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Education of the Human Mind

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The Entertainment Value Chain We've seen lots of activity along this value chain lately. NewsCorp/DirecTV and the abandoned Comcast-Disney effort are/were attempts to meld distribution and content. Time Warner is still trying (with little success) to combine distribution, content, and apps. Device makers like Apple and Gateway represent efforts (one successful, another not) to extend beyond devices. Palm and TiVo are examples of relatively new device-app combinations. Apple is grabbing three pieces of the value chain with its iTunes product.

Why all this jockeying? We see three trends driving vertical integration.

1. Everyone is (rightly) nervous. Each link has more competitors than ever before. Cable and telcos are stepping on each other's turf. Distributors like Comcast own their own content properties, siphoning eyeballs and advertising. PC makers like Dell are moving into the CE space. Retailers like Circuit City will compete with cable and telcos to install and service the digital home. It's brutal out there.

2. Dollars are moving away from content creators. Cable companies take money out of the pockets of content makers in many ways: VOD fees, increased sales of local advertising, and premium fees for their own channels (like local sports networks). Digital downloads are siphoning revenues from music publishers. And marketers are spending more time, energy, and dollars on new forms of marketing like search, email, and their own brand Web sites.

3. The hardware business ain't so rosy, either. Commoditization and overseas threats don't bode well for device makers. Case in point: When Gateway started selling big-screen TVs, that was a sure sign that selling PCs ain't what it used to be.

4. Dollars are flowing to the application layer. The distribution, content, and device layers are mature multihundred-billion-dollar businesses -- all of which are under attack. The apps layer is in its infancy, a fast-growing market of a few billion dollars. Think TiVo fees, RealOne subscriptions, Google's advertising dollars, Apple iTune fees, and mobile data service revenues. We're just getting started here, and there's only one way to go . . . up.

5. Experiences will mean more than any piece of the chain. Is there one place in the value chain that is best? No. For companies pondering where they should be, the question to ask is: What is the best place in the chain for a particular experience? For video search or a local directory, distribution players will exert the most leverage. For long-form entertainment, content owners will win out. For business information or communication experiences, apps will harvest the most value. Devices will control experiences that are intimately tied to the device, like photos or games.

The digital home is just getting started. We'll be writing a lot more about it during the next year. Also, next month, our 2004 Consumer Technographics Benchmark will be complete, as well as reports on mobile messaging, email service vendors, and video on-demand. Have a great June!

Chris Charron

Vice President

Devices, Media, & Marketing Research

P.S. If you'd like to suggest research for us to write or if there are data points you are looking to track down, feel free



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