The medium Television in Germany looks back on a more than 70-years old history. Since the first regular television programme was broadcasted in 1935 – which has been the first worldwide – television was subject of permanent change. Broadcasting and recording techniques, end devices, public perception and acceptance and content developed significantly over the decades. Starting with a single channel broadcasting black and white free-to-air, today consumers with the proper equipment can receive hundreds or even thousands of different channels that serve every imaginable need. Free-to-air broadcasting was little by little replaced by cable and satellite broadcasting, starting in 1983 respectively in 1988. Hand in hand with the digitisation era a new medium arose in the 1990’s: broadcasting via the internet. Due to high bandwidth requirements this distribution channel developed slowly. Even nowadays this represents the bottleneck of the potential “TV of the future”, called Internet Protocol Television (IPTV). However, IPTV has yet earned an early round of applause which is legitimated by the numerous advantages it offers for the consumer as well as for the distributer, content provider and advertiser.
Table of Contents
1 Introduction
1.1 Problem Formulation
1.2 Research Questions
1.3 Methodology
1.4 Thesis Organisation
2 Terms and Definitions
2.1.1 IPTV
2.1.2 Technological Fundamentals of IPTV
2.1.3 The IPTV Value Chain
2.1.4 Internet TV
2.1.5 Hybrids
3 Literature Review
4 Theoretical Framework
4.1 Market Analysis – Porter’s Five Forces
4.1.1 Threat of New Entrants
4.1.2 Intensity of Rivalry among Existing Competitors
4.1.3 Threats of Substitute Products or Service
4.1.4 Bargaining Power of Buyers
4.1.5 Bargaining power of suppliers
4.2 Business Model Theory
5 Market Overview
5.1.1 Player in the Market
5.1.2 Legal Framework
5.1.3 Licensing of content
5.1.4 Market Drivers & Restraints
6 Case Study T-Home
6.1 Company Description
6.2 Analysis of German IPTV Market with Porter’s Five Forces
6.2.1 Threat of New Entrants
6.2.2 Intensity of Rivalry among Existing Competitors
6.2.3 Pressure from Substitute Products
6.2.4 Bargaining Power of Buyers
6.2.5 Bargaining Power of Suppliers
6.2.6 Conclusion
6.3 The Business Model of T-Home
6.3.1 The Business Model Framework
6.3.2 Critical Design Issues for IPTV in Germany
6.3.3 The Architecture of T-Home
6.3.4 The T-Home Revenue Model
6.3.5 Further IPTV Revenue Models
7 Results
8 Conclusion
9 Appendix
9.1 Internet Survey
9.1.1 Questionnaire
9.1.2 Outcome of the Questionnaire
9.2 Interviews with T-Home Customers
10 Bibliography
Table of Figures
Figure 1: Delivery of the IPTV Signal
Figure 2: Compression of SD Content
Figure 3: IPTV Value Chain and Players
Figure 4: Performance of Internet TV Players
Figure 5: Porter's Five Forces
Figure 6: Purchasing Power 2006
Figure 7: Intensity of Forces in the German IPTV Market
Figure 8: Four Design Domains of Business Model Framework by Faber
Figure 9: Service Domain Design
Figure 10: Technology Domain Design
Figure 11: Finance Domain Design
Figure 12: Organisation Domain Design
1 Introduction
The medium Television in Germany looks back on a more than 70-years old history. Since the first regular television programme was broadcasted in 1935 – which has been the first worldwide – television was subject of permanent change. Broadcasting and recording techniques, end devices, public perception and acceptance and content developed significantly over the decades. Starting with a single channel broadcasting black and white free-to-air, today consumers with the proper equipment can receive hundreds or even thousands of different channels that serve every imaginable need. Free-to-air broadcasting was little by little replaced by cable and satellite broadcasting, starting in 1983 respectively in 1988. Hand in hand with the digitisation era a new medium arose in the 1990’s: broadcasting via the internet. Due to high bandwidth requirements this distribution channel developed slowly. Even nowadays this represents the bottleneck of the potential “TV of the future”, called Internet Protocol Television (IPTV). However, IPTV has yet earned an early round of applause which is legitimated by the numerous advantages it offers for the consumer as well as for the distributer, content provider and advertiser.
