"Fast Follower" Strategy Might Not Work in Video Streaming Business

As a rule, major transitions in technology and revenue models are slower to develop than most predict.

In other words, the amount of change tends to be overestimated in the near term, and underestimated in the long term.

That has direct implications for would-be suppliers. Overestimating near term demand means some firms will enter too early, and fail before the opportunity can be realized.

Others simply will over-invest in promotion, before conceivable sales justify that level of investment.

Other potential constants will wait too long to enter the market, and fail to gain a foothold at all.

In fact, some common business strategies, such as the “fast follower” model, will fail, in part because brand-new markets, after an inflection point, are created so fast that there is no time to use that strategy.

In fact, that illustrates the tension between the “first to market” and “fast follower” strategies overall. The “first to market” principle suggests that firms entering a new market need to move quickly, so they are in position to dominate the new market.

Others argue that, generally speaking, a “fast follower” strategy works better, and that the benefits of being a first mover are over-rated.

That might not be true for every market, and almost certainly will not be the case for over the top video. The reason is that big new markets often develop so quickly, once an inflection point is reached, that contestants not already in the market do not have time to get in.

So maybe, somewhere between “first mover” and “fast follower” is a position that might be termed “early mover,” where a contestant perhaps is not first, but is early into a developing market, without waiting for the market to develop to the point where a “fast follower” strategy works.

The other issue is what qualifies as “fast.” Some firms, especially those facing disruption of their core legacy businesses, simply wait too long to respond, and might be called “lagging followers.”

Others who might say they are “fast followers” wait until they are fairly certain a sizable market exists before jumping in. That can make them “faster, but not fast enough” contestants, if the market goes from a small number of early adopters to mass market too quickly.  

Such decisions are tough because inflection points, where adoption of any new product dramatically increases, are tough to spot, in advance.

In the consumer electronics industry, the inflection point often occurs when the innovation is adopted by about 10 percent of homes. As slow as adoption might have been before the inflection point, adoption often is quite rapid after the inflection point.

Seven years after the iPhone was launched, 70 percent of the US population is using smartphones.

Smartphones existed before the iPhone so the category is older than seven years but as far as adoption goes this is nearly the fastest ever.

The CD Player reached 55 percent adoption in seven years and the Boom Box about 62 percent. If measuring the period between nine percent penetration and 90 percent, Asymco estimates a nine-year period between smartphone inflection point and saturation.

So if market saturation is reached in nine years, one might reason that a firm has to be ready to scale up in the first years of a new market where global distribution and manufacturing are required.

The reason is simply that the market will be saturated in just nine years. Any firm that requires four years to build a global capability will already have missed half the potential market before it is ready to compete fully.

More to the point, it took only six years for smartphone penetration to grow from 10 percent to 70 percent in the U.S. market.

Even competitors already in the smartphone market were not assured of success. “Late” in this case was tantamount to “never.”

Something like that could happen in the over the top video streaming market. Consider the effort, time and money Netflix is spending to build a more-global capability, as much as it dominates the U.S. market.

Netflix, which operates in about 40 countries, has to spend money to add local programming in many of those countries, and local content really does not scale. And Netflix points out that 80 percent of the potential market lies outside the United States.

Whether you consider Netflix a first mover or a fast follower, it is in the market at a point where the broader inflection point--a shift of most major channels to over the top delivery--has not yet occurred.  

The larger point is that the inflection point is approaching. Would-be leaders in the video streaming market essentially need to be in the market, or get into the market soon, to ensure they are in position once the inflection point is reached.

The National Basketball Association and ESPN are planning a new online video service that would stream regular season games, apparently on an over the top basis, without requiring purchase of a linear video subscription.

The contract rights for such a move have been approved by the NBA, which means we might eventually see a direct-to-consumer NBA package similar in revenue model to

HBO's over the top streaming service and the CBS All Access over the top streaming service.

Starz likewise is launching an over the top video streaming service for Asia, Africa, the Middle East and Latin America.

It seems only a matter of time before other channels and networks also decide it is time to launch their own OTT services as well.

You might wonder why the inflection point, and which firms are in the market when that happens, matters.

The “fast follower” strategy might not to work.

In brand-new markets, adoption grows so quickly after the inflection point that there simply is not time for a new contestant to gear up to meet the demand.

If a firm has not already positioned in the new market space, it often takes too long to respond to the new market’s sudden emergence.

