STRATEGIES FOR THE CONVERGENT WORLD
By Hazim Ansari
For the last several years, pundits have used the term “convergence” to describe business trends in nearly every industry sector imaginable. Products and services in the world of computers, telecommunications, broadcasting, film, cable, retailing, music, and video games, to name a few, were concurrently converging to compel the creation of a new, as yet undefined, modern corporation. While the term convergence has possibly been permanently tainted with its frequent, divergent, and often premature use, certain fundamental shifts in our economy have occurred that are forcing nearly every company to develop strategies to adapt to new market realities. Given the uncertain future of our “convergent” world, it is critical that companies address this new business paradigm with a broad legal vision, combining expertise from the entertainment, broadcast, telecommunications and technology disciplines.
Setting aside the narrow definitions of convergence, marketplace observers have extracted several fundamental, overarching concepts that appear to underlie our rapidly changing economy.
First, companies can no longer be categorized into industries vertically defined by the type of information created, processed, transported, distributed or sold. The digital revolution has made the difference between voice, data, video, and audio immaterial, making the definition of AT & T; as a corporation that transmits voice and Cox Communications as one that transmits audio and video outdated.
Second, no longer constrained to vertical industries, companies are being horizontally defined by their relationship to content, regardless of what that content might be. They are now in the business of content generation, content aggregation, content transmission and distribution, enabling the receipt and display of content, and/or content manipulation. A retailer who sells beach apparel catering to the California lifestyle is now a service provider who creates and aggregates California lifestyle content , a vehicle for the sale of apparel.
Third, channels to the consumer are transforming. Companies, whose core strengths lie in their extensive geographical presence, are being challenged by newcomers who have established a direct relationship with consumers via the Internet. Although this superficially appears to argue for a new, more egalitarian business terrain, consumer channels may be subject to even greater levels of monopolistic control by companies who dominate the delivery, aggregation, and/or manipulation of content to the consumer.
Fourth, new forms of competitive advantage are being created, most of which are rooted in the collection and manipulation of consumer data. While the bricks and mortar “location, location, location” mantra will remain true, consumers’ personal data may be a company’s primary asset when staking out Internet real estate.
The restructuring of traditional vertical industry segments into horizontal industry segments has resulted in the creation of an entirely new competitive landscape for many corporations. Although companies may be leaders in their vertically defined business segments, they are finding many more competitors and fewer clear advantages in a horizontally defined world. They are further finding that their channels to consumers are being compromised by 10-month old Internet start-ups and that, on balance, they have fostered few of the new competitive advantages.
Some companies have responded by focusing on their core horizontal markets and developing legal strategies to carve from these markets a defensible niche from which they can extract long-term value. For example, certain Internet companies whose core strengths lie in the novel aggregation and manipulation of content are aggressively seeking patents to protect what they believe to be the novel business methods that form the foundation of their enterprises. Other companies whose core strengths lie in a widespread retailing presence are aggressively restructuring distribution agreements with suppliers to maintain control over product distribution and limit competition from suppliers selling directly to consumers. Companies are also seeking opportunities to acquire or exclusively license new technology that can be used to develop a competitive advantage in their core niche. For example, a traditional studio may be a content generator, but it is also becoming an exclusive licensee of technology that allows it to manipulate, present, or create content in a manner not available to other studios.
Companies are establishing a strategic presence in other horizontal market segments through select alliances. Being a dominant player in one portion of the content value chain is not sufficient to guarantee long-term success. After all, a content generation company must have conduit to the consumer, and a content distribution company must have content to distribute. The need to ally with third parties intensifies if a company’s core strength lies in a niche from which it will not be able to extract sustainable long term economic value or which is not highly valued by consumers or the capital markets.
In that regard, some technology companies that develop tools to manipulate or generate content are eschewing the conventional technology licensing model in favor of a content co-development model. Recognizing the relative anonymity and weak market position of many tool suppliers, technology companies are foregoing up-front fees and significant royalties in favor of less royalty and limited rights in the content generated from the tool. Similarly, content generators are aggressively seeking alliances with content aggregators and distributors to ensure they have a direct conduit to consumers and access to consumer data, and are not relegated to being a fungible commodity that can be easily replaced, if and when they choose to extract more economic value from their content.
Because of the deconstruction of conventional vertical industries, properly structuring alliance agreements requires a cross-disciplinary legal approach. Companies interested in protecting core business assets, structuring forward-thinking alliances, or creating licensing programs that allow them to control their core assets while gaining access to third- party resources should understand the legal issues from the perspective of traditional entertainment, broadcast, telecommunications and technology disciplines. While the law cannot stop these market trends, it can hedge against the unknown by protecting core company assets and creating strategic alliances that effectively position the company to handle new opportunities and challenges.
Hazim Ansari is a patent attorney in O’Melveny & Myers’ technology practice and works closely with the firm’s entertainment, media, telecommunications, corporate and venture finance practices to counsel emerging and middle-market clients.
