No.12 August 1, 2000
The Future of the Interactive
Digital Media Industry
Toshitada NAGUMO
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.
Copyright 2000 by Nomura Research Institute, Ltd.
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NRI Papers No. 12
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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.
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.
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
broadcasting 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 broadcasting infrastructure such as broadcasting
satellites (BS), communications satellites (CS) and terrestrial broadcasting, 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 broadcasting 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 broadcasting infrastructure.
Figure 1. Estimated Size of the Market for
Interactive Digital Media
(¥ Billion)
2,000
;;;
;;;
;;;
;;;
• 400-percent growth in five years
• Growth in e-commerce particularly sharp
1,600
1,200
800
;;;
1998
E-commerce
(business-to-consumer)
2 Mobile Phones and Video Game
Consoles to Act as Drivers
Internet access charges
400
0
E-commerce
(business-to-business)
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:
Advertising revenue
2003
(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.
(1) Devices other than the personal computer will replace
the PC as the main device for accessing the Internet.
The Future of the Interactive Digital Media Industry
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NRI Papers No. 12
August 1, 2000
(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 imode 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 broadcasting acts as a catalyst for the use of interactive digital media
Internet
Digital BS and CS
Data broadcasting
TV
BS and CS
operators
Headends
Via office LAN
TV
Terrestrial digital
broadcasting
Video game
consoles
Content providers and
service providers
PHS systems
Terrestrial
broadcasting
station
TV
Japan Highway
Public Corporation
Car navigation
systems
ISDN, xDSL, FTTH, WLL
Telecom carriers
Mobile phones
Digital CATV,
cable modems
Portable terminals
Notes: BS (broadcasting 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
2000
Terrestrial
broadcasting
2005
Terrestrial digital
broadcasting
2003: Actual broadcasts
begin (Tokyo-Nagoya-Osaka)
2006: Actual broadcasts
begin (nationwide)
overcoming problem of poor reception, “must carry” law?
Analog broadcasting
Developments in
broadcasting media
Completed by 2010?
Digital CS broadcasting
Satellite
broadcasting
Digital BS
broadcasting
Analog BS broadcasting
FTTH
Other
Development of dual receivers
for BS and CS broadcasts
enhanced competitiveness
of satellite broadcasting
December 2000:
Actual broadcasts begin
Due to be completed by 2007
Construction of digital networks
CATV
Developments in
high-speed access
networks
2010 (CY)
2001: Deregulation of FTTH
new CATV companies
allowed to enter market
1999: 23 percent of
population covered
xDSL
Autumn 1999: xDSL
FWA
Autumn 1999: WLL
Mobile
phones
2002: MMAC
2001: IMT-2000
Notes: IMT (International Mobile Telecommunications); MMAC (Multimedia Mobile Access Communication System).
The Future of the Interactive Digital Media Industry
3
2010: 100%
Obsolescence of access network
as a result of spread of optical fiber?
more means of high-speed access
Copyright 2000 by Nomura Research Institute, Ltd.
2010: 100% of transmissions digital
NRI Papers No. 12
August 1, 2000
Figure 4. Forecast of Number of Internet Access Terminals
(Million Terminals)
200
160
120
80
40
0
;; ;;;;;;;;;
;; ;;;;;;;;;
;;;;;;;;;
;;;;;;;;;
;;;;;;;;;
;;;;;;;;;
Information appliances
Video game consoles
Mobile phones
PDAs
Home PCs
Office PCs
1996
97
Telecom/
broadcasting
infrastructure
98
99
i-mode
cdmaOne
2000 01
Fixed rates
02
03
IMT-2000
Digital BS
04
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
05 (FY)
Digital CATV comes into its own
Digital terrestrial broadcasting 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 to
@Nifty, 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 1998. 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 2004. 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 1999. Such services rely heavily on advertising revenues and commissions from e-commerce, and
have attracted considerable interest.
The Future of the Interactive Digital Media Industry
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NRI Papers No. 12
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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.
lite) at 110° east longitude, and can be used for communications services, including satellite Internet, and
for multiple services combining broadcasting and communications.
Once CATV and terrestrial broadcasting start to go
digital in 2003, most of the broadcasting 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.