1.1 Problem Formulation
For decades fixed line subscription was the major source of revenue for telecommunication companies. After the German telecommunication market was liberalised in 1998 and the Deutsche Telekom lost its monopoly, profit margins dropped due to increasing competition. Declining profits were compensated by the large growth of online markets. But, this revenue source is again endangered by emerging competitors: Cable operators that expand their business via triple play business models. The three major players in Germany, Kabel Deutschland, Unitymedia and Kabel BW do no longer offer pure television experience only, but bundles including telephony, television and internet access. A further development – quad play offerings that also include cell phone tariffs – will most likely happen in 2008, according to Adrian von Hammerstein, CEO of Kabel Deutschland (Maier, 2007). In order to access new revenue sources and to break the phalanx of cable providers in the television market, German telecom operators like the Deutsche Telekom or Alice launched their IPTV services. However, the success of those offerings is dependent on the proper formulation of their business models and their competitive strategy towards the cable providers. This paper will analyse the German IPTV market. On the basis of this analysis, the author will detect critical design issues and figure out how business models need to be designed in order to be successful in the German market and where to find new sources of revenue.
1.2 Research Questions
In the course of this paper, the author will give answers to the following research questions:
- Which competitive forces influence the German IPTV market most?
- Which design issues are critical in business modelling for the German IPTV market?
- Which models promise new sources of revenue for IPTV providers?
1.3 Methodology
After the decision with which topic to work on (IPTV in Germany), the author started the literature research. The first step was to observe local libraries for scientific books on this topic. Then, after the author gained first insights, internet research was conducted. Primary attention was paid to industry-related literature, like new developments regarding IPTV technology, regulations, offerings et cetera. After the evaluation which issues and problems the author wanted to research, and with which theoretical framework this was supposed to happen, the theories of Business Models and Porter’s Five Forces were scrutinised. After the author acquired basic knowledge on the basis of books, further journals and other academic papers were searched in order to deepen that knowledge. This was followed by research of academic papers that connect the issue of IPTV with the theories the author planed to apply. Regarding the literature research as a whole, the author made use of libraries, common search engines like Yahoo, Amazon or Google Scholar, and the databases LexisNexis and EBSCO. If a suitable paper was found, the author tried to exploit the source by analysing the bibliography of the found source. The research of literature was not completed at a certain point, but was still conducted within the writing process. In order to examine customer satisfaction and to compare intended value of T-Home and perceived value of customers, a consumer survey was conducted as well as interviews with customers of the firm. Particular questions could be answered by email and telephone inquiries to firms participating in the IPTV value chain.
1.4 Thesis Organisation
The first step in preparing this paper was to write down the problem formulation in order to make clear what is going to be researched in this work. This is followed by the research questions and the methodology according to which this paper was prepared. Chapter 2 defines the most important terms of this thesis, IPTV and Internet TV. Furthermore, the technological architecture of IPTV is described and the author briefly describes hybrid programmes of IPTV and Internet TV as well as the IPTV value chain. Chapter 3 provides the literature review, where the most important literature that helped to prepare this work is explained. Chapter 4 then gives an overview of the applied theoretical framework. The theories applied within this paper, Porter’s Five Forces and the theory of business models are described. The author depicts why the models were chosen and in what extend they help to answer the research questions. Chapter 5 provides an overview of the German IPTV market. The major players in the market are exposed, and forces that drive and restraint the market development are located. In addition, the author provides an overview of the legislation in Germany the industry is faced with.
The following chapter 6 provides the case study of this work. Here, the theoretical framework is applied to T-Home, the major IPTV service provider in Germany. That is, after the company is analysed, Porter’s Five Forces are applied to the German market. Afterwards, the author analyses the T-Home business model and identifies critical design issues. Moreover, an outlook towards future revenue sources is provided. In chapter 7 the findings of the prior chapters are summarised. Chapter 8 then draws conclusions from the research.
2 Terms and Definitions
The IPTV Focus Group (FG IPTV) defines IPTV as follows: “IPTV is defined as multimedia services such as television/video/ audio/text/graphics/data delivered over IP based networks managed to provide the required level of QoS/QoE, security, interactivity and reliability” (International Telecommunication Union, 2006). However, in scientific literature one can find diverse definitions of IPTV. This highlights the fact that there exist no clear border between IPTV, internet TV, and other services like youtube.com. In their whitepaper “The IPTV/VoD Challenge – Upcoming Business Models”, Altgeld and Zeeman (2005) define IPTV as “the delivery of real-time streaming TV over broadband IP networks. It is a multicast service delivered to many concurrent users.” Since there are mainly two approaches to distribute video content via IP, the notion often provides confusion to consumers. In general, one can distinguish between ITPV and Internet TV. Both services possess several capabilities, features and attitudes that keep them apart.