And that means market leadership goes to one or more firms that already have invested in the new space, and are poised to scale up operations quickly once a mass market develops.

Once the inflection point is reached, contestants might have only six to nine years before most of the market is taken by one of the suppliers.

Linear to OTT Video Inflection Point Grows Nearer

By some reports and studies, ESPN lost 3.2 million customers in less than a year, and the company recently said ESPN could be sold direct to consumers in the future, all signs that a fundamental change in the linear TV subscription business is closer.

Disney says such reports are wrong, though acknowledging some slippage. That is intended to reassure investors, and others, that the ESPN business model remains intact.

Big and fundamental changes in markets rocked by changing technology tend to happen rather slowly at first, then reach an inflection point where everything changes rather quickly.

That is one reason why some believe Netflix will not be challenged, once the inflection point is reached. “Netflix is the most powerful content aggregator in the world today,” said Charlie Ergen, Dish Network CEO. “And there's nobody that's even close.”

That illustrates one element of inflection points. Contestants sometimes think “we have time” to jump in one the inflection point clearly has been reached. The problem is, by that point it is too late. The leaders will zoom and dominate the new market; late entrants will struggle and generally fail.

Just how close we are to the inflection point still is not clear, but Netflix continued growth, subscriber losses in the linear business and what is happening to the fabled ESPN franchise are indicators the inflection point is coming closer.

To be sure, in its third quarter of 2015 report, ESPN owner Disney reported stronger revenue and earnings per share, net income and cash flow.

In fact, the number of subscribers for ESPN overall actually grew, but apparently not at the flagship ESPN network itself.

“ESPN has experienced some modest sub losses, although those have been less than reported by one of the prominent research firms and the vast majority of them, 80 percent, were due to decreases in multichannel households with only a small percentage due to skinny packages,” said Bob Iger, Disney CEO.

It is true that 83 percent of all U.S. households watched ESPN in the first quarter. But that’s the thing about inflection points. Once reached, everything changes, fast. In other words, 80 can become 20 in a rather quick period of time, compared to all the slow, grinding shifts that happened before the inflection point.

TV Inflection Point Might be "A Few Years" Away, says Moody's

Cable TV companies do not face immediate revenue threats from over the top video alternatives “for the next few years,” according to Moody’s Investor Service.

Perhaps the key phrase is “for the next few years.” At some point, a transition to OTT streaming services is going to hit an inflection point, the rate of change will go non-linear, and the business will change rather quickly.

So far, the changes have been gradual. In 2014, cable suppliers lost about 1.2 million accounts, while AT&T and Verizon picked up about a million accounts. Satellite suppliers gained about 20,000 accounts. So there was a net shrinkage of about 126,000 accounts, on a base of 95.2 million.

The decline of cable accounts has been underway since 2012, the Federal Communications Commission reports.

On the other hand, late in 2013, for example, U.S. cable TV operator high speed Internet access accounts surpassed video accounts for the first time. That does not necessarily speak to the health of the video subscription business, though, as cable losses were to the benefit of telco suppliers.

A change in adoption from rather slow and linear to exponential tends to happen for adoption of most important new technologies, however. There is a longish period where it seems not too much change is happening, but then an inflection point where adoption rapidly increases.

A firm that misses the transition quite frequently begins a period of irreversible decline. On the other hand, such inflection points are common in the communications business.

Until the early 1990s, few people actually used mobile phones. But mobiles suddenly became the primary way people globally make phone calls and arguably also have become the way most people get access to the Internet.

The inflection point everywhere in the developing world seems to have happened between 2002 and 2003.

In 2000, one might still have looked at tele-density figures for Africa and south Asia and still have concluded that not much was happening, in terms of adoption. But that changed, sometime around 2004, when a growth inflection point was reached, both in terms of income and use of mobile phones.

That has direct implications for Internet access as well. Over time, the volume of smart phones, compared to feature phones, will shift dramatically in the direction of smart phones. And that will rapidly change the usage of Internet apps.

Statistics showing wide disparities in use of the Internet around the world are snapshots in time. What is equally important is the pace of change. One might have argued, based on statistics from 1990 or 2000, that many in developing regions developing regions still were not able to use phones and computers or get access to the Internet.

But an inflection point occurred in India around 2004.

One might wonder how close we now are to such an inflection point in the video entertainment business, as some studies suggest an uptick in customer churn, in a business that generally has been seeing smaller churn rates for a decade or more.

