The Future of the Interactive Digital Media Industry Toshitada NAGUMO

Transcription

1 No.12 August 1, 2000 The Future of the Interactive Digital Media Industry Toshitada NAGUMO

2 NRI Papers No.12 August 1, 2000 The Future of the Interactive Digital Media Industry Toshitada NAGUMO I The Interactive Digital Media Industry Enters a Growth Mode II The Japanese Market Expected to Lead to Greater Internet Access by Means Other Than Personal Computers 1 The Role of a Diverse Infrastructure in Creating an Interactive Digital Media Industry 2 Mobile Phones and Video Game Consoles to Act as Drivers 3 The Effect of Fixed-Rate Broadband Internet Access on Internet Usage Patterns 4 Digital BS Set to Become the Key Type of Broadcasting Infrastructure 5 The Importance of User-Friendliness and Brand Image III Customer Management the Key to Interactive Digital Media 1 An Eight-Layer Interactive Digital Media Industry 2 Vertical Cooperation Between Different Industries 3 The Limitations of Hardware and the Communications Infrastructure 4 Considerable Development Potential of Aggregators, Portals and Back-Office Functions 5 The Importance of the Customer Management Function IV The Dominance of Vertical Integration 1 Japan at the First Stage of Vertical Integration 2 The United States at the Start of the Second Stage V Customer Management Holds the Key to the Future T he interactive digital media industry has expanded rapidly on the back of the Internet and is expected to grow fivefold during the next five years, driven mainly by e-commerce and an infrastructure consisting of mobile phones, video game machines, broadband fixed-rate Internet services, and digital broadcast satellites. The industry can be divided into eight different layers and is becoming increasingly integrated vertically. The most important of these are the roles of aggregator, portal and back office, all of which rely heavily on customer management. Companies hoping to become key players in the industry will have to develop a strategy for each of these layers as part of their overall management strategy. 1

3 I The Interactive Digital Media Industry Enters a Growth Mode The Japanese Internet market, which used to be regarded as being three years behind its US equivalent, at long last looks as though it is about to take off. With some 50 percent of households believed to own a computer (according to a survey by NRI s Information & Communication Industry Consulting Department) and with an estimated 27 million Internet users (according to the Ministry of Posts and Telecommunications White Paper Communications in Japan 2000), diffusion among nonspecialist users is now well under way. More use is also being made of devices other than personal computers such as video game consoles and mobile phones (NTT s i-mode, etc.), to access the Internet, in addition to the traditional combination of telephone line and personal computer. High-speed Internet connection services that use CATV infrastructure are also proving popular. Internet users can thus choose from a growing range of devices in order to go online. Figure 1 shows the likely future scale of the Japanese market for interactive digital media services (in this case, Internet access charges, advertising revenues and added value from e-commerce) based on data published by the Ministry of International Trade and Industry. According to the ministry s projections, this market is set to grow to five times its 1998 size by 2003 and become the growth industry of the 21st century. In Figure 1, the average transaction charge taken to represent the added value from e-commerce has been calculated as 1 percent of the actual value of the transaction in the case of business-to-business transactions and as 5 percent in the case of business-to-consumer transactions. For financial transactions, the actual brokerage commission has been taken to represent the added value. Figure 1. Estimated Size of the Market for Interactive Digital Media ( Billion) 2,000 1,600 1, ;;; percent growth in five years Growth in e-commerce particularly sharp ;;; ;;; ;;; ;;; E-commerce (business-to-business) E-commerce (business-to-consumer) Internet access charges Advertising revenue (CY) Note: Market size is the total of (1) added value from e-commerce, (2) Internet access charges and (3) advertising revenue. Source: Nomura Research Institute, from Ministry of International Trade and Industry data. E-commerce accounts for a significant share of this market and has the potential to create numerous opportunities as we enter an age of interactive digital media. In the following we shall examine the direction in which the interactive digital media industry is likely to develop and the business opportunities that are likely to be created. II The Japanese Market Expected to Lead to Greater Internet Access by Means Other Than Personal Computers 1 The Role of a Diverse Infrastructure in Creating an Interactive Digital Media Industry Figure 2 is a schematic diagram of the interactive digital media described in this paper. Basically, access to the Internet via many different types of communications and infrastructure will create an interactive digital media industry. The infrastructure ranges from the traditional public telephone network to leased lines, local area networks (LANs), broadband networks (including Fiber to the Home (FTTH), asynchronous digital subscriber lines (ADSL) and wireless local loops (WLL)), CATV, the digital infrastructure such as satellites (BS), communications satellites (CS) and terrestrial, car navigation systems and mobile phones. Each of these, in turn, uses a variety of terminals. The main ones are personal computers, video game consoles, and information appliances such as set-top boxes in the home; personal computers in the office; and mobile phones, personal handyphone systems (PHS) and car-mounted terminals such as car navigation systems out of doors (or when on the move). Finding the optimum combination of communications or infrastructure and terminals will determine the user environment for interactive digital media. Similarly, the way in which this environment is used and the kind of services and charging plans offered will be the key to how interactive digital media can develop. Figure 3 shows the future direction of a digitized communications and infrastructure. 2 Mobile Phones and Video Game Consoles to Act as Drivers Taking these factors into account, we tried to project the number of Internet terminals that would be in use in Japan. (See Figure 4.) The results indicated the following: (1) Devices other than the personal computer will replace the PC as the main device for accessing the Internet. 2

