The latest issue of Foreign Affairs features the cover article “The Rise of Big Data” by Kenneth Cukier and Viktor Mayer-Schoenburger, which mostly details some of the incredible ways companies like UPS, Google and Apple have come to rely on vast arrays of numbers in order to run their businesses better. But data has always provided a problem in that it gives a substantive assurance of certainty that has a propensity to foster overconfidence in those relying on it. The article attempts to address this:
“[K]nowing the causes behind things is desirable. The problem is that causes are often extremely hard to figure out… Behavioural economics has shown that humans are conditioned to see causes even where none exist. So we need to be particularly on guard to prevent our cognitive biases from deluding us; sometimes, we just have to let the data speak.”
The sentiment here is admirable, and the context perceptive. But the final part of the quotation (my emphasis) assumes wrongly that data can speak objectively, that there is a fundamental ‘truth’ in a number. All too often though the wrong things are measured, or not all variables are measured. What data does not record, or worse, cannot record, can often be overlooked. While ostensibly data is there to provide assistance with building models and predicting future trends and movements, it sometimes leads to a very narrow view of one particular future, and fails to account for possibilities, that, though while unlikely, could potentially be devastating. This is what Nicholas Taleb writes about in his by turns unreadable but seminal work, Black Swan. The fictional, paranoid loner Fox Mulder of the hit series The X-Files had it right fifteen years ago when he lamented “in a universe of infinite possibilities, we may find ourselves at the mercy of anyone or anything that cannot be programmed, categorised or easily referenced”. The financial system before 2008 was a victim of such narrow thinking.
Hendrik Hertzberg, in his Talk of the Town column “Preventive Measures” in this week’s The New Yorker, made the adroit analogy with the 2002 film Minority Report in our quest to categorise and predict acts of crime. Hertzberg points out that in reality this “turns out to be a good deal more difficult than investigating such an act once it occurs”. Indeed, such prediction methods are being implemented, just with somewhat less efficacy than in the Tom Cruise movie. The stop-and-frisk procedure currently employed by the New York Police Department points to a sustained effort to engage in preventative measures to reduce crime, effectively what Cruise and his myrmidons were doing, albeit without the help of psychic imagery as in the film. While the psychic “Pre-Cogs” turned out to occasionally disagree, the success rate with stop-and-frisk is even less attractive. “In the final months of 2012″, writes the New York Times, only 4% of stops resulted in an arrest.
Hertzberg also alludes to the dilemma of mountains of data, produced without concern for oversight or management; producing more just because it’s possible to produce it:
“This fall, the National Security Agency, the largest and most opaque component of the counter-terrorism behemoth, will [open] a billion-dollar facility [analysing] intercepted telecommunications… each of the Utah Data Center’s two hundred (at most) professionals will be responsible for reviewing five hundred billion terabytes of information each year, the equivalent of twenty-three million years’ worth of Blu-ray DVDs… that’s a lot of overtime.”
The other problem this data poses – and increasingly this goes for many industries that are jumping on the Big Data bandwagon – is that intelligence departments and businesses alike are able to put quantifiable targets and figures to what they want to achieve, whether they are actually applicable or not. Police claim the low stop-to-arrest ratio implies that they are preventing crimes by stopping someone before they act. There is nothing to argue otherwise. The New York Times article alludes to the debate over what ratio or percentage the Supreme Court would be comfortable with under the tenet of “reasonable suspicion”. This leads down a dangerous path where we treat data as an answer to a question, rather than as supporting evidence to an answer.
Confucius was an influential Chinese philosopher who lived about two and a half thousand years ago. His teachings on subjects like respect, honesty, education and the importance of strong family bonds are as relevant today as they were in his day.
On one occasion, he was challenged as to whether there was ‘One word, which may serve as a rule of practice for all one’s life?’ Confucius responded, ‘Reciprocity’.
His answer captures a fundamental human truth, which is not restricted to eastern philosophy. In the New Testament, Matthew reports Jesus giving similar advice during the Sermon on the Mount – do unto others as you would have them do unto you.
Whatever you believe, thousands of years of wisdom boils down to the fact that a bit of ‘give and take’ makes the world go round.
Reciprocity and Persuasion
At Dialogue, we ‘persuade people to buy’, and reciprocity is a key principle of persuasion. After all, people are more likely to do something if there is something in it for them too. You have to meet them halfway.
Quite how reciprocity manifests itself, very much depends on the relationship between the two parties.
You’ll happily do a favour for a friend, just for the intangible sense of being a good mate and knowledge that they’ll be there for you, should you ever need them. Whereas when the relationship is less personal, you’ll expect something back much sooner for your efforts. Just today I was asked to give a restaurant some feedback in exchange for a free coffee.
