This paper applies Michael Porter's Five Forces framework to analyze the competitive environment for a hypothetical new online music and movie download business. The analysis examines supplier power, barriers to entry, buyer power, threat of substitutes, and competitive rivalry in a market dominated by established players like iTunes, YouTube, and Hulu. The paper concludes that while barriers to entry are low and competition is intense, differentiation strategies targeting underserved market segments offer a viable path forward for new entrants willing to invest in market research and specialized content positioning.
According to management theorist Michael Porter, "the model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure" (Porter's five forces, 2008, Quick MBA). Thus, every new company offering either an innovative or existing type of product or service must understand its current position in its specific industry market. A new company must strive to position its product optimally by conducting what Porter calls a Five Forces analysis.
Five Forces analysis offers insight into the current market environment in a product-specific way. It can also enable manufacturers to reframe their product or service offering to be more unique and competitive, particularly in markets that are not especially welcoming to new entrants. In this instance, the proposed business under analysis will be a new company designed to provide downloadable music and videos over the Internet. The online company will attempt to rival current popular websites such as iTunes, Kazaa, Hulu, and YouTube.
Finding a new and unique online niche will be necessary, given the highly competitive industry structure, low barriers to entry, and fickle nature of consumers in the target demographic. The business does have some advantages, such as relatively low input costs for maintaining a website, but this alone does not guarantee success. This analysis will examine each of Porter's five forces to evaluate the feasibility of entering this competitive market.
"Introduction to the five competitive forces"
The first of Porter's forces is supplier power, which includes supplier concentration, importance of volume to suppliers, differentiation of inputs, impact of inputs on cost or differentiation, switching costs, presence of substitute inputs, threat of forward integration, and cost relative to total purchases in the industry. One advantage of marketing an online service, such as downloadable movies or music, is that there are relatively few input costs beyond maintaining the website. However, suppliers do have significant power to withhold attractive content.
Many broadcasting companies refuse to allow content to be transmitted online, or will only allow content to be disseminated through select websites. This creates a substantial barrier for new entrants attempting to secure premium content. Additionally, the company must position itself relative to its cost scale in relation to the prices of other online companies, such as iTunes. Even if it provides a free service, evident added value must be conveyed to attract advertising revenue by drawing traffic comparable to existing online viewing sites such as YouTube, Hulu, and the websites of television channels that provide free content. This constraint may significantly affect the new business's ability to offer specialized or differentiated content relative to competitors.
The second of Porter's forces is barriers to entry, which comprises absolute cost advantages, proprietary learning curves, access to inputs, government policy, economies of scale, capital requirements, brand identity, switching costs, access to distribution, expected retaliation, and proprietary products. In theory, the barriers to entry for an Internet company are extremely low—all that is required is a website, the knowledge to operate it, and an innovative idea. In actuality, however, the barriers may be higher than they initially appear.
Consumer preference presents a difficult barrier to surmount. Consider the search engine market, where Google has become virtually synonymous with web searching, despite being merely a brand name. YouTube and Hulu have substantial brand loyalty in free video viewing; Kazaa and iTunes dominate the downloadable music market. Although it is not a formal structural barrier, it will be difficult to divert advertising revenue away from sites that already have massive traffic and possess a strong first-mover market advantage. Even Microsoft faced significant difficulty challenging Apple in the downloadable music market.
On the other hand, while consumer attention spans are finite, internet users can theoretically download or watch content from multiple sites simultaneously. Thus, users do not face a clear opportunity cost when selecting one site over another, other than time. The first-mover advantage is surmountable if the proposed website can offer substantial added consumer value or is significantly differentiated from current offerings.
The third of Porter's forces is buyer power. Online, buyers or users have tremendous power because they can be quite fickle and simply switch allegiance with a point and click of the mouse. Buyer power comprises bargaining leverage, buyer volume, buyer information, brand identity, price sensitivity, threat of backward integration, product differentiation, buyer concentration versus industry concentration, available substitutes, and maximizing buyers' incentives for choosing one website over another.
