Google’s key innovation was not great search, rather it was the ability to offer highly targeted advertising that was not offensive to users. This killer combination remains a holy grail for all players in the industry and is likely to remain the holy grail for the 3-7 year time frame of this analysis.

Although Microsoft has failed dramatically in their efforts to monetize (or even provide) online search, the XBOX 360 may be the best example of using a superior device and powerful global brand to monetize entertainment content in the form of video games.   Unfortunately Microsoft’s past losses on the XBOX 360 make it hard to analyze how effective their very long term strategy will be with the XBOX – a strategy that anticipated huge losses for some time as they sought to capture an elusive, primarily teen male market.

In terms of technology and power the Nintendo WII is inferior to the XBOX 360, but the WII appears likely to monetize better over the long haul. Compelling gameplay and clever, demographically targeted marketing seems likely to trump compelling technological achievements – a lesson Microsoft seems destined to relearn with each new deployment.

Other trends are probably not as sweeping in significance as those related to optimizing content monetization because in this market potential profits often drive the directions of change and innovation. I’m describing them below next to the relevant players:

Device Manufacturers: Key trends will relate to customer aquisition and retention and mobile advertising. Branding and customer loyalty are now trumped by cost and convenience and this will continue with the conspicuous exception of the iPhone which is likely to garner good to great customer loyalty. The Google Phone or mobile software may revolutionize this market because it appears likely Google will use targeted advertising in innovative ways to keep phone costs down. Prediction: Google will offer software that is broadly compatible with many new iPhone style devices, and will offer cost cutting using advertising. The effort will succeed though it will add relatively little to Google’s bottom line for some time. It will seriously threaten the ability of struggling carriers like Sprint to stay viable in this market, but they will copy the innovative revenue approaches of Google and may even wind up providing Google software on their own phones. Historically Google likes to see key players thrive using Google innovations rather than displace them (e.g. adsense advertising for other websites).  Treo and Palm in trouble – Centro is too little, too late.   CEO Advice: Partner, customer centricism, mobile advertising innovations.

Distribution Networks: As distribution of digital entertainment and content converges, and online distribution mechanisms gain market share and technological traction, legacy companies must evolve or risk being seriously crippled by online players like Google YouTube and Yahoo Video. Again however it appears that the online players are more interested in partnerships than in global distribution domination, so we are likely to see an era of big brand partners across the board with all media types.

Content Producers: This is the most threatened group thanks to the rise of social networking, user generated content, and superb free online software. Content producers should seek whenever possible to leverage user generated and legacy content to keep production costs to a minimum. They should anticipate the fatigue people may experience with low quality online video clips and seek to jump into that space with quality legacy or cheap original content.

Good advice to digital entertainment CEOs?   Partner, and partner some more.  Scale to modest production values at low cost for most productions, while preserving the lucrative “huge budget” film market which will remain capital intensive for some time. Use innovative high technologies to reduce labor and time costs while still creating “big budget” style content.Web based content aggregators: Google and Facebook are the players to watch as they are currently driving the innovation and Google is driving monetization in the key online content spaces of search, social networking, and video.    Look for search revenues to continue massively upward as advertisers increasingly become aware that offline advertising is generally less effective, often with negative ROIs.    Online advertising often has negative ROI as well but the measurability and superiority of online targeted pay per click and pay per action models will continue to shape the market and drive advertising online.  Short term gains for Google, long term gains for all content aggregators.   However, Facebook’s trumpeted 10 billion+ valuations are misguided and premature.   Look for video and social networking to monetize poorly – even worse than generally expected.   Fixing this will be difficult and may not be possible.   Search advertising will continue to be the key monetizer in the online space.    CEO advice:  No vacations.   Copy Google.  Leverage existing customer bases (MS and Yahoo and Google) to populate new efforts in social networking.   Do not buy Facebook.  Myspace will continue to thrive but gradually lose ground to Facebook as user sophistication increases.   This will lead to more “openness” at Myspace and an approximate consolidation of current market share while Facebook and many other social networks will grow faster, and potentially explosively.  Look for the “killer social networking application” in this market, and buy it early.

Multi-business tech/media conglomerates: Momentum matters, and Sony and Microsoft are such enormous revenue and profit powerhouses that they keep moving the market as needed to give them control that is in many ways simply in proportion to their size.   However, especially in the 5 year outlook Microsoft faces a huge threat from online office suites and services that are free, good, and gaining rapid use.   Look for the enterprise markets to dry up – slowy – in favor of cheap open source and online solutions.   Look for Microsoft to continue failing in the online space.  They simply do not seem to understand or simply don’t want to negotiate the new open landscape where leaders, followers, market movers and market shakers all mingle comfortably in the interest of optimizing the big game.   Google understands this principle brilliantly as does Yahoo, though neither appear to have a keen interest in diversifying to the extent that would be needed to assume Microsoft or Sony’s role in the entertainment industry.

Sony will fare better due to their current and continuing key market positions in movies and gaming.  Unlike Microsoft they are not threatened as much by online changes and the direct, hostile competition to MSN that is coming from Google.

Summary:

The pace of innovation and technological change in the entertainment industry will not subside, and may even continue to increase.   The key force of content monetization  will drive the entire industry and online search will be the most explosive ongoing revenue source.   Reducing the cost of content production will be a key challenge.  Producers and distributors should leverage social networks with their user generated content and cheap archival legacy content as much as possible