4 (2) Mobile phones will be far and away the most important of these devices. (3) Other devices that will help to increase the size of the market will be video game consoles and personal digital assistants (PDAs). Two of the main devices in the future will be mobile phones and video game consoles, particularly NTT s i- mode mobile phone system and Sony Computer Entertainment s PlayStation 2. As of the middle of June 2000, or just over 15 months after its launch in February 1999, i-mode had more than 7.5 million subscribers. This Figure 2. Schematic Diagram of Interactive Digital Media The Internet forms the core (in that it is central to almost all of these media) Data acts as a catalyst for the use of interactive digital media Data Digital BS and CS Internet TV BS and CS operators Headends Via office LAN TV Video game consoles Terrestrial digital Content providers and service providers Japan Highway Public Corporation TV Terrestrial station PHS systems Car navigation systems ISDN, xdsl, FTTH, WLL Telecom carriers Mobile phones Digital CATV, cable modems Portable terminals Notes: BS ( satellite); CS (communications satellite); FTTH (Fiber to the Home); WLL (wireless local loop); xdsl (digital subscriber line). Figure 3. Developments in the Digitization of Telecommunications and Broadcasting Infrastructure (CY) Developments in media Terrestrial Satellite Analog Digital CS Terrestrial digital 2003: Actual broadcasts begin (Tokyo-Nagoya-Osaka) Development of dual receivers for BS and CS broadcasts enhanced competitiveness of satellite 2006: Actual broadcasts begin (nationwide) overcoming problem of poor reception, must carry law? Completed by 2010? Digital BS Analog BS December 2000: Actual broadcasts begin Due to be completed by 2007 CATV Construction of digital networks 2010: 100% of transmissions digital Developments in high-speed access networks FTTH 1999: 23 percent of population covered xdsl Autumn 1999: xdsl 2001: Deregulation of FTTH new CATV companies allowed to enter market 2010: 100% Obsolescence of access network as a result of spread of optical fiber? Other FWA Autumn 1999: WLL 2002: MMAC Mobile phones 2001: IMT-2000 more means of high-speed access Notes: IMT (International Mobile Telecommunications); MMAC (Multimedia Mobile Access Communication System). 3