Sometimes, we don’t have time to agree what we are going to do in exchange for a product or service. That’s where money comes in handy. Everything has a price and shoppers can choose to pay it or not.
With cold hard cash having a consistent value (between merchants, if not over time) and many branded grocery products being stocked by multiple retailers, it ought to be easy for shoppers to identify where they get the best value. However, as we know, it’s rarely that simple. Prices fluctuate and aren’t available until you go in-store. Shoppers are rewarded for their patronage in other ways too, from loyalty cards to multi-buy offers. Add in the intangible value of convenience and the comparisons go from black and white to a shade of grey.
But sometimes, brands don’t just want your money. Like the place that offered me a coffee, they want you to do something else. With disposable income shrinking, it makes sense to offer shoppers another way to get access to the things they want.
It also plays on another basic human trait; valuing something more if you’ve had to work for it.
Sampling with a difference
One way brands can encourage consumers to try their products is to give them a free sample. The trouble is, when something is free, we often take it because there is no cost to us, even if we don’t particularly want it. If you put a barrier in place, however small, you can discourage those who don’t really want your product and ensure that those who do take it value it.
For example, last year Kellogg’s set up the ‘Tweet Shop‘. They wanted exposure for their new Special K Cracker Crisps. In exchange for a tweet, visitors to the store were given a free sample. They could have picked up a packet for under £1 at Boots, so the gift didn’t have a huge monetary value. But because it wasn’t simply shoved into their hands as they walked past a train station like so many samples, they valued it more.
There’s a great case study that highlights just how much what something costs frames how much we value it. A photo-editing app called GroupShot is normally priced at 99p. However, for twenty four hours, it was free to download. As you’d expect, download rates shot up. After all, the main barrier to owning the app had been removed. However, the developers noticed that over half of the people who downloaded the app for free failed to ever open it. They’d got a free sample and that’s where their relationship with the brand ended.
We don’t know whether the Tweet Shop achieved the level of exposure that Kellogg’s hoped, but those who did interact with it would have enjoyed their Cracker Crisps all the more for having to earn them.
Another brand to innovate in their demands on shoppers is Weetabix.
They recently partnered with Boots to run the first ‘Pay with a Picture‘ campaign. In order to get their hands on a free sample, shoppers had to photograph a TV advert and then use that photo as a voucher in-store. It sounds like a lot of effort and this review suggests the experience could have been friendlier to shoppers. However, in exchange for a free product, Weetabix made people engage with them and complete one shopper journey.
Away from the ‘breakfast brand extending itself into a light snack’ category, Amex have used their Card Sync technology to integrate sales into Twitter. To participate, cardholders have to tweet a special purchase hashtag, for example ‘#BuyXbox360Bundle‘. They then receive a confirmation tweet from Amex with a discounted price. The cardholder then has to retweet that message within 15 minutes of receiving it and the item is then sent to their billing address.
This not only ensures that cardholders follow Amex on Twitter, giving them a low cost media channel, but also that their cardholders act as ambassadors, broadcasting their savings to their followers.
Identify your goals and understand your audience
Remember the restaurant that offered me a free coffee in exchange for feedback? I don’t drink coffee, so they won’t be getting a response. However, let’s imagine that they had offered me a free cup of tea while I was in there, and asked me whether I would mind spending a couple of minutes answering their questions.
Social norms would have obliged me to do so because they had already given me something, and therefore I owed them.
In reality, one reason they didn’t adopt this approach is that the offer of a free coffee wasn’t a free gift at all.
It was also a trick meant to drive me back to their establishment and buy something else to go with the coffee. It’s not a bad tactic, but in this instance, having two goals means that neither is realised.
The challenge for brands is to find something to give back to their consumers that their consumers will value. They also need to identify what they want them to do in exchange, be it act as a brand ambassador, try a new product or simply feel more affection for them.
It’s important to understand what each party brings to the relationship. Ensuring it is fair can help strengthen the bond between them. Occasionally, one party is already unwittingly giving something away without getting anything back, which leads to a deterioration of the relationship and a lack of loyalty.
For example, every year I pay a hefty amount to London Midland and in exchange they help me get to and from work. However sometimes, trains are delayed, meaning my fellow passengers and I give up our precious time and get nothing in exchange.
Sometimes, this frustration results in the brand being badmouthed. Worse still, it can result in staff being abused. This, in turn, reduces their job satisfaction and motivation to represent the company positively, increases staff turnover and costs the company money in the long term.
But let’s imagine that those wasted minutes were converted into loyalty points that gave commuters something back – free upgrades, discounts with partner brands, etc. Then, the delays might be tolerated with better grace.
