Media and Communications Supply Chain Analysis Ovum Report to DBCDE 24 June 2013 – Final report Project Number CYTE0678 Table of contents 1 Key Findings 4 2 Project Background 5 2.1 Scope of the project 5 2.2 Structure of the report 5 2.1 Why the supply chain matters 5 3 Supply chain trends: top-level assessment 7 3.1 Key findings 7 3.2 The traditional supply chain 9 3.3 The emerging supply chain 11 3.4 Competition and innovation 15 3.4.1. Competition 15 3.4.2. Innovation 17 3.5 Consumer implications: top level assessment 18 3.5.1. Revenue models 18 3.5.2. Privacy, security and consumer protection 19 3.5.3. Universal service, local content and community standards 20 4 Supply chain trends: the role of infrastructure and devices 22 4.1 Key findings 22 4.2 The traditional infrastructure supply chain 22 4.3 The emerging infrastructure supply chain 24 4.3.1. Cloud IT infrastructure and platforms 25 4.3.2. IP connectivity and the software defined network 29 4.3.3. Devices and the managed device platform 33 4.3.4. The vendor landscape 35 4.4 Competition and innovation 36 4.4.1. Competition 36 4.4.2. Innovation 38 4.5 Consumer implications 38 4.5.1. Consumer revenue models 38 4.5.3. Service availability and consumer recourse 39 5 Supply chain trends: an industry-level assessment 41 2 5.1 Voice and Messaging Services 41 5.1.1. The traditional supply chain 41 5.1.2. The emerging supply chain 43 5.1.3. Competition and innovation 46 5.1.4. Consumer implications 49 5.2 Music Services 51 5.2.1. The traditional supply chain 51 5.2.2. The emerging supply chain 53 5.2.3. Competition and innovation 56 5.2.4. Consumer implications 58 5.2.4.1. Consumer revenue models 58 5.2.4.2. Privacy, security and consumer recourse 58 5.2.4.3. Service availability and local content 59 5.3 Gaming Services 59 5.3.1. The traditional supply chain 59 5.3.2. The emerging supply chain 62 5.3.3. Competition and innovation 63 5.3.4. Consumer implications 63 5.4 Video Services 64 5.4.2. The traditional video services supply chain 68 5.4.3. The emerging supply chain 74 5.4.4. Competition and innovation 79 5.4.5. Consumer implications 80 6 Case Studies 82 6.1 Gree (games) 82 6.1.1. Company background 82 6.1.2. Supply chain analysis 86 6.1.3. SWOT 88 6.1.4. Revenue model 91 6.1.5. Future outlook 92 6.1.6. Impact on the market and consumer 93 6.2 Netflix (video) 94 6.2.1. Company background 95 6.2.2. Supply chain analysis 97 6.2.3. SWOT 100 Ovum Consulting, Level 2, 459 Little Collins Street, Melbourne, Victoria Telephone +61 (0)3 9601 6700 www.ovum.com © Ovum Consulting 2010. Unauthorised reproduction prohibited 3 6.2.4. Future outlook 101 6.2.5. Impact on the market / consumer 102 6.3 Skype (voice and videoconference) 103 6.3.1. Company background 104 6.3.2. Supply chain analysis 105 6.3.3. SWOT 107 6.3.4. Future outlook 108 6.3.5. Impact on the market and consumer 109 7 Attachment: Cloud services in Australia 110 7.1 AWS – cloud services exemplar 110 7.1.1. AWS Cloud services benefits 112 7.2 The Australian Cloud Services Landscape 113 7.2.1. Global IT Services Companies 113 7.2.2. Global Cloud Services Providers: 114 7.2.3. Telecoms Companies 114 7.2.4. Australian ICT Services Companies 115 7.2.5. Australian Cloud Services Companies 116 Ovum Consulting, Level 2, 459 Little Collins Street, Melbourne, Victoria Telephone +61 (0)3 9601 6700 www.ovum.com © Ovum Consulting 2010. Unauthorised reproduction prohibited Media and Communications Supply Chain Analysis 4 1 Key Findings The digitisation of service delivery over networks and the spread of the IP networking protocol have enabled significant changes in the supply chain for communications and media services. We see three main supply chain trends arising from this change: The separation of the Internet applications industry from the underlying IP connectivity industry, splitting industries that were traditionally vertically integrated The horizontal integration of both the applications and the infrastructure industries, though for different reasons. Applications aggregators are integrating different kinds of applications in order to leverage their common investments in applications support platforms. Infrastructure owners such as telcos and cloud service providers are consolidating to achieve economies of scale that can offset declining margins The internationalisation of application markets and the emergence of global applications and of global aggregators like Google and Apple. Underneath these top-level trends, however, there is a great deal of industry detail that qualifies these trends. This report documents industry specifics around voice, messaging, music, game and video services in section 5. To take one important example, the distinction between communications and media services is becoming blurred but it has not been eliminated, due to the persistence of traditional content licensing regimes which still constrain the media industry. This has also held up internationalisation of content applications. These trends have important implications for the patterns of market power in the communications and media industries. The most important developments are the steady decline in the market power of network and IT infrastructure owners, and the rise of global “managed device platform” (MDP) providers who control device operating systems and application ecosystems. The MDP’s achievement of critical mass on a global scale has raised barriers to entry against potential competitors. Google and Apple are the most prominent examples. Privacy and security are also affected. Much of the new application ecosystem is supported by advertising, and the growth of personal data trading and individual profiling has accelerated over the last two years. There is a risk of a privacy backlash that could have significant implications for the funding of future application development. At the same time, the “virtualisation” of network and IT infrastructure, with the increasing standardisation and real- time control of network elements based on standard interfaces, is making networks more efficient but is also introducing new infrastructure vulnerabilities. These trends also challenge local content rules and community standards regulation, since international applications cross jurisdictional lines. At the same time, the consolidation of applications development and aggregation around global MDPs may simplify the management of these issues in the future. Finally, the recognition of broadband IP access as the enabler of the benefits of the application ecosystem has led to a rising interest in broadband access, reflected in the overall trend towards policies in support of infrastructure investment. At the same time as these technology-enabled trends have emerged, there has also been a significant change on the demand side. Research by Ovum and others shows that the traditional passive identities of “subscriber” and “audience” are giving way to a more active, “consumer” identity amongst users of services. Different consumer segments differ in their preparedness for this transition, which will challenge policy-makers who seek to adapt policy to these new industry conditions. © Ovum Consulting 2013. Unauthorised reproduction prohibited. Media and Communications Supply Chain Analysis 5 2 Project Background 2.1 Scope of the project The DBCDE has asked Ovum to develop a report which describes and analyses the supply chains for the production and delivery of both mass consumed digital media and communications services and emerging digital media and communications services. The analysis will have regard to domestic and international markets and include: Existing supply chains versus new and emerging supply chains Business models and strategies employed by the key players involved within the supply chains A high level assessment of competition and competitive advantage in the supply chains A high level view of relative costs across the supply chain. In this context, the report also describes and analyses the key implications for consumers over the medium term, resulting from likely changes to the supply chains of digital media and communications services. In addition, the report contains three case studies that detail the supply chains of specific media and communications services. 2.2 Structure of the report The report’s methodology is to examine the differences between traditional and emerging value chains, particularly the patterns of horizontal and vertical integration and disintegration, for a range of communications and media services. In addition, the report examines the current and potential impact of supply chain changes on the consumer environment. This analysis is conducted in Section 3. Although there are broad supply chain trends that affect both communications and media services, much of the emerging infrastructure supply chain is common to a range of new services. This infrastructure supply chain is examined in more detail in Section 4. There are important differences between different industry verticals that use this infrastructure. In order to understand these differences, supply chain changes and consumer impact are assessed for five different supply chains: • instant messaging and voice for communications services. • digital gaming, digital music and video entertainment for media services. Section 6 includes three case studies of emerging market players to demonstrate the issues at an operator level. These case studies of supply chain relationships have been prepared for emerging players in the voice, gaming and video entertainment industries. 2.1 Why the supply chain matters Changes to the supply chain for communications and media services have affected consumers of those services in several ways. The most obvious impact is the proliferation of devices and suppliers that consumers face, a result of an increasingly complex supply chain.