5 Figure 4. Forecast of Number of Internet Access Terminals (Million Terminals) ;; ;; Information appliances Video game consoles Mobile phones PDAs Home PCs Office PCs ;;;;;;;;; ;;;;;;;;; ;;;;;;;;; ;;;;;;;;; ;;;;;;;;; ;;;;;;;;; (FY) Non-PC market Dominated by devices such as Sony s PlayStation 2 and NTT DoCoMo s i-mode mobile phone with Internet connectivity PC market Telecom/ infrastructure i-mode cdmaone Fixed rates IMT-2000 Digital BS Digital CATV comes into its own Digital terrestrial begins Notes: (1) The figures refer to terminals and not users; (2) cdmaone (CDMA-type of mobile phone); and (3) CDMA (Code-Division Multiple Access). is significantly more than the 3.5 million subscribers Japan s largest Internet service provider to date, and indicates just how strong the mobile phone market is. The introduction of IMT-2000, the next generation of mobile phones, in 2001 and its higher data transfer rates will permit the use of moving images and a wider range of applications, thereby increasing user convenience. This, in turn, will lead to increased use of the Internet. The outlook for video game consoles is similarly bright. As of the end of March 2000, Sega Enterprises had shipped about 1.9 million of its Dreamcast game consoles to outlets in Japan alone since the product was launched in November Worldwide shipments were 5.55 million. One of the product s selling points was its Internet connectivity, and over 550,000 of those who bought consoles in Japan apparently connect to the Internet, giving an Internet user ratio of just under 30 percent (according to a statement from the company in February 2000). This higher figure than what the company had been expecting was not only a pleasant surprise, but also an indication of just how significant the potential demand for Internet access is. This was followed in March 2000 by Sony s launch of its PlayStation 2. Within a few days, 1 million units had been sold, making it clear just how strong actual and potential demand is. As of the end of May, more than 2 million units had been shipped. Although Internet connectivity is an optional feature, more than 4 million people can be expected to have access to the Internet via their PlayStation 2 console if it is assumed that 12 million units will be sold by the end of 2000 and that the Internet user ratio is the same as that of Sega s Dreamcast console. Similarly, although personal digital assistants (PDAs) are used mainly as personal organizers, their potential as devices for accessing the Internet is considerable. 3 The Effect of Fixed-Rate Broadband Internet Access on Internet Usage Patterns The introduction of a flat rate for accessing the Internet has helped to increase both the number of Internet users and the number of hours they connect to the Internet. Whereas, previously, users tended to set themselves a time limit because of restrictions on the number of hours they could access the Internet, the disappearance of such restrictions is likely to encourage them to spend more time online for such things as window-shopping. However, even without these restrictions, users will still feel constrained unless download times can be reduced. This is where some sort of combination with broadband becomes necessary. Such an approach would mean that CATV would form the backbone of a fixed-rate broadband Internet service for the time being. However, areas with the necessary CATV infrastructure are limited. Therefore, the key question would be what system could perform that function in other areas. At the moment, many hopes are being pinned on ADSL and fixed wireless access (FWA), and FTTH is expected to become the key technology after Therefore the tendency to charge a fixed rate to access the Internet or use ISDN probably represents a temporary state of affairs. Also, this tendency has probably been reinforced by the appearance of free Internet access first in the UK, and since then by the launch of livedoor in Japan in November Such services rely heavily on advertising revenues and commissions from e-commerce, and have attracted considerable interest. 4

6 In any case, what has become clear is that any added value from simply offering access to the Internet including time online tends to disappear rapidly. 4 Digital BS Set to Become the Key Type of Broadcasting Infrastructure As for -type infrastructure, satellite along with the use of CATV to connect to the Internet mentioned above has attracted considerable interest. Digital BS can be expected to have a major impact as a result of what will probably be a high diffusion rate. First, the fact that all that is needed to be able to receive digital BS programs is to fit a digital converter to an existing analog system means that some 13 million households those with CATV and those that receive broadcasts via the kind of communal system used in apartment blocks as well as those that already receive broadcasts direct will have access to digital BS. Second, in addition to the publicity that will accompany the launch of digital BS, the fact that tunerreceivers will be marketed that can be used with either BS or CS broadcasts will mean that the number of household subscribers can be expected to increase as soon as the new service starts. However, when digital BS starts, most stations mainly national TV network stations hope to operate free of charge and to cover their costs by means of advertising revenue. This is likely to mean that the tuners that will be used as interactive digital media devices will not be capable of providing functions such as authorization and billing. Therefore, a system that is capable of data and promoting e-commerce will have to rely on some infrastructure other than digital BS. The possibility that users might have to invest in more than one type of infrastructure is a short-term drawback. Yet another factor was the announcement at the end of February that SkyPerfecTV and DirecTV Japan will be merging. DirecTV Japan is scheduled to cease by the end of September. The merger will mean that CS will become a more powerful force. Unlike BS, CS offers authorization and billing, and the merger of the two companies is likely to lead to a reassessment of this type of as well as create added value. After the merger, Sony and Fuji Television will be the driving forces behind the new company, and Sony, which missed the opportunity to acquire a BS data capability, is likely to make the most of the e-commerce opportunities presented by CS. Moreover, the planned launch of a new commercial satellite (CS110) later this summer will mean that a full e-commerce service will become possible. This new communications satellite will be positioned in the same orbit as that of the BS ( satellite) at 110 east longitude, and can be used for communications services, including satellite Internet, and for multiple services combining and communications. Once CATV and terrestrial start to go digital in 2003, most of the infrastructure used for e-commerce will have a digital capability. At the end of the day, however, the deciding factor is likely to be the number of users. This would suggest that digital BS will almost certainly be the main type of infrastructure used. 5 The Importance of User-Friendliness and Brand Image Interactive digital media have only just started to come into general use. The following are some of the main points concerning users. The typical user is increasingly likely to be the everyday person in the street rather than the enthusiasts or young male businessmen who have been the main users in the past. These average folks see interactive digital media as consumer products just like TV sets or telephones and expect from them the same user-friendliness and brand image. Service providers themselves therefore need to be aware of such changes. As such factors will also have a big influence on the use of devices other than personal computers to connect to the Internet, service providers will need to realize just how important brand image and promotional activities are. III Customer Management the Key to Interactive Digital Media 1 An Eight-Layer Interactive Digital Media Industry Let us take a closer look at the interactive digital media industry. Table 1 shows the different functions that are required as layers. These are described in more detail as follows. (1) User hardware These are the devices and peripherals needed to use interactive digital media. They include personal computers, modems, mobile phones, personal digital assistants, video game consoles, information appliances and set-top boxes. (2) Equipment software This is the software installed in user devices and peripherals. It includes operating systems (e.g., Windows CE), browsers and plug-ins. 5

