Using BATNA to Create Leverage

If you're trying to gain concessions or get a better contract price, raise the value of your best-alternative-to-negotiated-agreement, also known as BATNA. Apple seems to be doing this with the Apple TV. Some quick thoughts:

  1. Apple is creating an Apple TV app store with interactive, subscription-based sports content apps from MLB and possibly the NFL. This creates a way for sports content providers to reach their audience directly, without licensing the content to a cable sports network like ESPN. This kind of distribution alternative improves the value of Apple, MLB, and the NFL's BATNA relative to ESPN, which has historically aggregated sports content and made it available through ESPN's cable channel. As Apple aggregates interactive, subscription-based sports apps from content providers like MLB and the NFL, and the audience for these apps grows, Apple's BATNA improves while ESPN's BATNA declines.
  2. The Apple TV app store makes Apple an aggregator of interactive app content, or content that can be manipulated by the app software infused into this content, versus static television content that cannot be manipulated. Aggregated, interactive app content increases Apple TV differentiation. The content specificity enabled by the Apple TV app store and by convenient/fluid Siri search also disaggregates cable channel aggregators like ESPN. ESPN provides an aggregated sports "buffet" rather than only covering specific sports like MLB or the NFL.
  3. The Apple TV app store will draw user time/attention away from the cable networks, likely hurting television ad sales.

Apple's efforts create pressure on cable networks to negotiate with Apple, as the value of the networks' BATNA -- preserving cable channel aggregation and/or the current system of lucrative affiliate fees that networks receive from cable companies -- goes down, while the value of Apple's BATNA -- a varied offering of subscription-based, interactive/specific app content -- goes up.

Given these dynamics it seems likely that major cable networks like ESPN and Disney will eventually offer interactive, subscription-based content apps through Apple TV. And the outcome probably won't be all broad-based, buffet style content apps or all highly specific content apps: a subscription-based ESPN app will likely exist alongside a more specific, subscription-based MLB or NFL app. Users will have more than one choice, depending on the job-to-be-done. Casual sports fans might prefer the ESPN app while hardcore baseball fans might prefer the MLB app.

I should say up front, I could easily be wrong about all of this. There are strong structural impediments to the changes detailed above, as noted by Ben Thompson at stratechery.com. Only time will tell.

The author owns stock shares of Apple. 

Heads, Long Tails, and Light Consumers

I'm currently reading Blockbusters by Anita Elberse and wanted to summarize a few thoughts on the book. Blockbusters, by Anita Elberse (Henry Holt and Company, 2013).

Elberse talks about the general effectiveness of blockbuster strategies, or the idea of a company focusing most of its resources -- including its marketing and talent funds -- on just a few products or services, whether it's movies, music, books, or electronic hardware. She makes a strong case for focusing on the "head," or sales driven by a few blockbuster products that are expensive to develop and market, versus focusing on the "long tail," or sales from targeting multiple niche market segments with a range of specialized products. Big profits are driven by the head and not the tail. Id.

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Citing William McPhee's Formal Theories of Mass Behavior, Elberse also makes the interesting point that "light consumers" who buy less frequently and know less about product alternatives tend to opt for the most popular choice. Companies with blockbuster strategies naturally monopolize light consumers. Id. "Heavy consumers" who buy a product frequently are more aware of their alternatives and are typically the ones who choose niche, long tail products. Id.

Ironically, McPhee found that heavy consumers tend to appreciate popular products more than the obscure products they often buy. Id. This suggests that heavy consumers of obscure niche products are prime candidates to eventually switch to more popular blockbuster products.

Elberse notes that YouTube and Netflix formerly seemed interested in pursuing long tail strategies, trying to provide a niche offering to every market segment. This strategy was enabled by the negligible transaction and search costs associated with digital goods. YouTube and Netflix initially seemed to believe that long tail sales would widen and lengthen because consumers would value niche offerings more than blockbuster offerings, leading to declining sales in the head and growing sales in the tail. This apparently hasn't occurred. Id. YouTube has since shifted its focus to premium "channels" from well-established stars/brands like Jay-Z, while Netflix is spending big on premium content produced in-house, like the House of Cards series with Kevin Spacey. Id.

The implications for companies like Apple seem pretty clear. Focus your resources, including your marketing and talent funds, on just a few blockbuster products, thereby monopolizing light consumers while also attracting heavy consumers. Heavy consumers may start with a niche product but they're likely to appreciate the blockbuster product more, making them prime candidates for product switching.

Addendum (added 8/26/2015):

The effectiveness of blockbuster strategies versus long tail approaches should also be good news for premium content producers like Disney, ESPN (a Disney subsidiary), and HBO. Regardless of whether consumers get this content through cable providers like Comcast or over-the-top services like Apple TV or Roku, premium, blockbuster content should remain a healthy source of profits.

The author owns stock shares of Apple.

HBO, ESPN, and Jobs-to-be-Done

There's a rumor Apple is going to simplify TV through fewer, more relevant channels and make TV more affordable and customizable. Applying the lens of low end disruption theory:

  • The standard cable package with ESPN and HBO overserves many customers -- it's too expensive with more TV channels than they want. These customers want something simpler and more affordable.
  • Apple can use an asymmetric business model to offer overserved cable customers: (1) more affordable television that's customizable and/or more focused on the best content (like ESPN and HBO); and (2) a simpler, more usable interface that makes it easy and convenient to watch desired content when and where you want. These are unmet jobs-to-be-done that cable companies and content providers are currently ignoring.
  • Apple's asymmetric model likely involves reducing/eliminating the middleman role of cable companies by allowing users to subscribe to content directly (from a content provider like HBO), with small margins for the Apple TV and small margins for Apple in its assumed role as content provider middleman. Apple still benefits from this asymmetric model because Apple TV and the company's role as content middleman facilitate the sale of "sticky," highly profitable ecosystem hardware like iPhones, iPads, and Apple Watches.
  • Content providers may benefit from this model because it will motivate them to focus on creating, nurturing, and producing the best content and the best channels -- content that actually generates meaningful subscription/advertising revenues -- rather than creating sub-par content/channels that providers package and sell to cable companies through affiliate fees. Some of these sub-par channels probably can't survive without packaging and affiliate fee support: they can't survive unless they're packaged with better content/channels, with cable companies forced to pay the content provider an affiliate fee for the whole package (kind of like an unprofitable product subsidized by a profitable product). If sub-par, packaged content that can't survive on its own is subsidized through affiliate fees then this may artificially inflate end user cable subscription fees. If end user cable fees are artificially inflated due to subsidized content then Apple's asymmetric model may improve affordability more than anticipated.
  • Another factor driving a more affordable business model for the distribution of television content is the way mobile devices are competing for user attention. Paid or advertising-reliant TV content providers (ESPN, HBO, ABC, CBS, NBC, etc.) are currently seeing user time and attention shift to free content on mobile devices (YouTube, social media, news, entertainment, etc.). To benefit from this shift rather than be harmed by it, traditional TV content providers must look for ways to: (1) make television content on mobile devices widely available and easily accessible; and (2) offer affordable subscriber options that can compete with free mobile content. Content providers can benefit from an asymmetric model because more affordable/accessible/customizable content, available across TV's and mobile devices, will likely increase the viewer base for content providers, increasing the subscription and advertising revenues these providers receive.

See Concepts page and discussion of Clayton Christensen.

The author owns stock shares of Apple.