Explaining consolidation and modularization, integration and disintegration

Using Netflix and the “Prisoner’s Dilemma Wedge” as an example

Hi dotglum
You can think of “modularization” somewhat like “disintegration”. Once upon a time, the cable bundles were, substantially, an all-or-nothing proposition. Sure, the consumer could choose whether or not to add HBO, but the majority of the bundle was a fully-integrated monolith — take it or leave it. You couldn’t get a single channel like ESPN a la carte, nor could you get a single show like Breaking Bad. Netflix’s “modularization” thereof disintegrated that bundle…

Think of the cable bundle as a brick wall: Sure, there are individual bricks, but they’re hopelessly mortared together. Netflix broke-down that wall so that the individual bricks — atomized shows/movies/studios/distributors — could move to other platforms as either standalone destinations or parts of new bundles in new mediums. That made these bricks — the atoms — so much more valuable because they could be used to build multiple walls and sold a la carte.

Aside from everything else discussed in the article, that was a technological innovation: To some extent, DVD-by-mail was innovative (see: “first sale doctrine”), but Netflix’s big innovations were in streaming tech (see: “chaos monkey”), which made all video entertainment content fungible, such that any modular component can be streamed on any platform, anytime, at the-flick-of-a-switch. That’s the real meaning of this “modularity” talk: Netflix made these bricks fully fungible.

The frictionless-ness of this fungibility/modularization/atomization gets at the spirit of the article’s following assertion, which very much embodies the “Prisoner’s Dilemma Wedge”:

Starz didn’t have to incur any tangible expenses to stream its content via Netflix — no additional production costs, no additional content licensing costs, nor distribution costs, customer acquisition costs, not even forgone opportunity costs. In fact, Netflix paid Starz for the rights! All Starz had to do was sign on the dotted line, then Netflix merely flicked-a-switch.

Now, here’s that whole sentence again, from the original “Prisoner’s Dilemma Wedge”:

Netflix eventually both integrated content from modular distributors (vertical integration), and modularized the bundle from integrated cable providers (horizontal integration).

In other words, Netflix horizontally integrated after establishing a beachhead against movie rental chains like Blockbuster (i.e. “choose a direct competitor in your horizontal against whom your value proposition is strongest, which not only avoids channel conflict with your upstream suppliers, but also justifies your markup relative to their services”), from which it expanded to subsume the much larger market for consumers in the cable bundle.

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