7 Table 1. Eight Essential Function Layers of Interactive Digital Media Essential function Description Examples Brief assessment of business opportunities User hardware User terminal or peripheral PC, set-top box, PDA Falling hardware prices making it increasingly difficult to earn a profit Equipment software Software for user terminal or peripheral Browser, plug-in software, Java, HAVi, JINI, Windows CE Basically the preserve of US software houses; need to form alliances with US partners Content, services Information content, services Films, programs, music, information, services (mail order, finance, booking) Demand likely to grow as number of users increases Aggregators Arrangement of content and services by category, formation of a community Amazon.com, ebay, Rakuten, multi-channel TV companies Important area in attracting users by specialist categories; relies mainly on revenue from advertising and transaction processing; need to encircle users Portals Gateway to interactive digital media services Search engine, online service, EPG Important area in attracting users: relies mainly on revenue from advertising and transaction processing; need to encircle users Network services Network for interactive digital media services ISP, online service, data Falling prices indicate need to combine with portals and aggregators Network infrastructure Communications network Type-1 carrier, CATV, broadcaster Fixed rates and falling prices indicate need to combine with network services, portals and aggregators Back office Platforms Overall system for managing interactive digital media services MediaServe, IBC Very important as the function that manages customers Construction, operation Construction and operation of systems for providing interactive digital media services Web hosting, e-business solutions Will offer significant business opportunities as more companies become involved; small and medium-sized companies will perform a key role Software Software for interactive digital media services Billing, authorization, security, content management (copyrights), customer management/tracking, marketing, measuring the effectiveness of recommended advertising, choosing advertisements Basically the preserve of US software houses; need to form alliances with US partners Notes: EPG (electronic program guide); HAVi (Home Audio Video interoperability); Java (a new-generation computer language); JINI (a type of network technology); Windows CE (Microsoft s operating system for personal digital assistants). (3) Content and services This includes the content and services which users ultimately consume. It is highly diverse and covers news, many different types of information, entertainment, financial services, shopping and booking services. (4) Aggregators These companies sort into categories the content and services that users ultimately consume. They guide users according to their needs, interests and tastes, and are similar to the specialized channels on multi-channel TV. Examples are Amazon.com, Rakuten and Autobytel.com. (5) Portals These sites function as gateways when using interactive digital media. In contrast to aggregators, which have a particular aim in mind, portals are designed to attract as many users as possible and therefore cover a wider area in less depth. Examples are search engines such as Yahoo and services such as AOL. (6) Network services These are the network services used by interactive digital media. The main examples are Internet service providers and data communications using personal computers. (7) Network infrastructure This is the physical component consisting of communications equipment. In the case of Japan, this would be the Type-1 carriers. (8) Back office This component is hidden from users, but is responsible for overall control of services and customer management. It is also responsible for marketing, and tailors advertising to different user profiles. The back-office component can be further divided into the following three subcomponents. Platforms: The systems for providing the actual backoffice service. 6

