Guest Post: A Jay, Mvix
It is always fun to write about competition (and no I don’t mean the upcoming March Madness), specially when it relates to a seemingly growing industry like digital signage. Industry analysts suggest the market boasts as many as 600 digital signage content management providers, with dozens more being added to the clutter every month.
Without a doubt, some level of competition is healthy, in that it drives the providers to achieve more. However, in a market with 100s of seemingly undifferentiated solutions, the prognosis looks bleak. Undeniably, we are seeing a race to the bottom in terms of pricing in the digital signage space right now.
Two very simple explanations:
- 65-75% of applications of digital signage are commoditized. A vast majority of clients seek simple, low-cost solutions which can be implemented quickly and easily;
- mundane project and technology requirements lead to immensely low barriers to entry in this space.
The digital signage content management platforms face tough competition from ordinary “web-pages streaming” solutions that are being pitched as commercial platforms. The market has already become cluttered with such service providers (with some, even operating out of their home basements) that offer very few points of differentiation. Most offer HTML5 page streaming, basic video support, some animation and maybe archaic scheduling. Many customers, however, simply stop using them within a few weeks or months.
In contrast, specially outfitted digital signage systems provide an ever-expanding library of dynamic content widgets but also a comprehensive toolset for multi-user role management, remote network monitoring, and reporting. Without a doubt, enterprise-grade digital signage platforms offer clear, and tangible benefits.
However, a recent onslaught of patched-up web-page based “signage CMS” solutions has made the market perceptually more commoditized and led to an unfortunate, upward spiral in customer acquisition cost.
Competition and Commoditization
Commoditization is often seen as the kiss of death for any industry. Commoditization occurs when the market perceives products to be substitutable. As the market seeks simpler, undifferentiated features, switching costs drop and price competition increases. Digital signage system providers have witnessed almost 30-45% drop in margins (albeit with increased market share) in the past three years.
On the other hand, there’s a clear lack of innovation in the digital signage space. Radically innovative features have stagnated. While lack of industry-wide standards are holding back new developments, the situation is further complicated by significant drop in profits, those increased customer acquisition costs, and lack of market need (for unique features).
Few companies in our industry are genuinely focused on doing something new. Countless digital signage providers are offering “new” signage platforms, but they all look eerily similar and have virtually identical features and functionality. They are being guided by the competition, while spending huge amounts of money to gain market share but incremental improvements to their existing solutions.
The race for this market share maximization is quite often without much merit (or profit). Instead of forging ahead with new innovations – companies are trying to stay afloat.
In such a heavily competitive, commoditized market, clients are overwhelmed with undifferentiated choices. Cognitive dissonance leads to brand skepticism and multiple, unsuccessful attempts to make a rational choice amongst vendors. Pilot projects are extended indefinitely, project deadlines get pushed out, lead times increase while providers continue to invest in customer acquisition.
Ultimately, clients give up and resort to guesswork, and effortless transactions regardless of product differentiation. The bottom line: end-users are overwhelmed.
Too much competition is not always good for consumers either.
Light at the end of this tunnel?
Amidst the uncertainties of a fast growing digital signage market, many digital signage providers are often unsure of how best to steer the ship. Should we ride out the storm – i.e. focus on increasing market share without any regard for profit? Or, perhaps, exit and realign the products and technology toward a newer market (i.e. IOT, beacons, interactive signage, NFC, mobile, BI etc.) ?
Neither of these options are easy nor are they commercially viable.
For a sustainable business model in such an environments – companies will have to seek two fundamental strategies:
- Reduce or optimize customer acquisition cost;
- and/or increase customer wallet share (i.e. customer lifetime value or CLTV)
To navigate the troubled waters of this industry, solution providers will have to quickly and strategically reduce customer acquisition cost.
A digital signage project is made up of many components – display screens, hardware, software, content, services etc. Providers of each of these components expend almost the same marketing dollars to acquire a client and execute the project – i.e. one client, one project – being marketed to/wooed by multiple “non-competing” providers.
Bottom line, it’s a wasteful expense which can be strategically optimized if the players can partner-up toward a larger ecosystem for digital signage signage
Useful synergies can be easily developed across providers not only to reduce customer acquisition cost, but also toward project execution. Strategic partnerships between display screen manufacturers, signage system providers, content management softwares, content curators, infrastructure providers could provide a smarter, seamless experience for the clients.
Critics of such partnerships often cite the isolationist perspective of these strategies. i.e. a display company does not want to align themselves with a particular provider so as not to “anger” others. But strategic partnerships do not have to be isolationist. If a display screen provider has five different product lines, there is a potential of several such partnerships to exist simultaneously – each targeted toward a specific market size/vertical/application.
Owing to the lack of profitability, many large, well-known brands have exited the digital signage content management marketspace in the past three to four years. Whatever the motive, the writing is on the wall i.e. there is neither a need nor a viability for 600+ digital signage CMS providers to co-exist in this niche industry. While companies can maintain the status quo (i.e. no growth) for the short term, industry consolidation is inevitable in the coming months/years. We are at the point of inflection.
While reduction in customer acquisition cost is an urgently necessary Band-Aid, the need for increased customer wallet share is the longer term prophylactic strategy.
For the past several years, “consolidation” has been a hotly discussed topic, albeit (and strangely) barely executed.
- most potential acquirers (with cash in hand) are “waiting to see how the chips fall”;
- it is difficult to evaluate the real value of the target company (obviously, current client base is not a predictor of future revenues, in a commoditized markets);
- lack of knowledge on how to navigate post-consolidation in an undifferentiated market. More importantly, most players are busy enjoying the status quo (the proverbial low hanging sinful fruit) – i.e. double digit industry growth.
Regardless of the future of M&A in this industry, consolidations will start with liquidation/closure of CMS providers with high operational cost structures, high customer acquisition cost, and those who have chased market share at the expense of profitability.
For providers who offer the mundane features of digital signage (which fundamentally appeal to the commoditized market) and have no price differentiation, the best strategy is to exit and redeploy resources to more attractive markets.
As the digital signage display screen market becomes even more commoditized (with significantly more consumer-grade brands flooding the market), larger display screen brands are finding it difficult to compete effectively on cost or differentiation of “commercial-grade” features. This will require leading brands to focus their attention on fast-growing software, service and content businesses.
A consolidated brand will win on the basis of more efficient cost structures that arise as a result of scale and experience, market reach, channel relationships, or total project effectiveness.
If history serves as a good teacher, traditional amalgamation strategies of consolidations (complete fusion of two company/cultures) are unlikely to succeed in this marketplace – specially when you try putting different personalities like software developers, content creators and logistics personnel under the same roof.
Winning M&As will mean an amorphous bundle of software, hardware and services under a unified corporate umbrella, with a meaningful ability to innovate, and adapt within their silos.
Despite the sobering state of the digital signage industry, forecasts and long-term prospects continue to look good. The industry has continued to enjoy a double digit growth for the past five years and is expected to do so for another five to 10 years. While these growth forecasts offer comfort, creeping commoditization is an overlooked challenge facing the digital signage industry. The coming years are not for the faint-hearted
The most common mistake digital signage providers are making is failing to recognize commoditization and adapt to changes in market conditions. Legacy business models have ceased to succeed.. A continual innovation in the business model and the industry structure is required to fend off the threat now posed by commoditization of digital signage content management market.