P2P distribution, broadband connectivity to lead business

The future is in peer-to-peer distribution, the power lies with the content packager, and broadband connectivity will foster multiple new revenue opportunities for content producers, according to Business Redefined: Connecting Content, Applications, and Customers, a global study released today by Ernst & Young.

The study, based on 128 in-depth interviews with CEOs of the leading technology communications and entertainment companies from across the world, and including an analysis of secondary source data from more than 100 information sources around the world, posits that the technology communications and entertainment sectors are primarily responsible for reshaping the world`s economy. The study included one South African, Telkom`s Sizwe Nxasana.

Nearly two-thirds of the global CEOs surveyed cited broadband connectivity as the most significant immediate factor influencing the way customers will experience entertainment and communications and will utilise technology over the next few years.

"Our analysis concludes that business is being redefined in four distinctive ways," says Jeremy Grist, the partner heading up Ernst & Young`s Technology, Communications and Entertainment division in SA.

The strongest trends outlined in the study were those of digital broadband content leading to multiple new revenue opportunities for content producers and reduced production costs, and of content packagers becoming a pivotal point of value creation beyond the Internet, with profound implications for the entertainment industry.

The study also suggests that network operators will have to place their bets on one of several services business models.

The network-only model limits services to the existing network, while the portfolio model is based on different business units pursuing network and service operations independently but with common goals. The third model, a hybrid, indicates a network-enabled services company, in which telecommunications companies have customer linkages to deliver services through their own network. Lastly, there is the pure-play model, which would involve building a pure services company completely separate from the network operation.

"Watch for the virtual wireless company," said one CEO about the pure-play model. "They can develop first rate customer orientation and never build the network - they can just lease capacity from the rest."

"The need to grow from providing basic network services such as long distance delivery, to providing new value-added services such as unified messaging, for instance, was the most pressing priority we heard from the CEOs of network operators," says Grist.

"While traditional network operators continue to maintain bulky communications networks, they must also quickly capture the incredible growth opportunities offered by new services such as mobile communication and network design and management. They must evolve to satisfy the demand for services that business and consumers can use in their daily lives."

On the other hand, CEOs have noticed that revenue from communications-based services is expected to expand by an average of 68% per year for the next four years.

Network-based solutions include unified messaging, video conferencing, and network-based call centres. Among these service areas, unified messaging represents one of the largest near-term global opportunities for network operators, growing from $1.2 billion in 2000 to $18.2 billion in 2005, according to research in the study. Video conferencing and network-based call centres are also expected to grow significantly.

While network operators acknowledged they should own these applications, few saw themselves as effective service providers in these areas today.

Grist points out that broadband`s across-the-board impact and the unprecedented new level of competitiveness will shape transformation in content production and distribution, whether the content in question is software, movies, or business information.

"At the same time, already ferocious competition will gain even more in intensity," he reports. "Many factors have combined to trigger the sudden, dramatic increase in competition. The globalisation of markets, deregulation, technology-compressed product lifecycles, and enabling technologies that lower entry barriers for both start-up competitors and established competitors crossing over from other industries."

The study stresses that content producers face tremendous opportunity and uncertainty. It states that CEOs of content production companies must focus first on identifying the right combination of revenue opportunities afforded them by new and emerging technologies. They must then determine how to exploit these technologies to lower costs as well as analyse their distribution channels.

The "content packager" model is expanding from its original Internet model into offline businesses, and will help to redefine communications, entertainment and enabling technologies in the broadband era.

By matching detailed customer knowledge against its knowledge of information, applications and entertainment sources, the content packager cuts through the content chaos and lets someone find what he or she needs. "People need content packagers because they can`t find the content they want and don`t trust the content they find," stated one CEO.

As another executive noted: "Studios and record companies have their heads in the sand when it comes to demand elasticity. Consumers know that they are being had when it comes to music pricing. It is the worst form of bundling - buy ten songs when you want only two."

Back on the Internet, peer-to-peer network technologies, as popularised by the millions of consumers that used Napster, are a siren call for the entertainment industry to reinvent its distribution and business models from the ground up.

A case in point is that Napster grew from nowhere to 35 million users in only 20 months, which translates into a 3 100% compound annual growth rate. While CEOs are fully aware of the revenue and legal challenges with these companies, the message is clear. "Peer-to-peer technology demonstrates how developing an easy-to-use application that creates consumer excitement promotes both rapid adoption and an explosion in consumer activity and interest," explained one CEO.

The Business Redefined study discovered that the majority of CEOs believe application service providers (ASPs) to be an important but currently unfulfilled market opportunity. According to the study, ASP success hinges on their ability to redefine their businesses as content packagers.

Many ASPs still require significant custom software integration for each customer with average implementation times measured in weeks and months - too long to achieve the efficiencies promised by ASPs. The report says the key to unlocking the ASP Content Packager model is for them to find more efficient ways to deliver applications, as well as to eliminate the current limited distribution chain restrictions.

Despite the variety of possibilities, the study found that the largest obstacles to implementing new services and business models for network operators remain a shortage of qualified executive leadership and capital constraints.

"CEOs know they need to push into new applications," says Grist. "But they have three problems according to the report. First, it is difficult for them to select the winners among new applications. Second, the CEOs are struggling to pick a business model that accommodates a successful service business in a traditionally network-driven business. Finally, CEOs are struggling to find the right talent and new capital to lead these businesses."