8 Building and operation: The building and operation of systems for providing interactive digital media services. This includes outsourcing and application service providers (ASPs) in addition to systems integration. Software: The technologies for providing the above functions. They range from billing to authorization, security, content management, marketing and measuring the effectiveness of recommended advertising. This classification indicates (1) that the interactive digital media industry requires vertical cooperation between different industries; (2) that the three layers with the greatest potential in Japan are aggregators, portals and the back office; and (3) the importance of customer management. 2 Vertical Cooperation Between Different Industries The interactive digital media industry consists of hardware manufacturers (consumer electronic goods, household electrical appliances, and computers), software manufacturers, network providers, telecommunications companies, systems integrators, content providers, marketing service providers, providers of a wide range of services (including retailing, financial services, and booking) and delivery companies as well as venture businesses providing new business models. Because it is basically an agglomeration of different industries, the various service providers need to be able to build win-win relationships in which they can also make the most of their own strengths. 3 The Limitations of Hardware and the Communications Infrastructure Each of these layers has its own characteristics. Japanese companies excel in some, but not in others, and they vary in their added value. Equipment software and backoffice software, for example, are generally the preserve of US companies, leaving little room for Japanese companies to show their strengths. Alongside major US corporations such as Microsoft, Sun Microsystems and Oracle there are a host of venture companies in this field, constantly developing new technologies. Hardware, on the other hand, is generally regarded as the area where Japanese electrical and electronics manufacturers excel. However, although Japanese companies produce a wide range of devices, the trend towards lower prices has made it difficult for them to turn a profit from such business. Therefore companies involved in this layer have tended to try to become involved in other layers in order to create more added value. The network service and network infrastructure layers have also seen their added value decline. As prices have fallen and an increasing number of service providers have switched to fixed-rate charging for Internet access, more aggregator and portal sites have been set up by companies attracted by the prospect of revenues from advertising and e-commerce commissions. Similarly, at the level of content and services, established companies that had not yet made a move into the Internet business are now trying to enter the market in response to the growth of e-commerce on the Internet. In addition to seeking ways to offset falling sales from traditional outlets, such companies face the challenge of making full use of interactive digital media to rationalize and modernize their operations. 4 Considerable Development Potential of Aggregators, Portals and Back-Office Functions As demand for interactive digital media increases, demand for aggregators, portals and back-office platforms as well as their construction and operation will also increase. Moreover, the fact that these layers require considerable local (i.e., market-by-market) input means that this aspect of the Japanese interactive digital media market can be expected to develop along its own lines. (1) Aggregators As was mentioned above, aggregators play an important role in providing content and services in an efficient manner as well as in entertaining users. From a user s perspective, they are the nerve center of interactive digital media. In many cases, this layer attracts users by virtue of some specific aim, interest or taste, and features a strong sense of community. As a result, this layer is an effective way of identifying user needs and lends itself to one-to-one marketing. This, in turn, can produce new sources of revenue. Moreover, if an aggregator becomes a major player like Amazon.com, it can even attract as many users as the portals described next. (2) Portals For a portal, the key to success is attracting as many users as possible. In this respect, portals are similar to terrestrial network. This means that, in contrast to aggregators, the number of major players will inevitably be limited. In fact, the only major players currently making a profit from their portal sites are Yahoo and AOL (in the United States) and Yahoo Japan (in Japan), and any business hoping to make a success as a portal must strive to achieve sole survivor status. However, if the number of people using interactive digital media continues to increase, the market may be large enough for two or three companies to survive. The next phase is likely to be the emergence of another Yahoo or two. (3) Back office It is the back office that supports these functions behind the scenes, and it is the back office s platforms that hold 7