2.1.1 IPTV
Real IPTV services are mainly offered by telecommunication companies and large media groups, such as the Deutsche Telekom (T-Home Entertain), Microsoft (Microsoft Mediaroom) or Apple (Apple TV). Start-ups like Joost or Zattoo do not offer pure IPTV services but hybrids of IPTV and Internet TV. A further characteristic of IPTV can be found in the supply of content, which can be described as traditional. That is, service providers simply broadcast the same content as their competitors do via cable, satellite or free-to-air. However, IPTV possesses a feedback channel, which allows it to offer features its competitors do not have. Therefore the IPTV technology can be considered as a competitive replacement product for established cable and satellite services (Good, 2005). On the other hand, the delivery discloses similarities to the cable and satellite technique: Content is also delivered in a “semi-closed network” (Good, 2005). This proprietary system gives the service provider high control of its content distribution. This again provides several advantages. First of all, it reduces the risk for theft and piracy. Digitisation allows the provider to equip the content with DRM (Digital Rights Management) for instance. Furthermore, it is possible to bind distribution to diverse factors, like geography or time for example. This feature provides the opportunity to broadcast content with complex license rights. However, geographic limitations may also be a matter of infrastructure, which is a critical part of IPTV, since requirements in terms of broadband access are obligatory. Another unique feature IPTV offers is detailed monitoring and recording of user behaviour. Due to the requirement of Set-Top boxes (STB), no additional devices need to be installed to compute ratings and other patterns of consumers (Held, 2007: 137). Those end devices, a prerequisite to receive IPTV, turn the broadcasting signal into content which then is displayed on the television screen. Therefore the viewing experience is basically the same as for conventional television over cable or satellite (lean back). The viewer is more or less bound to its living room and its accustomed viewing device.
2.1.2 Technological Fundamentals of IPTV
The network architecture to deliver IPTV signals varies depending on the type of service provider and its resources and capabilities. However, there are four areas that can be considered as universal:
1. Video Headend
The first stage of the general IPTV network topology is the video headend, or super headend, where video content is captured. At that stage, the gathered material is encrypted and compressed. The topology requires the integration of hardware and software like satellite antennas, receivers, encoders and DRM systems. DRM is an anti-piracy tool that allows the content provider to determine certain limitations. This can be quality of content, storability, frequency of plays and many more. Within the video headend, the signals are broken into small packages and sent to the customers STB. The end device has the adequate software installed to reassemble the single packages into a video signal, which finally appears on the TV screen.
2. Core IP Network
The second stage is designed “to carry large amounts of data quickly, securely and reliably across expansive geographic areas to local distribution systems” (Near Earth, 2006: 8). It is mostly delivered and maintained by an external service provider. In the case of T-Home this is Cisco Systems. The network is literally the “data highway”, on which the IPTV signal is delivered. When the content reaches the edge of the network, other content or services can be integrated. Such a service can be VoD features for instance.
3. Access Layer
The access layer personates the connection from the service provider to the home of the end-user. The IPTV signal can theoretically be distributed via various different physical media. This can be satellite, coaxial cable, Fibre-To-The-Home (FTTH) or the telephony line. In the case of T-Home and all other German IPTV players, the telephony line is employed. The required bandwidth is provided via ADSL2 (+) or VDSL.
4. Customer Premises
Once the video signal reaches the home, it needs to be forwarded to every room of the building. Therefore the service provider “places a home gateway such as a cable modem, router and/or a set top box which in turn is connected to the TV” (Near Earth, 2006: 10). The transmission from one room to the other may happen by the use of wired Ethernet, WiFi, Ultra Wide Band (UWD) or power line.
Delivering the Signal
Video can be delivered according to three different methods: File transfer, broadcast and VoD (Held, 2007: 105). The file transfer method is not relevant for the topic of this paper, since this is mainly used for downloading content to PCs, IPods or similar devices. The latter methods, on the other hand, are used for “real-time viewing of a movie, television show, concert or other type of visual performance” (Held, 2007: 105). In the broadcasting method, the video signal is delivered to the home by multicasting. The person who controls the STB selects the channel of her choice, whereupon the device establishes a connection to the preferred channel and eliminating the need for all other digitised channels in order to save bandwidth (Held, 2007: 106). The source of the broadcast can either be a movie or series stored on a media server, or a live feed from an on-air television station. VoD is delivered slightly different. Since VoD responds to a query of a user, who for instance orders the latest Hollywood blockbuster, content is delivered via unicast. Typically, the user selects a programme from a list stored on the subscriber management system, which is also responsible for billing issues. The complete process of both delivery methods is displayed in figure 1 beneath.
