Internet television or streaming television content digitally has provided an alternate channel for disseminating content and here, too, there are behemoths. The distribution of content over the Internet is termed OTT (over- the-top). The distributors are also called edge providers, to distinguish them from broadband providers (ISPs such as Comcast, ATT) and backbone networks (Level 3, Cogent, Akamai), which provide long haul fiber optic links and high-speed routers carrying vast amounts of data.10 Dominance of the broadband segment by OBs such as Comcast suggest that there are significant economies of scale involving fixed costs in setting up the infrastructure - a frequent argument made by the opponents of net neutrality, an issue discussed in Chap. 7.
The unbundling ofdistribution from creation has allowed dissemination of content produced by independent artists, along with the traditional fare produced by the major television studios (NBC, HBO, etc.). Digital distribution channels substitute for sales in physical distribution channels such as television and downstream retailers like Walmart, who sell DVDs of television shows. Further, since pirated television content may already be available on the
Internet, streaming content may have to be underpriced to compete with free, pirated content. Importantly, streaming content may increase interest in the shows leading to legitimate purchase and decreased piracy. Increasing a product’s awareness by providing content on multiple channels is like advertising, which has a cost, but the benefit is increased interest and legitimate sales .11
There are two types of OTT intermediaries: active resellers with control over the pricing and marketing details of the transactions passing through their channels, and those who simply act as a passive marketplace .12 Digital downloads ofcontent through Apple’s iTunes Store or Comcast are in the category of reseller since the Apple, and not the content producer or artist, determines the terms of sale. Warner Brothers and Sony Entertainment are also resellers or distributors. Extending the reach of marketing, United Artist Entertainment, the movie studio, has ownership interests in Regal Entertainment Group, which owns the theatres, and thus monitors marketing and distribution.
On demand streaming services such as Spotify and Pandora for music and Amazon for streaming video are examples of the marketplace, which is a passive intermediary. The artist, as was the case with Radiohead and Taylor Swift, retains control over the streaming distribution of his or her creations and not the intermediary.13
For mobile service, there is the further concern of interoperability or compatibility across different OTT platforms, such as those based on the iOS operating system and the Android system. Technical compatibility across different platforms has strategic implications and therefore should be considered as more than a passive holdover from prior generations of products. It can be a strategic business choice and, in this sense, is a double edged sword. Figure 5.2 illustrates the difference between single-homing for users, where they are limited to a single OTT platform and multihoming, where they can access both OTT #1 (iOS) and #2 (Android). Multi-homing for the users enhances their choices. But it also lowers the benefits of price decreases since the gain in demand due to lower prices is shared across platforms; this is the indirect network effect. With limited compatibility, content and apps for Android supported devices remains distinct from content for iOS supported devices. There is increased competition for users because of this all-or-nothing market. Compatibility between the two operating systems would decrease the need for market- enlarging competitive strategies since the gains from a larger user base are shared by all platforms.
Fig. 5.2 Single and multi-homing for users
In the digital book market, the early intermediary as resellers were Amazon (launched in 1995) and Barnes and Noble (launched in 1997). Booksellers used the wholesale model where the retailer, as the intermediary, intercedes between the publisher and the consumer, who typically would pay double the wholesale price. When Amazon entered as an online intermediary, it paid the wholesale price to publishers and resold at deep discounts (often at a loss) to consumers. When Amazon introduced the Kindle in 2007, it offered bestsellers for $9.99, threatening the publishing industry. Subsequently, Apple released the iPad in November 2009 and negotiated with five publishing companies (Hachette, Harpercollins, Macmillan, Penguin, and Simon & Schuster), inducing them to join the platform by raising the prices of bestsellers to $ 14.99. The agency or retail model, offered by Apple in its iTunes store, is one where the publisher sets the retail price and Apple gets a 5 % commission on each sale. The Department of Justice sued Apple, along with the publishers, in April 2012 over collusion in setting the price, in violation of Section 1 of the Sherman Act. The court claimed that Apple and the publishers desired to increase the publishers’ pricing power to destroy the monopoly exercised by Amazon. It is interesting to note that Amazon’s below-cost pricing is itself anti-competitive since any entrant would lose money if it matched Amazon’s prices.14