Buyers have access to a wide array of currently familiar websites for downloading music and movies, and they possess a high degree of leverage because of their willingness to switch websites or opt out of the technology entirely. Downloadable movies and music are luxuries rather than necessities, giving consumers significant negotiating power. Brand loyalty for websites is low, as users visit sites to explore content rather than because of website prestige. Price sensitivity is also high, given the availability of free content. Downloaders of music and movies are reluctantly willing to pay, but only for content they consider worthy of premium status.
The fourth of Porter's forces is the threat of substitutes, which is extremely high in the digital content market. There are relatively few detrimental costs for users when switching from one substitute to another in the downloadable content market. Past precedent suggests that buyers tend to be loyal to particular websites. While subscription models offering unlimited monthly content can create a "buy-in" audience, few consumers are willing to invest in subscriptions at new, untested websites given the ability to be more flexible in their buying habits at established sites.
Given the popularity of Kazaa, which offers unlimited subscriptions and access to a wide array of popular artists, asking consumers to subscribe monthly to an unproven site may prove problematic. A clear additional value must be offered in terms of performance and content to make the trade-off of viewers' time worthwhile. Without compelling reasons to abandon existing platforms, new entrants will struggle to convert users from established alternatives and competing entertainment websites.
Porter's fifth factor is the degree of rivalry, including exit barriers (extremely low online), fixed costs and value added (low), industry concentration and growth, intermittent overcapacity, product differences, switching costs (low), brand identity, and diversity of rivals. The new website must clearly brand itself as something unique and advertise its ability to provide distinctive value to viewers. Viewers must know they are coming to experience something special at the evolving website, much as they visit iTunes or Hulu knowing their favorite artists or television personalities will be featured.
Low levels of consumer loyalty, the ease of switching websites, and a relatively wide array of Internet sites to distract consumers increase firm rivalry online in entertainment content distribution. Even though the number of best-known websites popular for seeking such content is small, the potential for new entrants to proliferate remains high due to low barriers to entry. This intensifies competitive pressure on all players in the market.
Given the high levels of competition in the downloadable music and movie market, proceeding into these competitive waters must be done with extreme caution. However, several possible solutions exist to cope with this highly competitive marketplace with low barriers to entry. Differentiation seems to be the most likely solution.
Offering a special, exclusive line of videos or music selections is one way to draw attention and traffic to the website. If the website can enter into an agreement with a popular artist or television show for exclusive content, an automatic consumer base will be generated. The challenge lies in finding such an agreement with a sufficiently popular artist. While established artists might offer iTunes an exclusive release contract for a new song, they would be far less likely to do so for an unknown website unless the arrangement served charitable purposes or garnered additional press attention.
Another possibility is to create a built-in audience by entering into an agreement with an existing institution, such as a university, which can offer online course content through the website. This approach would assure the site of an automatic audience base. However, branding the website as an educational content site could limit revenue potential, as the main source of income would likely be students, and outsiders would not be drawn to viewing its content.
Porter also offers strategies for gaining competitive advantage regarding market position, such as a broad-based strategy with a low-cost, high-volume cost leadership model, a broad-based differentiated model, or a smaller, segmented, focused strategy within a niche market segment. In the case of websites offering downloadable music and movies, with razor-slim profit margins based on clicks, subscriptions, or downloads, appealing to a broad audience is critical. However, differentiation remains essential. Positioning a website to appeal specifically to downloaders of alternative movies and music, for example, would be one way to navigate the challenges of a highly competitive, supersaturated marketplace with several powerful existing major players.
Starting a new Internet website devoted to downloadable music and movies appears to be an uncertain prospect, given the high levels of competition in the current marketplace, the power of existing rivals, and strong levels of buyer power and consumer switching behavior. However, the challenges are not insurmountable if the new entrant pursues a strong differentiation strategy and appeals to a broad yet underserved market segment.
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