Figure 1: Delivery of the IPTV Signal
illustration not visible in this excerpt
Source: Held, 2007
Compression
The compression of the distributed content is essential for the success of IPTV. STBs consist of chipsets that decode the arriving signals, which means they are being decompressed. Current compression standards are MPEG-2 and MPEG-4. Those technologies were developed by the Moving Pictures Expert Group (MPEG). They are supposed to compress video and audio data to send television signals more efficiently. MPEG-4 is an enhancement of the older standard MPEG-2 and delivers superior compression gains. However, until these days, television providers had little urgency to use this standard. They did not experience any bottleneck effects in the delivery of standard definition content. The upcoming of high definition content, however, created the demand for better compression techniques. Since bandwidth is in most cases still limited, German IPTV providers then decided to use MPEG-4, which allows distributing a high definition signal with a bandwidth requirement of only 6-8 Mbps. MPEG-2, in contrast, requires 19.5 Mbps for the same signal. Figure 2 illustrates the differences in compression of both standards.
Figure 2: Compression of SD Content
illustration not visible in this excerpt
Source: Intel, 2004
2.1.3 The IPTV Value Chain
The IPTV value chain consists of five main elements, whereas the fifth element, middleware, is not arranged in line with the other elements, but is rather implemented in each of them. Figure 3 clarifies that by displaying the whole value chain and giving examples of leading firms of each segment. The first element is composed of companies producing content for the IPTV service like movies, series, shows, news magazines and documentaries. Also included are content aggregators and channels. The second link of the chain consist of the head end, i.e. companies that supply the service provider with hardware like servers, receivers, encoders and so on. The third link is composed of firms that establish the actual infrastructure over which IPTV is delivered. Concrete, these are the lines that connect households to the World Wide Web for example. The fourth part of the value chain is occupied by companies manufacturing STBs and further end devices. Within every link of the chain, suppliers of middleware do also participate in generating value.
Figure 3: IPTV Value Chain and Players
illustration not visible in this excerpt
Source: Detecon, 2006
2.1.4 Internet TV
Comparing Internet TV to IPTV, there are some crucial characteristics that distinguish them from each other. First of all, there are substantial differences in the delivered content. Due to the fact that no own infrastructure is preconditioned, it is very easy to broadcast content. Therefore one can find a huge amount of shows of independent producers that is only available on the internet. Examples for such shows are “Ehrensenf” in Germany or “Rocketoom” in the United States. This guarantees Internet TV a much higher diversity compared to IPTV. The content is much more dynamic and independent, and every possible niche interest is served. However, this is only possible due to a lack of quality control. Unlike for IPTV services, there exist no quality standards in terms of image resolution or content quality. On the other hand, every publisher or producer of content possesses a direct communication channel to the consumer. Forums, blogs or a comment feature enables the consumer to give direct feedback to the publisher. A further fact that differentiates Internet TV from IPTV is that a STB is not applied. That is, the service is more or less device independent and can be employed on multiple devices like home computers, TV sets, mobile devices and many more. This again gives rise to a different viewing experience. While the consumer experiences a lean backward experience with IPTV, Internet TV offers mainly a lean forward experience. Moreover, due to lower bandwidth requirements, Internet TV offers the experience of consumption “on the way”, assuming the consumers own a mobile device that supports such a feature.
According to Gugel (2006) and Held (2007) the following offerings are considered as Internet TV as well: Regular broadcasters like the German ARD or N-TV, which stream their programme live on the internet, on-demand services offered by broadcasters like the latest episodes of series (Germany’s Next Topmodel, Pro7) and additional content provided by broadcasters on the internet (historic news clips on BBC.co.uk). Those offerings have in common, that they are mostly specially edited before there are streamed. That is, the quality is levelled down or advertisements are cut out.