4 Digital BS Set to Become the Key Type
of Broadcasting Infrastructure
As for broadcasting-type infrastructure, satellite broadcasting—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 broadcasting, 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 broadcasting 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 broadcasting 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 broadcasting by the end of September. The merger will mean
that CS broadcasting will become a more powerful
force. Unlike BS broadcasting, CS broadcasting offers
authorization and billing, and the merger of the two
companies is likely to lead to a reassessment of this
type of broadcasting 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
broadcasting capability, is likely to make the most of
the e-commerce opportunities presented by CS broadcasting. 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 (broadcasting satel-
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.
The Future of the Interactive Digital Media Industry
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NRI Papers No. 12
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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 broadcasting
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
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
Back office
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.
(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.
(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.
(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.
(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.
• Platforms: The systems for providing the actual backoffice service.
The Future of the Interactive Digital Media Industry
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NRI Papers No. 12
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• 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.
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.
2 Vertical Cooperation Between Different
Industries
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.
4 Considerable Development Potential of
Aggregators, Portals and Back-Office
Functions
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.
(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.
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
(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 broadcasting. 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
The Future of the Interactive Digital Media Industry
Copyright 2000 by Nomura Research Institute, Ltd.
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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
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
Future type of Website operation
Dial-up
networking
Customer
management
Home
Inventory
management
Payment
Operations
Web
management
Billing
LAN
Delivery
Office
• ASP
• Hosting
Web site
11
(company has only
11
essential resources)
11
• Business model
11
• Workflow
11
• Value chain
111
•11
Network
•11
Product knowledge
Various
channels
PC
Set-top box
TV
Console
•11
Customer knowledge • CATV
• Digital BS
• IMT-2000
PDA
• Data communications
infrastructure
for
Home,
office
• Internet
corporate users
New solutions requirements
ASPs, hosting, back-office integration, outsourcing
Note: ASP (application service provider).
Source: Nomura Research Institute, from Hewlett-Packard information.
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.
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.
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
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
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NRI Papers No. 12
August 1, 2000
Figure 6. Evolution of the Internet
“Users work the Internet”
“Internet works for users”
Enterprise employee portal
All employees receive the same information
and services
Employees receive content and services based on
their authorization level
Customized learning
Students log onto a specific university’s online
site or go to the university itself
Anyone can learn according to individual interests
and needs
E-mail and document translation services
Contact a translation agency
Automated ad hoc translation
Internet business collaboration
Create one’s own virtual private network (VPN)
or dedicated secure connection
Dynamically share resources on an ad hoc,
on-demand basis
Wireless commerce and services
Use the mobile phone for call-related activities
and transaction authorization
Services run on the Internet and are controlled and
accessed by wireless devices
Contact restaurants individually to book a table
Contact a service to do the booking
Give instructions for a transaction to be carried out
Have a transaction carried out automatically
with notification according to specific parameters
Purchasing tickets
Purchase tickets oneself
Use service to purchase tickets based on preference
with automatic billing and notification
Bank information and bill payment
Check bank balance and pay bills
Have bills paid automatically according to
account balance
Restaurant reservations
Purchasing stock
Source: Nomura Research Institute, from Hewlett-Packard information.
Figure 7. Stance of Main Players
Hardware
Equipment
software
United States (for reference)
PlayStation 2,
PC
Nihon Keizai Newspaper
Recruit
Content/
services,
aggregators
AOL
Japan
E-trade, Onsale,
E-loan
BIGLOBE
@Nifty
Network
services
Back office
Yahoo!
Japan
goo
i-mode
TW
MSN
NTT
DoCoMo
Network
infrastructure
Mitsui
Corp.
Unisys,
“Moshi Moshi”
Hotline,
MediaServe
Set-top
box Netscape
Internet bookstores, Microsoft
Internet toy stores
Capital
participation
Internet banks,
Internet brokers
Mitsui So-net
Corp.
Portals
Web
TV
Telephone
PC
PC
AOL
AT&T
Speed
Net
NTT
CWC
Excite
at
Home
Internet
Research
Institute (IRI)
So-net NEC
Fujitsu
NTT Data
Mitsui Corp. Sony NEC
Fujitsu
NTT DoCoMo NTT
TW
Cable
Comcast
Capital
participation
Softbank
AOL
Microsoft
AT&T
AOL
Note: CWC (Crosswave Communications); TW (Time Warner).
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 its @Nifty
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
The Future of the Interactive Digital Media Industry
Copyright 2000 by Nomura Research Institute, Ltd.
9
NRI Papers No. 12
August 1, 2000
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.
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.
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
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.
The Future of the Interactive Digital Media Industry
Copyright 2000 by Nomura Research Institute, Ltd.
10
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