ParisTech Review

For five years, the entire audiovisual industry has been striving to accompany and even to anticipate consumption patterns through two new services: catch-up TV services and video on demand (VoD). Nowadays video is consumed anytime, anywhere, on any device. The French market is a perfect example of what is happening in other developed countries: in 2012, 97% of French people aged over 15 years watched catch-up television on their TV set, 32% on a computer, 8% on a smartphone, and 3.5% on a tablet.

The emergence of the VoD market is also the token of a dematerialization process, and it marks a major disruption in consumption patterns. This new distribution method offers an attractive alternative to DVD rental services. It also helps to enhance the supply of Internet service providers. With 45 million videos downloaded (twice the figure of 2009) among the 68 VoD platforms that exist in France, this service, it seems, is in fact prevailing in the consumption habits of the French, giving them access to some 40 000 files: movies, series, shows, and documentaries.

Nicknamed “Atawad” (“Any time, anywhere, any device”), this new consumption pattern is inevitably shaking up the stakeholders of the video industry, as exemplified by the recent closure of the Virgin Megastore in Paris or the reconfigurations of the Groupe TF1 or Fnac . With 55% of the French consuming cultural goods on the Internet, with an average monthly expenditure of 36 euros for 75% of online buyers, the cultural sector is not facing a decline in demand but a profound change: that of its consumption patterns and, consequently, of the economic models of all its stakeholders.

New landmarks are needed to guide these transformations. We have developed six axes, which we shall illustrate with the digital strategy of Arte France Développement, a subsidiary of the TV channel Arte in charge of digital issues.

1. Reformulating the customer value proposition

Customer value proposition (CVP) is the foundation of any economic model. External challenges should be an opportunity to focus actions and energy on the source of any sustainable value creation: the provision of “useful effects” and therefore of customer benefits. Enhancing or adapting the formulation of the customer value proposition will bestow meaning and strength to all stakeholders, primarily among employees. To do this, that formulation must combine several qualities: simplicity, ideally envisioned starting from the client’s perspective, understandable and easily remembered by anyone ; singularity or uniqueness, to identify the specific field covered by the model compared to the competition ; and lastly, credibility, the entire action system actually being refocused around this proposal.

In the case of Arte France Développement, whose goal is to sell part of Arte’s catalog, the value proposition must also be consistent with the mission and values of the parent company: quality, diversity and high standards. Arte’s mission is to “provide cultural content that caters to all viewers that are curious and open to the world, throughout Europe and especially in France and Germany.” To implement this mission in a digitized commercial offer, the model must be based on a thorough understanding of the expectations of existing customers and of those who are to be seduced by the new offer.

Two services have thus been created: catch-up TV (Arte +7) and video-on-demand (VoD Arte). The customer value proposition can be reformulated as follows: “to provide access to culture via the ARTE catalog on all media platforms, 24/7, with the help of quality documentaries or films that are demanding and respect cultural diversity.”

2. Exploring new revenue sources and methods

A business proposal is also assessed by its ability to generate revenue streams. Reinventing an economic model can be achieved by smart questioning and engineering that specifically revolves on how to build the “top line”, i.e., turnover.

Identifying sources of income can be achieved through a three-pronged approach. First, by identifying potential partners and their role, in terms of use, financing, contribution to the construction, distribution or promotion of the value proposition.

Second, by identifying how various components within the offer contribute to monetization, and by designing different packages or “bundles” that combine diverse products or platforms, services, rights of use, equipment, software…

Lastly, by studying the methods of payment: transfers of ownership of a product or platform, subscription, payment for a defined use vs. unlimited use, royalties… and possible combinations of these modalities.

Until recently, the economic models of the video industry were based on the sale of physical media (VHS, DVD). Monetization intervened upon payment of such physical media. Dematerialization, however, makes it an imperative to explore new perspectives for sources of income.

To design the digital model for Arte France Développement, the questioning was explicit: how to charge the access to online services? Through pay-per-view, through subscription? Or through advertising? Subscriptions secure revenue and reinforce brand identity. Pay-per-view perfectly fits into a functionality-oriented economy. As for advertising, it is based on high visitor traffic.