9 Figure 5. Website Operations Become Core-Resource-Oriented Seeking to attract new operators such as ordinary companies and small/medium-sized businesses (business-to-business and business-to-consumer) Traditional type of Website operation Future type of Website operation Web site (company has all the resources it needs) Customer management Inventory management Payment Operations Web management Billing Delivery Business model Workflow Value chain Network Product knowledge Customer knowledge Dial-up networking LAN Home Office Customer management Inventory management Payment Operations Web management Billing Delivery ASP Hosting 11 Web site (company has only 11 essential resources) 11 Business model 11 Workflow 11 Value chain Network 11 Product knowledge 11 Customer knowledge Internet Various channels CATV Digital BS IMT-2000 Data communications infrastructure for corporate users PC Set-top box TV Console PDA Home, office New solutions requirements ASPs, hosting, back-office integration, outsourcing Note: ASP (application service provider). Source: Nomura Research Institute, from Hewlett-Packard information. the key to sources of revenue such as customer management. Businesses that are not currently involved in e-commerce at the content and services level especially, small and medium-sized businesses can be expected to become increasingly involved. The first challenge facing such businesses will be to build systems for providing services via interactive digital media. Although in theory they could purchase and operate such systems themselves, a shortage of know-how means that this will not be easy in practice. This is where services such as outsourcing and Web hosting (in which the service provider will set up, operate and manage a Web site on behalf of a customer) come into their own. Demand for the services of application service providers (ASPs) as a means of using interactive digital media is also likely to increase significantly. As a result, companies may decide to adopt a strategy for interactive digital media whereby they focus their resources on developing Web sites for core business activities, but outsource all their other Web sites. (See Figure 5.) In other words, if service providers can build back offices with numerous general-purpose features, they will be able to offer these to many business customers. This is also a very important layer from the point of view of industrial development, and is likely to be a focus of attention. 5 The Importance of the Customer Management Function As was mentioned above, customer management is the key to the interactive digital media business. The main objective is to use one-to-one communications to offer customers an optimum service. The aggregator, portal and back-office functions mentioned above all belong to a layer with customer management at its center and are likely to enjoy a bigger increase in demand than any other area. Interactive digital media can be expected to develop in a very different direction in the future. In the past, for example, the pattern of Internet usage has been for users to search for information. (See Figure 6). However, if the Internet can learn user habits and tastes and these can be linked dynamically as more and better Internet content becomes available, the pattern of usage may move to one in which the Internet supplies information to the user. In other words, the Internet would act as a proxy and help users to do various things. Customer management would also be central to this function a good indicator of just how important this will become. IV The Dominance of Vertical Integration 1 Japan at the First Stage of Vertical Integration What strategies have service providers adopted to deal with this situation? As Figure 7 shows, most service providers have tended towards vertical integration with a focus on the content/services, aggregator and portal layers. Sony s strategy, for example, has centered on its Sonet Internet service, and used personal computers (Sony s 8

10 Figure 6. Evolution of the Internet Enterprise employee portal Customized learning and document translation services Internet business collaboration Wireless commerce and services Restaurant reservations Purchasing stock Purchasing tickets Bank information and bill payment All employees receive the same information and services Students log onto a specific university s online site or go to the university itself Contact a translation agency Create one s own virtual private network (VPN) or dedicated secure connection Use the mobile phone for call-related activities and transaction authorization Contact restaurants individually to book a table Give instructions for a transaction to be carried out Purchase tickets oneself Users work the Internet Check bank balance and pay bills Internet works for users Employees receive content and services based on their authorization level Anyone can learn according to individual interests and needs Automated ad hoc translation Dynamically share resources on an ad hoc, on-demand basis Services run on the Internet and are controlled and accessed by wireless devices Contact a service to do the booking Have a transaction carried out automatically with notification according to specific parameters Use service to purchase tickets based on preference with automatic billing and notification Have bills paid automatically according to account balance Source: Nomura Research Institute, from Hewlett-Packard information. Figure 7. Stance of Main Players United States (for reference) Hardware PlayStation 2, PC PC PC Telephone Web TV Set-top box Netscape Equipment software Content/ services, aggregators Nihon Keizai Newspaper Recruit Mitsui Corp. So-net Internet banks, Internet brokers E-trade, Onsale, E-loan Internet bookstores, Internet toy stores Microsoft Capital participation TW Portals AOL Japan i-mode goo Yahoo! Japan MSN Excite at Home AOL Network services NTT DoCoMo AT&T Network infrastructure Back office Unisys, Moshi Moshi Hotline, MediaServe Mitsui Corp. CWC So-net NEC Mitsui Corp. Sony NEC Fujitsu Fujitsu Note: CWC (Crosswave Communications); TW (Time Warner). NTT Data NTT DoCoMo NTT NTT Internet Research Institute (IRI) Speed Net Capital participation Comcast Softbank Microsoft AT&T TW Cable AOL AOL own Vaio range) or PlayStation 2 as terminals, CWC (Crosswave Communications) and SkyPerfecTV as its network infrastructure, and the infrastructure of So-net and SkyPerfecTV for back-office functions. Fujitsu has also adopted vertical integration focused on Internet service as has NTT DoCoMo, whose strategy is built around its i-mode service. Softbank, whose strategy used to rely on content/services, aggregators and portals, has also been moving towards vertical integration since it set up SpeedNet (a network infrastructure) late in 1999 and took a stake in Internet Research Institute (a back-office service). The direction in which interactive digital media are taking the customer management function is gradually becoming clearer. 2 The United States at the Start of the Second Stage The same trend is also clearly visible in the United States, where the main players include Microsoft, AT&T and AOL. Particularly significant was the acquisition by AOL (a portal and the top Internet service provider) of Netscape Communications, which gave AOL access to equipment software. Similarly, AOL s acquisition of Time Warner (announced in January of 9

