The Creation of Value: The Broadband Value Circle and Evolving Market Structures
O'Melveny & Myers LLP; Silicon Flatirons
April 4, 2011
The traditional value chain is a hierarchical ordering of inputs that results in the ability of one firm - a manufacturer of automobiles, for example - to offer a finished product directly to consumers. The market is characterized by two distinct lines of business relationships: the vertical relationship between input suppliers and product manufacturers, and the horizontal relationship across the market in which the manufacturers compete against one another.
Although the traditional value chain has not been replaced, today’s broadband marketplace is witnessing the rise of an alternative structure - the "value circle." The value circle describes a world in which multiple companies, not necessarily in the same product markets, are able to offer competing packages of value to consumers. Thus, in the wireless broadband market, firms that manufacture devices, supply connectivity, engage in e‐commerce, create software, or provide search are all creating new economic surplus in a market in which they simultaneously compete, cooperate, buy, and supply from one another.
From this new circular structure the following tenets have emerged: Many companies, traditionally associated with different product markets, can nonetheless offer competing combinations of value directly to the same audience of users; bargaining among companies divides new consumer surplus in ways that reflect the ability of companies to create value, play the "central" role in their composition, and each directly to consumers; the market is dynamic and swift, with competing combinations of value changing in rapid succession; the purchaser/creator at the center of the circle plays a fundamental, and not simply passive, role in the formulation of new value propositions; all of the players are making strategic decisions amid conditions of deep uncertainty; and Consumers, because they place value on the new value propositions, benefit directly from new forms of value, embodied in additional choices in the marketplace.
The value circle is an additional tool for business strategists and policymakers to understand the velocity and seeming chaos of important markets.
This paper focuses on two markets: wireless broadband services, where the transformation from the value chain to the value circle is complete, and video entertainment programming, where indicia of the value circle are apparent.
Number of Pages in PDF File: 51
Keywords: Broadband Value Circle, competition, market structure, wireless broadband, video programming
JEL Classification: 03, L1, D2
Date posted: April 26, 2011