And as commuters’ time was no longer a free commodity, London Midland would come to value it more and consequently have a greater incentive to get trains to run on time.
Because as Confucius and Jesus identified all those years ago, when we appreciate each other and are fair in our actions, everyone wins.
Microsoft has been trying its hand at a bit of innovation of late in an attempt to raise some of its lost brand equity, and stem the larger market decline in PC sales, which has recently started accelerating. (On a side note, Deloitte have a caveat to these figures, saying the true measurement is in usage, not units).
One of the ways this innovation has come about is in the release of its Surface product, which has interested many but earned the ire of erstwhile manufacturing partners as Microsoft has pursued its own path, making the product in-house. Its new operating system, Windows 8, has struggled to gain traction with consumers. The president of Fujitsu, one of Microsoft’s partners, declared interest to be “weak” back in December last year. The most obvious step-change from previous iterations is the slate screen that greets users upon booting up. On proceeding through this, users then come to a more familiar Windows layout.
In yesterday’s Financial Times, Microsoft said it was preparing to “reverse course over key elements of its Windows 8 operating system”. Envisioneering analyst Richard Doherty was quoted as saying it is the biggest marketing fiasco since New Coke. The only difference being, Doherty comments, that Coca-Cola acknowledged their error three months in, whereas Microsoft is pushing eight months now since launch; Coca-Cola conversely paid more attention to what its customers were saying about the product. “The learning curve is definitely real”, said head of marketing and finance for the Windows business, Tami Reller.
Today’s FT featured an editorial entitled “Steve Ballmer was right to gamble on change”. Opening with a quotation by Bill Gates, saying that to “win big you sometimes have to take big risks”, the editorial cites Kodak as a primary example of a company that refused to take risk, and ended up succumbing to creative destruction at the expense of trying to protect legacy revenue streams. We’ve written before about Kodak and creative destruction. The editorial calls for a revival of a “climate of creativity” at the company, and certainly that is what Ballmer is trying to instill, very nobly and with good reason. Zeitgeist’s bone of contention is with the following, seemingly logical statement,
“…disruptive innovations are disruptive precisely because the new technology does not appeal to traditional customers. Instead, it appeals to the customers of the future.”
We would argue that Microsoft’s customer base is made up overwhelmingly of what might be considered “traditional” customers. Users who find familiarity with a long-established incumbent, who have no interest in OS alternatives like Linux, Apple, Android or Mozilla. They are not looking for a revolution. By all means change your product, but it must evolve, not look like a completely different way of computing when you switch it on. This point is confirmed nicely by a recent piece in Harvard Business Review, which details how to get customers to value your product more. The author, Heidi Grant Halvorson, describes the importance of knowing the right emotional fit for your customers’ mindset. The article elaborates,
“motivational focus — whether he tends to view his goals as ideals and opportunities to advance (what researchers call “promotion focus”), or as opportunities to stay safe and keep things running smoothly (“prevention focus”). While everyone has a mix of both to some extent, most of us tend to have a dominant focus.”
We would argue that users that prefer Microsoft Windows OS to other systems would strongly fall into the latter category. Change is perhaps inevitable, but Microsoft are choosing a precarious path with such radical changes aimed at a group little interested in such fundamental alterations to the way they interact with such an integral device.
Last night, at the Royal Automobile Club on London’s Pall Mall, Zeitgeist was fortunate enough to hear Harper Reed, the Chief Technology Officer of the Obama 2012 US presidential campaign speak candidly about how he helped get out the vote and keep the Democrats in the White House. Harper is ex-Threadless, the famous T-shirt company that lets users contribute their own designs, with the most popular becoming actual products sold the world over. It’s a democratic philosophy, one that understandably caught the attention of the campaign committee. It is also the kind of thinking that cities like New York and Chicago are starting to employ; actively gathering, analysing and distributing data to inform policy implications and help citizens. What follows is a brief summary of his thoughts and points that Zeitgeist found interesting.
Harper began the talk with the fundamentals, discussing how, when he arrived, the campaign seemingly already had much of the data gathering resources needed to achieve what he wanted. The trouble was it as all siloed. Putting all the data together was a major step in the right direction, toward cohesive data analysis. He elaborated, saying they went from having fifteen different numbers for doors that needed to be knocked on, to one. On hiring the right people for the task at hand, Harper was explicit in noting that they had hired tech people and taught them about politics, rather than the other way around. He riffed on the state of journalism, saying it was similarly important when hiring journalists that know about tech.