11 this year, but still to be completed) has given it access to a greater range of content network infrastructure. All that it remains for AOL to acquire is a hardware manufacturer. Although the US interactive digital media market appears at first sight to be similar to that in Japan, there is a difference. AOL made these moves after it had already signed up 20 million customers in the United States. Even though it had already done a thorough job of customer management, it found that it had to provide a wider range of content as well as broadband infrastructure (CATV) in order to keep all these customers happy. This suggests that, if an interactive digital media service provider of the likes of AOL should emerge in Japan in two or three years time, the need to provide the kind of content that customers would require might well trigger a realignment of the industry. Be that as it may, current developments indicate that aggregators, portals and back-office systems hold the key to success. This is true of all the main players in the industry, and is one of the main challenges they face. V Customer Management Holds the Key to the Future At the level of terminals and network infrastructure, interactive digital media have reached the stage where they can fully satisfy user needs. Key examples include mobile phones, video game consoles, broadband fixed-rate network services, and digital BS. Similarly, in terms of size, the market for interactive digital media expected to grow fivefold in the five years to 2003 could be described as the growth market of the 21st century. The next challenge facing the industry is for service providers to make the most of their customer management function and offer users an optimum service. In order to achieve this, they will have to build business platforms, become vertically integrated, and, above all, form alliances. The key to vertical integration will be aggregators, portals and back-office systems. As well as the source of growth in the interactive digital market, they are also the layers where new demand will emerge. The main objective for aggregators and portals is to attract users and enable them to make full use of interactive digital media, as this will become a key source of earnings. The back office, meanwhile, will be the albeit invisible key to providing customer management systems. Moreover, companies that succeed in building generalpurpose back-office systems will be able to target a rapidly growing number of service providers and seize new business opportunities. At any rate, any company hoping to be a key, or at least a serious, player in the interactive digital media industry, should seize the opportunities presented by the various layers involved in customer management. This also represents a major challenge. Toshitada NAGUMO is a senior consultant in the Information & Communication Industry Consulting Department and specializes in consulting related to interactive digital media and in helping clients to form alliances. 10

12 As a leading think-tank and systems integrator in Japan, Nomura Research Institute is opening new perspectives for the 21st Century through creating intellectual property for the benefit of all industries. NRI serves domestic as well as overseas clients both in the public and private sectors through knowledge creation and integration in the three creative spheres of Research and Consulting, Knowledge Solutions and Systems Solutions. With the opening of the new millennium, the world economy is facing rapid structural changes led by the dramatic growth of IT industries and the rapid expansion of worldwide Internet users the challenges of which require new concepts and liberation from outdated systems. As one of Japan s top solutions providers, NRI is dedicated to equipping its clients with strategies for success in this difficult environment through providing the best in knowledge resources and solutions. NRI Papers presents selected works of NRI s 3,000 professionals in its worldwide research network. The mission of NRI Papers is to contribute new ideas and insights to business management and future policy planning that are needed to overcome many of the obstacles before us. All copyrights to NRI Papers are reserved by NRI. No part of this publication may be reproduced in any form without the prior written consent of NRI. Inquiries to: Editorial Section I Corporate Communications Department Nomura Research Institute, Ltd. nri-papers@nri.co.jp FAX: