Tectonic Shifts in Content Value Chains

[Posted by Mark Mulligan]

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From a content strategy perspective, one of the most interesting developments that came out of Mobile World Congress was Nokia’s refinement of their Ovi strategy, with the announcement of the Ovi store (see Thomas Husson’s post for more details).

The Ovi Store might just look like another me-too App store, and in many ways it is. But the strategy goes much further than that. This is part of Nokia’s attempt to develop stronger, deeper relationships with the end-consumer with an ambitious content and services strategy. But the real audacity lies not in the breadth of the services portfolio, rather in the disruptive, even disintermediative, threat to Nokia’s channel partners. However inclusive Nokia may try to appear, selling content and services such as ring tones, music, games and other applications compete directly with mobile operator offerings.

The walled-garden operator portal strategy may be a short sighted one, but the operators are already having to compete with the established Internet brands without having to worry about one of their historically trusted partners. It is true that the operator relationship is more important in markets with strong subsidies, but even in those without, the operators are at the very least a strong potential ally, at most a crucial partner.

And yet the Ovi strategy remains key, because Nokia needs to own more of the value chain. Even before this years’ expect global handset sales decline, markets were getting saturated and replacement cycles being stretched by 24 month contracts. The emerging markets will have finished emerging sooner or later. This is Nokia planning for long term growth when its core handset business will be mature. It’s a high stakes game, and if they pull it off, all of the damage to channel partner relationships will become an unfortunate but ultimately tolerable price to pay. It’s classic sacrifice move, gambling tactical loss will bring strategic gain.

On the other side of the value chain equation we’re beginning to see some content owners trying to extend their share. MySpace Music, the joint venture between the major record labels and MySpace, is an astute move for all parties.  There is upside for both sides, however tortuous the negotiations might have been (and indeed there’s a case for terms being revisited when this thing’s been in the water for long enough to just how well it floats).  MySpace now have a much more workable revenue and cost model for pursuing an ambitious on-demand streaming strategy whilst the majors now have more meat in the game.  MySpace Music’s success will be theirs also. In traditional licensing models labels would have profited more only as streams increased.  Now they profit more both from increased streams and if MySpace gets better at monetizing its ad inventory. 

The MySpace JV is also a bet on the future for the labels. As they journey through the transition from historical reliance on distribution towards the consumption era, they get to own part of the consumption infrastructure.  If MySpace Music was to ‘do an MTV’ the labels would profit this time round. And it’s not an isolated move: all the majors also of course took stakes in YouTube immediately prior to Google’s acquisition and Sky entered into a JV with UMG to launch a music subscription service. 

JV’s aren’t a panacea (cf Warner’s current dispute with YouTube and Sky’s current failure to draw in other partners) but they are a means of taking a stake in an uncertain future.  But someone’s value chain gain is typically somebody else’s loss.  Value chain evolution is a messy process and the path will be littered with the battered and bruised. Nokia of course will be hoping it won’t end up as one of those.