Beyond financial considerations, and its impact on the working capital requirements of the company, the reflection could not escape the legal constraints of the sector. On this market, offer is governed by a rule specific to the audiovisual sector called “media chronology” which aims to safeguard theatrical releases. Only after a given time has passed are other forms of exploitation such as video permitted. In France, the waiting time for a film to be available after its theatrical release is six months for the DVD format, four months for video on demand, 12 months for encrypted pay-TV (CanalPlus), 24 months for unencrypted pay-TV (if the channel coproduced the film), and 36 months for all free TV channels. A waiver to shorten the period to four weeks after theatrical release is possible if the distributor is also the producer.

However, should the chosen billing model be subscription-based, the original delay of four months jumps to a full 36 months. This is why most VoD platforms offering films are based on a fee-for-service model. On the contrary, specialized platforms like Vodeo.tv (specialized on documentaries) or generalist ones like Canalplay in France or Netflix in the USA offer their customers an extensive catalog, essentially resting on a vast collection that has but a few exclusives. With a “sophisticated” catalog that includes some 2,800 titles, Arte’s offer does not reside in a large volume of titles, but in a qualitative selection. This is why a fee-for-service approach was chosen.

3. Rethinking the value chain and the boundaries of the operating system

A value chain consists in initiating and assembling operations: designing, purchasing, processing, transporting, promoting, marketing, managing customer relations, etc. These operations revolve around a double flow, at once physical and informational. A new context thus requires rethinking the linkage between operations and between stakeholders. New combinations should be sought and devised.

The previous model, which was based on the DVD, allowed for a clear value chain: design, production, directing, editing, promotion, distribution, etc. It was easy to identify the respective positions of writers, publishers and distributors. With the new digital environment, it is a whole different ball game: distribution and promotion channels and devices have exploded, some stakeholders have declined or disappeared altogether (DVD distributors), some have appeared (equipment suppliers and telecom operators), the balance of power between stakeholders has shifted, the possible link between production and distribution has been reinforced, etc. In short, for a video producer the central question is no longer “who will distribute my film” but “which ecosystem do I fit in.”

With content being separated from container, Arte France Développement is confronted with the following dilemma: should they invest in a distribution platform or join an existing ecosystem like Apple’s? The response comes through a calculation of the value captured by said platform. A proprietary platform – such as www.artevod.com – delivers superior revenue to that generated on iTunes. Given that two-thirds of television-on-demand sales are carried out through home multi-play set-top boxes, it is also necessary for the company to distribute content on the consumer’s favorite channels. Arte France Développement has chosen a multi-channel strategy, selecting a portion of its catalog to make it available on the dominant ecosystem.

4. Rewriting the economic equation

Reinventing a business model translates into a new economic equation. In the context of the revenue permitted by the value proposition and by monetization, reengineering the operating system allows to identify a structure and a typology of costs as well as of the capitals employed (fixed assets and working capital requirements). The transformation of a business model may impact the combination of margin on income rate with capital turnover. The ability to envision cost structures in a different way therefore becomes a crucial issue. Visualizing operation costs (design, trade, etc.) should be favored over classifying costs by type (purchases, staff costs, etc.). It is essential against this background to be able to understand the relative evolution of fixed costs and of costs which are proportional to the business volume.

In the case of Arte France Développement, the decision was made to invest in a platform dedicated to distributing Arte’s programs: www.artevod.com. Calculation of the break-even point establishes the validity of the economic equation. It has been observed that stakeholders downstream of the value chain, such as Apple or Free, are strengthened in this process. Indeed, publishing and distribution costs, with the exception of bandwidth, are strictly proportional to revenue. Profitability therefore varies linearly with the selling price – without a threshold effect. Below a retail price of 1 euro, the publisher’s gross margin becomes negative. As for content rented via multi-play set-top boxes, profitability also varies linearly with respect to revenue. The lack of bandwidth costs and the absence of billing on behalf of the publisher imply that revenue is fully shared with the copyright holder. There is therefore no risk of a negative margin for the publisher, whatever the selling price… which gives leverage to IPTV service providers (Free) and to the iTunes Store (Apple).