2.1.5 Hybrids
Recently television services emerged in the internet that combine characteristics of both IPTV and Internet TV. The Swiss-American company Zattoo broadcasts regular TV channels via the web. However, since this service can only be received via home computer and no STB is available, this service offers a lean forward experience. The European company Joost, founded by the inventors of Skype and Kazaa, offers regular TV channels as well as special edited content. Like Zattoo, the user needs to download a client that allows the user to receive the programme on the home computer. This means the viewing experience is lean forward again. Until today, such services did not have a resounding success, compared to other video platforms like youtube.com or even veoh.com.
Figure 4: Performance of Internet TV Players
illustration not visible in this excerpt
Source: Compete.com
3 Literature Review
This literature review will present the body of already published literature that composes of the theoretical foundation of this work. It will give an overview of accessed literature, which again will help the author to avoid overlapping with previous work. The author sets out to apply economic theories and models to the German IPTV market. Therefore the review is composed by literature regarding theoretical models applied by the author as well as industry-related journals, books and other sources. The review is also supposed to set this thesis in a context with already existing work and to illustrate in what extend the author developed those work further.
In 1980, Michael E. Porter published his book “Competitive Strategy.” Within this work, Porter develops methods that help companies to analyse the market in which they are situated. Tools like Porter’s Five Forces enable those entities to determine the degree of competition within a specific industry and to establish suitable strategies from those findings. This work is the foundation of the author’s analysis of the German IPTV market.
In order to provide a clearer image of which strategy a German telecommunication operator needs to pursue, the theory of business models is exploited in this work as well. The author acquired a theoretical foundation by the use of the book “Internet Business Models and Strategies – Text and Cases” by Allan Afuah. His continuing work, “Business Models – A Strategic Management Approach” was employed as well in order to expand the focus and to deepen the knowledge of business models. This literature provides definitions of business models, explains how they are properly created and gives examples of successful ones. In order to gain a broader view on business models, further literature was gathered. The paper “The Role of the Business Model in Capturing Value from Innovation” by Henry Chesbrough and Richard S. Rosenbloom explores the role of a business model in capturing financial values from a new technology. The intellectual roots of the business model concept are depicted and the authors derive why a viable business model creates the basis for economic success. In addition to this, the work of Faber (2003) was scrutinised, too. In his paper “Designing business models for mobile ICT services”, he develops a conceptual framework for creating successful business models. Apart from those sources, which provide an introduction to the theory, the author accessed further sources that are closer connected to the topic of this work. One of those sources is the IBM whitepaper “The IPTV/VoD Challenge – Upcoming Business Models” by Jochen Altgeld and John D. Zeeman. The authors examine the IPTV and Video on Demand market according to market drivers and potential future business models that could potentially result in business success. However, the work regards the IPTV market in general and does not refer to special characteristics of certain countries. “Business Model for IPTV Service: A Dynamic Framework” is a paper that tries to analyse IPTV business models according to their success in various scenarios. Those future scenarios are combined with different business models that promise to deliver business success in that special scenario. The paper deals with the global IPTV industry, but does again not regard country-specific peculiarities. In addition, the developed business models only address IPTV companies which are situated in the “exploration phase” (Bouwman et al. 2007), that is the very beginning of a venture. Another work that deals with business models in the IPTV industry is “IPTV: Business Model Analysis from Porter’s Five Forces Perspective”. Within this paper, the authors analyse the IPTV industry with Porter’s Five Forces in combination with the prism of the Star tool by Galbraith. The paper points out the theoretical concept and applies it to case studies, again disregarding the German market. In the end, the developed model is supposed to be used as a tool to analyse the strengths and weaknesses of business models in the IPTV industry.
In addition to the already mentioned literature that provides insights into theoretical models, the author also employed rather industry-related literature. This literature is supposed to broaden the author’s industry-specific knowledge. This regards technological aspects of IPTV, market particularities, consumer behaviour, outlooks, market regulation and the development of digital television in Germany, market drivers and many more. The working paper “The end of television as we know it” provides a future perspective of the digital television market. A picture of future competition, convergence and value shifts is drawn and priority actions for executives are suggested. A further important source the author accessed for preparing this work is the book “Understanding IPTV” by Gilbert Held. The book examines concepts, applications and possible impacts of IPTV. It further gives an overview of technical issues as well as of industry players worldwide. It supports the author in exploring business opportunities and revenue streams that may emerge out of IPTV.
4 Theoretical Framework
In this chapter the theoretical models applied by the author in order to prepare this work are depicted. Those models compose the basis for later findings and conclusions.
4.1 Market Analysis – Porter’s Five Forces
The financial success of a firm is influenced by many factors. The industry a firm is located in and its level of competition are major aspects. Therefore it is essential to “find a position in the industry where the company can best defend itself against […] competitive forces or can influence them in its favor” (Porter, 1980: 3). To do so, the company needs to understand the industry and its competitors in the first place. Porter’s Five Forces model is an instrument that assists in analysing industries and afterwards deriving a competitive strategy from the findings. The author will conduct an industry analysis with the Five Forces model because it will build the foundation for subsequent formulations of business models and critical success factors. According to Porter, the “state of competition in an industry depends on five basic competitive forces” (Porter, 1980: 3). Those forces are shown below.
Figure 5: Porter's Five Forces
illustration not visible in this excerpt
Source: Adapted from Valuebasedmanagement.net
4.1.1 Threat of New Entrants
Since companies that enter certain markets always have the desire of gaining market shares, those new entrants increase the level of competition. This threat, however, depends on “the barriers to entry that are present, coupled with the reaction from existing competitors that the entrant can expect” (Porter, 1980: 7). Thus, high entry barriers and/or expectations of sharp quittance lower the threat of new entrants. Potential barriers to entry are the following:
Economies of scale occur when large volumes of a product are produced and, as a consequence, the cost per unit is declining. Chandler defines economies of scale as “…those that result when the increased size of a single operating unit producing or distributing a single product reduces the unit cost of production or distribution” (Chandler, 1990: 17). Potential new entrants can thus choose between entering the market either with a large production volume and a higher risk or a small production volume and cost disadvantages. However, economies of scale are not the only cost advantage established firms can experience in contrast to new entrants. Firms that have their products already on the market could have gained valuable experiences that allow them to produce or market their product more efficiently or just cheaper. Such learning or experience curve effects can also be triggered by workers who improve with their individual experience for example. Since companies, which already have products or services on the market, possess a certain level of brand identification and customer loyalty, new entrants need to overcome those loyalties. Usually this product differentiation is connected with large spending of capital and time. Large capital requirements for market entry limit the amount of potential entrants significantly, because in many cases such costs can not be recovered. If customers in the market are faced with switching costs, this can be considered as a barrier to entry. Farrell and Klemperer (2002) state that "a consumer faces switching cost between sellers when an investment specific to his current seller must be duplicated for a new seller". This may include employee retraining costs or the necessity of purchasing new devices. If a company enters a new market, it needs secure access to a distribution channel in order to provide future customers with its products or services. However, since often the most common channels are already “occupied” by established companies, the new entrant needs to persuade the channels from its product or service to distribute it. A country’s government can also create barriers to entry. The German government for instance created such a barrier with the allocation of UMTS licenses for mobile telecommunication providers. Further examples are completely regulated industries like railroads.
4.1.2 Intensity of Rivalry among Existing Competitors
According to Porter (1980: 17), “Rivalry occurs because one or more competitors either feels the pressure or sees the opportunity to improve position.” The intensity is determined by several factors. First of all, the amount of competitors or their balance is important. If there are a few dominant companies on the market and many small competitors, competition tends to be low because the major players establish certain parameters smaller companies need to follow in order to survive. Secondly, high fixed or storage costs fuel competition as well. Those costs set companies under pressure as they need to fill capacities. Thirdly, lack of differentiation and/or switching costs lead the consumer to base her buying decision on price and service. Fourthly, a driver of rivalry is slow market growth, because in the case of rapid growth firms expect to expand solely through the growth of the market. Fifthly, in industries where economies of scale are essential, augmentation of capacity in large increments might “disrupt the industry supply/demand balance […] and lead to chronic overcapacities” (Porter, 1980: 19), which again leads to increasing competition. Sixthly, diverse competitors increase competition as well, as their different sets of strategy et cetera hamper forecasts of behaviour. Seventhly, competition increases significantly if there are high exit barriers for market participants. They induce them to stay in the market and to compete even if earnings are low or even negative.
4.1.3 Threats of Substitute Products or Service
The Economist (2008) defines substitute goods as “Goods for which an increase (or fall) in demand for one leads to a fall (or increase) in demand for the other”. Thus, all firms of a certain industry compete with industries that are producing substitute goods. This leads to “a ceiling on the prices firms in the industry can profitably charge.” (Porter, 1980: 23). Therefore, competition in a given industry is high, if there exist suitable substitute products for the consumer.
4.1.4 Bargaining Power of Buyers
The competition within an industry rises if buyers possess high bargaining power. This again is determined by several factors. First, if purchases are concentrated or large in volume, this raises the importance of the buyer and therewith its bargaining power. The same counts for the case if purchases from the industry represent a significant fraction of the buyer’s costs. A further driver for increasing buyer’s bargaining power is standardised or undifferentiated products. Buyers can be sure to find an alternative if a product’s price or quality is not convincing. This is similar to the situation when buyers are faced with only few switching costs. If a buyer group earns low profits, this creates incentives to put commitment into lower purchasing costs. A further fact that increases the bargaining power of buyers is the credible threat of backward integration, because they then obtain a position to demand bargaining concessions. An additional situation that enhances buyer’s bargaining power occurs if the industry’s product is unimportant to the quality of the buyer’s products or services. This leads to decrease of price sensitivity. Finally, full information access of buyers, that is, information regarding actual market prices, demand or supplier costs, lead to greater bargaining leverage than when information is poor.
4.1.5 Bargaining power of suppliers
The fifth force that influences competitiveness in an industry describes the bargaining power of suppliers. Suppliers can threaten their buyers by raising prices or lowering quality. The circumstances that make suppliers powerful mirror those making buyers powerful. Therefore, those conditions are in the following mentioned without detailed explanations. A supplier group is powerful if:
- It is dominated by a few companies and is more concentrated than the industry it sells to
- It is not obliged to contend with other substitute products for sale to the industry
- The industry is not an important customer
- The suppliers’ product is an important input to the buyer’s business
- The suppliers’ products are differentiated or has built up switching costs
- The supplier group possess a credible threat of forward integration.
4.2 Business Model Theory
Similar to the term IPTV, there exists no clear definition for what a business model is. The simplest definitions put business models on a level with revenue models: “A business model is the method of doing business by which a company can sustain itself - that is, generate revenue” (Rappa, 2008). Afuah (2004) goes more in detail: “A business model is the set of which activities a firm performs, how it performs them, and when it performs them as it uses its resources to perform activities, given its industry, to create superior value (low-cost or differentiated products) and put itself in a position to appropriate the value”. Other definitions link the function of business models with the term of strategy: “A company’s business model deals with the revenue-cost-profit economies of its strategy – the actual and projected revenue streams generated by the company’s product offerings and competitive approaches, the associated cost structure and profit margins, and the resulting earnings stream and return on investment” (Thompson & Strickland, 2003: 3) or shorter: “A viable business model is a strategy that has a reasonable probability of succeeding if well executed” (Saloner, Shepard, & Podolny, 2001: 279)
Summarising the definitions, a business model consists of the potential revenue sources as well as of a strategic plan how to exploit those. Rappa (2008), researched business models on the web. He placed different approaches on generating revenue into 9 categories:
- Brokerage
- Advertising
- Infomediary
- Merchant
- Manufacturer (Direct)
- Affiliate
- Community
- Subscription
- Utility
Each of those categories consists of numerous revenue models. The term “revenue models” is used, because Rappa solely addresses the source of revenue, but leaves out any strategic approach. This might be suggestive of being superficial, but his work addresses e-commerce businesses and web-based firms only.
The approach of Afuah, which is described in his book “Business Models – A Strategic Management Approach” (2004), goes far more into details. He interprets the business model as system of components (value, revenue sources, price, related activities, implementation, capabilities and sustainability), relationships and interrelated technology.
Within Afuah’s simplified business model planning process, he answers three questions:
1. Where is the firm now?
2. Where does the firm go next, and how does it get there?
3. How does the firm implement these decisions?
Within the first step, the performance of the firm is analysed. One must discover whether the company performs well or not. Afterwards, the question “what makes the firm perform the way it has been performed” must be answered. Afuah conducts this analysis on the basis of the seven C’s, a theoretical model that scrutinises positions, industry factors, activities, resources and costs of a firm. With the help of the findings from the first step, opportunities, threats, strengths and weaknesses are defined. The second step starts with determining where to go next and how to get there. This is done on the basis of the findings of step one. Finally, in step three the firm determines how to implement strategic decisions from the second step.
Apart from Afuah, Faber (2003) provides a further approach on a business model framework. His work is explained later in chapter 6.3 of this paper.
[...]
- Quote paper
- Nikolas Fritz (Author), 2008, Internet Protocol Television in Germany – Analysing Business Models for Market Success, Munich, GRIN Verlag, https://www.grin.com/document/118703
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