Oct 29, 2014

Distribution and The Game of Power

Big Money. Nasty Intrigue. Titillating twists. Questionable backroom deals. Sounds like a blockbuster movie trailer doesn’t it? While movie studios and theatres are indeed involved, what’s at stake is not a plot line, but real world control over where billions in moviegoer revenue is earned.  
And it’s a David vs Goliath battle pitting a small number of large, mass market theatre chains against new independent theatre entrants targeting Hispanic and other growth segments. While the movie studios are desperate to reach these new growth markets, they’ve yet to stand up against their dominant channel partners who insist on exclusive movie rights.

As it turns out, we’re seeing new distribution battles in more and more of today’s markets. Some of these battles are vertical in nature, such as upstream product maker Apple vs. the downstream retail networks of the four largest cellphone carriers. Other battles are horizontal, such as Best Buy stores struggling against showrooming by shoppers from online retailers such as Amazon.com.

Back when Apple introduced the iconic iPhone, the company was forced to sign an exclusive distribution arrangement with AT&T to get the support and service levels required by consumers. That move was a smart one for AT&T, who now gets over half their subscribers from Apple products. But as the iPhone 6 is launched this year, the tables have turned and Apple has diversified its distribution channels to include all major carriers and retailers; AT&T’s protests aside.

Today we’re seeing an explosion of new distribution disruptions the scale of which we’ve not seen before. Take the entertainment industry. Powerful content providers (TV studios and sports franchises) are introducing radically new routes-to-market options. Even as long-time distributor DirectTV renews it’s NFL broadcast license for $1.5 billion per year, the football league is introducing a new direct-to-consumer online channel NFLnow. HBO and CBS are introducing new direct-to-consumer distribution options that compete directly with Comcast and other dominant legacy channel partners.  Why the explosion in new distribution channels, and why now?

As ever, it’s all about Power. And, of course, Money.

For any successful 21st century company, whether branded consumer product maker, software and service provider, or industrial product manufacturer, focusing solely on what you make or sell is no longer adequate to secure long-term advantage. In the omnichannel age, those that rely on commoditized customer experiences from old-school channel partners are seeing profitability sink to marginality over night.

Forward-looking growth companies are working to influence and shape – indeed to steward -  their distribution systems towards greater and greater satisfaction of end-customers.  Said another way, standing still and viewing customer buying channels as simply “distribution pipelines” leads companies to over-focus on serving their distributors’ needs, at the expense of end-customer satisfaction. That’s why Steve Jobs chose instead to abandon Circuit City’s and CompUSA’s commodity shopper experiences in favor of a new Apple retail model.

But disrupting distribution channels on behalf of end-customers takes more than splashy announcements and big investments. It takes real senior leadership courage and conviction.  As the saying goes, it’s easier said than done.

Here’s what the industry experts had to say in a 2001 Businessweek article about Steve Job’s decision: “rather than unveil a Velveeta Mac, Jobs thinks he can do a better job than experienced retailers at moving the beluga… I give them two years before they're turning out the lights on a very painful and expensive mistake”.

Rick Wilson is Managing Director of Chicago Strategy Associates, a boutique marketing advisory firm focused on distribution channel strategy. He is also Adjunct Professor of Marketing at the Kellogg School of Management.

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