireless network applications, Google can help make that communicating computer look and feel more like the World Wide Web. Now, if Google makes good on its stated goal to purchase wireless airwaves, the company could also get a platform for the delivery of those applications. In this instance, Google could play the role of content supplier and user, as well as the vehicle for distribution of that content.
For any company hoping to be part of the new value-creation geometry, the shift will require evaluation, experimentation, and evolution.
Evaluate and Experiment
First, businesses need to evaluate the multiple roles they can play, making clear-eyed analyses of the impact on revenue and profit. They'll need to pay special attention to the means by which roles can be taken on simultaneously with success. So, for example, Nokia thinks in bold ways about the Web. But if Motorola stays largely focused on its traditional status as a handset manufacturer, it will continue to struggle.
What's more, companies will have to experiment with the combinations that can accompany the various roles. For example, record labels and TV and film studios are putting in place multiple distribution schemes—with or without Apple's iTunes, for a fee or free with advertising, with or without copyright protection software that limits how it's played. Companies situated along the Broadband Value Circle are by no means fungible; they have separate competitive advantages and their brands appeal to differing consumer aspirations. But one of the hardest tasks, especially for a big company, is to find small ways to test new possibilities.
Evolution in thinking is critical as well. At a recent dinner of high-tech elites, we asked a simple question: Is the iPod an example of innovation? Many said no, arguing that the digital music player doesn't represent a big technological advance. They're only half right. Innovation isn't just technology; it's also the application of ideas in the service of creating new value, and that can involve design and fashion as much as software and hardware.
For the consumer, all this creates multiple ways to participate in the creation of value in concert with companies lying at points around the circle. That certainly includes Facebook, MySpace, and YouTube, but we may look back and think that home pages and amateur videos were the 21st century equivalent of daguerreotypes—only a glimmer of how value could be created when the consumer's interplay with content mixes with the desire of companies to experiment, evaluate, and evolve.