Regulars know that I have a strong opinion on ecosystems. The whole theory if you have not read it before is that in this world of technology, controlling the “platform” or ecosystem is critical. Having a good service such as Flickr, maps, or others is important but it’s difficult to keep users if you do not control the entire ecosystem. Google (GOOG) (through Android, Chrome, etc.), Apple (AAPL) (iPhone, iTunes, etc.), Facebook (FB) and Amazon (AMZN) have been able to build incredibly complex systems that make it very difficult to compete with them. Yes, thousands of developers build mobile apps and entire businesses but they do usually end up depending on the platforms to some extent. Just think of how Zynga (ZNGA) was forced to modify its entire business to meet Facebook’s demands. Having an existing ecosystem also makes it much easier for these companies to launch new businesses.
You could argue that one of the companies that has been able to do well despite not “owning” an ecosystem is Netflix (NFLX). I’d guess that the main reason is the big entry barriers that exist in trying to negotiate deals with the Disney (DIS), and other media giants. Increasingly, it feels like the content producers have more and more power as different players compete to buy the rights to their content. Just think about all of the players that could compete for content from the NFL for example. You could have network TV [CBS (CBS), Fox (FOX), ABC], specialty chains (NFL network, etc), online and streaming players [Google’s Youtube, Amazon, Netflix, Microsoft’s (MSFT) xBox], etc. The content producers know that they have a lot of power and are increasingly able to charge huge amounts.
If Netflix and others see that content prices are rising more quickly than what makes sense from a business perspective, the logical next step is trying to produce its own. It’s a huge challenge and there’s no doubt that some will fail but these players are putting a lot of money and energy into this:
- Netflix: producing its own tv series such as Emmy nominated (and one of the best shows I’ve seen this year) House of Cards
- Google: Pumping millions of dollars into building legit Youtube channels with exclusive, high quality content
- Amazon: Not only is Amazon also producing its own video content but CEO Jeff Bezos made the headlines a few days ago by purchasing the Washington Post (WPO). With newspapers now at all-time low valuations, is now the perfect time to snatch these companies that are able to produce high quality content. When Warren Buffett and Jeff Bezos are both buying up newspapers, there has to be something more than meets the eye. What if these newspapers are able to successfully transform the content they produce to be multimedia and available in various platforms?
- Apple: Nothing yet out of the company led by Tim Cook but there has been speculation for some time that the company could start producing its own content to sell on iTunes, the largest digital marketplace in the world.
It’s very early to tell how this will play out and if technology companies trying to produce entertainment content will even succeed but I think that Amazon and Netflix are the early leaders while Google.has been making progress and others such as Apple and Facebook have barely started. In the end, I think it’s critical for these companies to start working on the content part once they have a solid infrastructure. Having one without the other will likely not be enough. All of this isn’t enough to make me buy or sell a security but I will certainly keep it in mind when doing analysis of tech stocks that I follow.