Moody's analysts said that the strength of the high speed access business, limited competition, and customer inertia would give cable operators time to adapt to the rise of new entrants to the sector.

"OTT options will take a small number of traditional pay TV subscribers, but the shift in the pay TV sector will be evolutionary, not revolutionary," said Moody's Vice President Karen Berckmann.

One advantage for distributors is that content owners are not pushing too hard for change. "Content providers are treading cautiously so traditional cable operators now have the chance to build financial flexibility and prepare in case industry fundamentals change more significantly."

Some would argue from history that is likely to happen. Change will be incremental until the inflection point is reached. Then change goes non-linear and exponential.

The danger is that an incumbent has not prepared in advance for the rapidity of the eventual shift. The greater threat is that the incumbent simply does not possess the desire and skills to make the transition.

Has Video Cord Cutting Finally Reached an Inflection Point?

This is probably a good example of what an inflection point (if accurate) looks like: more than half of “cord cutters cancelled their legacy pay-TV service in the two calendar years of 2015 and 2016,” according to The Diffusion Group (TDG).

In other words, the rate of change--assuming the data is correct--itself changed in 2016. In 2016, the linear video abandonment rate hit about two percent, much higher than had been the case over the last decade or so, where annual net losses have been in the “far less than one percent” range for most of the last five years. So a jump to as much as a two-percent abandonment rate in a single year would, if continued, represent an inflection point.

Inflection points are important, as they signify the “turning point” where an existing trend changes its rate, and goes exponential.

About a third of all respondents reporting they had abandoned linear video services had done so in a single year: 2016, an indication that the long-expected inflection point for linear video has been reached, and that change now will rapidly accelerate, if the TDG consumer response data is accurate.

The issue is that the self-reported behavior is at significant variance (an order of magnitude, 10 times) with other data.

Still, assume the high and low estimates of service abandonment are directionally correct, and that even the low estimate represents a dramatic rate of change difference that is sustained over the next few years and beyond.

If so,  then cord cutting not only has passed its peak of adoption, but now will decline much faster than has been the case over the last decade. Much depends on whether respondents are accurately reporting their behavior. There is some evidence they are not.

It is true that the rate of linear video subscriptions is increasing, but still at relatively low rates.

source: TDG

One has to be careful, though. It appears to have generally happened that sales of voice subscriptions by legacy telcos has fallen as precipitously as projected in the past.

What also has to be noted is that there has been offsetting product substitution (mobile for fixed) as well as supplier market share changes (share shift to alternate suppliers such as cable TV providers).

source: FCC

To be sure, few telcos actually report that voice line sales are as low as 18 percent of locations passed, though some have predicted losses would be that large. Instead, most legacy telcos say slightly fewer than half of homes passed actually buy a voice service.

The point is that, in the U.S. market, an inflection point for fixed network voice subscriptions was reached about 2000 or 2001, marking not simply the point where growth rates changed in terms of magnitude, but also in direction (positive to negative).

source: FCC

The same inflection point can be seen in global use of text messaging, where over the top alternatives hit an inflection point around 2003 to 2006, for example.

source: The Economist

European Mobile Broadband Penetration Growing: No Inflection Point, Yet

Mobile broadband penetration should reach 14 percent of the subscriber base in Western Europe, according to analysts at the Yankee Group.

So what should we expect for growth over the next decade? One might be tempted to extrapolate on a linear basis from where we are now. That is probably the one scenario that will not happen, as users change behavior and adopt both smart phones and use of mobile networks to support additional devices such as tablets.

Most technology and consumer electronics products actually are adopted in a non-linear fashion. There typically is a longish period of slow adoption, and then an inflection point where the rate of growth changes dramatically, and adoption is much faster.

Consider mobile phone adoption in the U.S. market. For a substantial period, including the years not shown on this CTIA chart, adoption was modest. But you clearly can see that the rate of adoption hit an inflection point around 1994, when the rate of adoption changed. 



That is likely to happen with mobile broadband as well. What we don't know is when the inflection point will arrive. But a good rule of thumb for most popular applications and devices is that change occurs more slowly at first, then more rapidly after the inflection point. So far, mobile broadband has not hit its inflection point. 

Mobile Commerce, Payments Inflection Point?

There have been a couple other mobile inflection points in the mobile business recently.

Watch for a Marked Acceleration of Gigabit Home Broadband Subscriptions in 2021

When will gigabit home broadband hit an inflection point? Probably in 2021. The inflection point is important, as it has in the past been the point at which slow or low adoption of a product accelerates, growing at a faster clip. 

