Friday, June 1, 2012

Products and Distribution

The tech and media industries have been at each others throats going back to Napster at least. Popular sentiment favors tech, since tech would purport to provide content for free (although it will be interesting to see if the pendulum swings the other way following the recent privacy backlash against companies like Facebook and Google). What's often overlooked is that this is a classic battle between a producer and a distributor.

In the media world, bitter negotiations between content producers and content distributors are hardly limited to the online world. They are probably even more bitter in the offline world, where the stakes are higher. Look at Time Warner Cable's blackout of Knicks and Rangers games over a dispute with MSG Networks over retrans fees.
Battles between producers and distributors have been going on since time immemorial, probably since  economic activity specialized enough to justify dedicated providers of distribution services. Opportunistic repricing, aka "holdup," is a well-honed technique of in the distributors to squeeze more money out of producers under the very real threat that if they don't pay up, the distributor will cut off distribution. Amazon has used this technique repeatedly in its negotiations with publishers. Eric Clemons, whose class on "Information: Strategy and Economics" was one of my favorites at Wharton, gave the classic example of the refrigerated cars that distributed beef from the Great Plains to Eastern markets. Initially, the shippers offered lower prices to entice the cattle farmers to take a chance on this new technology. Later, when the shippers had greater market power and wanted to renegotiate, they could simply say to the meat sellers, "Whoops, we need more money to get your meat to market. It's all going to rot if you don't pay our increased rates." Typically holdups are done after market leverage switches between negotiating partners.

Did SOPA/PIPA represent a tipping point in market leverage between traditional content producers (media) and the new content distributors (tech)? What sort of holdups might we see in the future of this relationship?

No comments:

Post a Comment