5. Identifying the new driving forces of growth

Value creation is not only measured statically, but also and especially according to a dynamic perspective, from future cash flows. The implementation of a new business model must make it possible to identify new sources of growth.

Dematerialization makes it possible to multiply distribution channels, and even to propose new billing models. Thus, it is quite possible to imagine the appearance of a monthly subscription offer via a global provider like YouTube or Dailymotion. Arte France Développement is currently testing such diversification: in early 2013, a subscription-based offer was launched for the geopolitical program Le Dessous des Cartes via Dailymotion (at 3.99 euros per month, non-binding). It is also conceivable that the aforementioned distributors will become increasingly involved in the production of content.

6. Linking the diversity of business models with platform effects

It is an imperative in the art of strategy never to be caught flat footed, in this case by new entrants that deploy new and more efficient models. Implementing economic models that allow to fight on an equal footing with actual or potential new entrants thus constitutes a relevant strategic alternative.

VoD platforms have no choice but to develop fast in order to reach a critical mass in terms of catalog and distribution partners. This is why we are witnessing not only a race towards critical size, but also the coexistence of different economic models within one same platform: VoD platforms now offer different payment models (fee-for-service, subscription-based, or supported by advertising).

To ensure consistency between the different business models and platform effects, companies must bet on the dominant technology. Choosing the technical standard used by the majority of consumers remains the key issue for a company like Arte France Développement: should one invest on the ecosystem used by Apple, by Microsoft (Silverlight) or by Adobe (Flash)? Given the proprietary technology used by manufacturers, compatibility problems may arise between the playback formats offered by these manufacturers and the formats issued by the content provider. Thus DRM protection (Digital Rights Management) in a format specific to the multimedia player (Windows Media Player, i-Tunes, etc.) can block the playback of video files (flv, divX, avi, mpeg4, 3GP, QuickTime, MP3, AAC, AMR) if the user does not possess the right technology or a compatible player.

Choosing the right technology is to ensure better access to consumers for the company. In this regard, Arte’s choice has been negative given that by equipping itself with Windows Media Player technology at the launch of its platform, the company has cut itself off from Apple and Linux users. The new version of said “player”, Silverlight, very recently provided an answer for such compatibility issues.

To sum up, we are presenting below the 6 benchmarks identified as key to reinventing a business model.

Entry into new business models is not a magical winning formula. It depends on the overall project of the company. Not posing questions with the right timing and not being capable of reinventing one’s internal boundaries when it is needed is a serious strategic mistake. Technological developments (digitization of video signal with digital terrestrial television and multiplication of free channels), sociological ones (television consumption patterns) and competitive ones (new globalized entrants such as Amazon, YouTube or Netflix) are going to disrupt the economic model of television channels and more generally that of content producers.

In this paper we have proposed a checklist for business leaders wishing to think about reconfiguring their business models, particularly in light of the threat of new entrants with an international dimension. For example, YouTube already has several million subscribers to its channels in the United States and has begun climbing the value chain by producing great directors. One million people (amateur videographers, producers, partners…) receive a monthly check from YouTube, which is more than the total number of employees of U.S. television stations and Hollywood studios combined. The platform is therefore turning into a giant bundle that attracts more than 800 million unique visitors per month and $ 3.6 billion in advertising revenue. Beyond the notoriety it provides them, YouTube allows its contributors to collect 50% of the revenue deriving from the ads that run before their videos actually play. Thus, an amateur videographer can collect three to six euros per thousand views. The latest to have benefited from this system is a Korean artist who became a millionaire, a certain “Psy”…

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• http://twitter.com/PerrinAlexandre Alexandre Perrin

  A complementary article about YouTube: “YouTube Declares War Is Over And It Won” : http://www.mediapost.com/publications/article/199471/youtube-declares-war-is-over-and-it-won.html#ixzz2S9WaojAX