Gigabit home broadband, on the other hand, might be nearing an inflection point. Important consumer technologies tend to hit an inflection point at about 10 percent adoption. And Openvault data suggests gigabit home broadband reached 8.5 percent adoption at the end of 2020. 

That means gigabit accounts will hit 10 percent of the home broadband installed base in 2021. And if the pattern holds, that means the adoption rate will shift to a higher gear, growing much more rapidly than we have seen over the last five to 10 years.

The reason 10 percent seems to be the trigger, one might argue,  is that it is the point where early adopters have become customers and users, setting the stage for behavior to extend to the majority of consumers. 

source: Engineering.com 

When will U.S. 5G hit a subscriber inflection point? Not this year.

In January 2021, 5G coverage reached 75 percent of potential U.S. users, albeit mostly using low-band spectrum, so performance improvement is slight. Coverage refers to availability, not subscriptions or usage. By July 2021, 80 percent  of the U.S. population is expected to have 5G coverage, says PwC. 

PwC forecasts that 12 percent of mobile devices in use by U.S. customers in July 2021 will be 5G enabled. That might or might not mean all those devices are used on the 5G network, however. 

Possibly for that reason, PwC suggests the 5G inflection point for adoption will happen later, in 2023.

One can see an example in cell phone adoption by U.S. households. About 1994, household adoption reached 10 percent or so, after a longer period of slow adoption. An analogous pattern happened with smartphone adoption as well. 

 

source: Our World in Data 

The adoption pattern perhaps is easier to visualize with a longer time frame. Here is a chart showing cell phone adoption in the United Kingdom.

source: Our World in Data

A wide range of physical products have shown the same pattern. Automobile adoption shows adoption accelerating once the 10-percent threshold was hit. 

source: Our World in Data

Catching Inflection Points Can be Really Important

People tend to think in a linear way: tomorrow will be like today, just differing in small ways. Most of the time, that is a reasonable supposition. Unless it is not. 

The shift from monopoly to competition; the replacement of fixed network services by mobile; analog to digital infrastructure; embedded to virtual; closed networks to open; owned to rented computing and rate-of-return to competitive dynamics provide good examples of non-linear phenomena in the global telecom business. 

Exponential change at power law rates are hard to grasp, at first. Inflection points happen, when slow-changing trends suddenly go non-linear. The practical business implication is that being out of position when the inflection point happens can be unrecoverable.

source: Math is Fun

Once an inflection point happens, a firm or industry can miss a dramatic upturn in demand, ceding leadership to others. Conversely, when an existing product hits a negative inflection point, sales and profit can vanish suddenly. 

It will seem quite odd indeed, but back in the 1980s the best minds in the telecom industry could not figure out how we were ever going to provide voice service to most consumers in developing nations. Mobility changed that rapidly, in the 1990s. 

source: ITU

Many of us thought of voice service as a product with highly-inelastic demand, not a product with a lifecycle. Likewise, the telecom business was closed, not open to third parties. Only telcos could program the network. With the internet, no programming is necessary. Given dumb pipe access, service and app creation is independent of the network. 

Many products were expensive, physical and difficult to supply at lower costs. Now many products are capable of almost-infinite replication at very-low costs. Distributors used to be essential to move those products to customers. Now distribution often can go direct to consumer or end user. 

1980	2020
Natural monopoly	Oligopoly
High margin	Moderate to low margin
Low to moderate adoption	High adoption
Low innovation	High innovation
Stable markets	Unstable markets
Compete on quality	Compete on price
Fixed network dominates	Mobile network dominates
Tightly integrated apps and network	Open network
Owned app creation	3rd-party app creation
Sell app, use network access	Sell network access (dumb pipe)
Voice business model	Internet access, mobile business model
Similar business models globally	Growing diversity of business models
99.999% uptime	99.9% or “good enough” availability
Few lead apps	Many lead apps
IT adoption: enterprise; SMB; consumer	IT adoption: consumer/SMB to enterprise

source: IP Carrier

Such basic questions as “who can be in our business?” now are open and indeterminate. Where every telco basically offered the same products in the monopoly era, strategies now diverge. And where competition once was based on quality, most often it is based on cost, with acceptable levels of quality. 

The global telecom industry, in other words, has developed in a non-linear way. That means we often struggle to keep up.