One of the more interesting insights Harper talked about involved the target demographics. Those most likely to vote are male or female 18-28, and women perhaps in her 50s. The younger group is adept and comfortable with all digital platforms, but still uses paper a fair amount. Paper, by contrast, is an essential medium for that middle-aged female voter. So the insight was about making paper use more efficient, given these groups’ use of it. Understandably this was a hard decision for a group of very tech-minded people to arrive at, but the acknowledgement showed they were willing to park their own pre-conceptions on how things ought to be done.
Like many startups, they were constantly trying to fail in order to create redundancies. This involved hosting hackathons where code was obsessively broken and then reconstructed, “ensuring things would break in ways we understood”, as Harper put it. They had the same approach with the content they published, aggressively testing every piece to make sure it was relevant and engaging for the intended audiences. What they failed to foresee was the Internet activist group Anonymous launching a DDOS attack the day before the election to coincide with Guy Fawkes day, which helped trigger a meltdown over at Amazon’s cloud servers, AWS. Harper made it sound like not too much trouble to switch the servers from the East Coast where they had been affected, to the West Coast, but the experience must have been a stressful one.
Lastly, he offered an opinion increasingly shared by many in the industry, which was a reluctance to talk of mobile device use as “second-screening”. Mobile devices, Harper pointed out quite rightly and obviously, are the first thing you look at when you wake up, the last thing you look at when you go to bed, and the thing you’re actually looking at when you’re supposed to be watching TV. Mobile first should always be the initial mindset.
In questions, Ruth Porter asked whether there were any pearls of wisdom that could be applied to those in UK politics and how they go about with their own strategy of getting out the vote. Harper conceded he had met that day with a party “whose name starts with ‘L’”, and believed that what was key was investment, commitment and belief from the very top in what social and data could do for the campaign. Without that, such efforts would amount to nothing. The lessons of the Obama 2012 campaign – and the pitfalls of Romney’s campaign – offer valuable lessons for political parties, but it seems any efforts at cherrypicking ideas or going in half-hearted would doom any prospect of leveraging what the Obama team were able to do.
Over the last few weeks, two very different types of establishment, from different parts of the world, have hit the headlines thanks to their unorthodox approaches in dealing with frustrating patrons.
In the process they gave the old adage about the ‘customer always being right’ a bit of a kicking, but that’s not what’s bothered me.
You can’t solve a problem that you haven’t identified
The madness started when a store in Australia imposed a $5 ‘browsing’ fee to combat ‘showrooming’. Then, a Californian restaurateur went one step further by naming and shaming the people who hadn’t turned up for their reservations on Twitter.
As we all know, when we want to encourage a behaviour, we reward it and seek to remove any barriers that might be impeding it. Conversely, when we want to stop a behaviour, we punish it and insert barriers.
Neither establishment is the first to seek ways to overcome these particular business challenges. Both caused plenty of debate with their novel approaches with many commentators critical of the decision to take the latter ‘punitive’ method, accusing them of being heavy-handed and ‘demonising’ their patrons.
However, my issue with what both businesses have done is that neither policy will solve the problem facing the business. And that’s because neither business has really identified the problem they are trying to solve.
From Showrooming in Australia
Let’s look at the Australian store first – ‘Celiac Supplies‘ in Brisbane. As its name suggests, it caters to people with a very particular need.
Their gripe is that these people come to the store for advice, and then leave without purchasing, in the (mistaken, according to the store) belief that the products will be available cheaper elsewhere.
Their frustration is understandable but by charging people to browse, they are likely to reduce footfall, when their challenge was all about increasing conversion. Their solution doesn’t really match their problem.
So, could they have approached the problem from another angle?
Many articles suggesting ways to deal with ‘showrooming‘ recommend investing in staff education and offering price-matching as key ways to increase the likelihood of closing a sale in-store.
In the case of Celiac Supplies, their staff knowledge is one of the main footfall drivers in the first place. And in their explanatory note, they highlight their competitive pricing. On the face of it, they seem to be well placed to overcome the dangers of showrooming.
The barrier to converting their footfall was simply the perception that they were more expensive. All they needed to do is find a way to overcome this.
It’s something that could easily be achieved by providing internet access in-store so that shoppers could check competitor prices before they left the store, or by listing the prices of nearby stores. By facilitating price comparison, the store would empower shoppers and reassure them that they are getting a good deal in-store. Better still, being a physical store means that they can immediately fulfil a shopper’s needs, eliminating the need to wait for an online order to be delivered.
So, rather than start from a position of mistrust, wouldn’t it have been better for Celiac Supplies to welcome potential shoppers, confront the problem of price perception, thereby overcoming their fears of overpaying and turn them into loyal customers?
To No-Shows in California
While showrooming is a relatively modern problem for retailers, restaurants have been dealing with ‘no-shows’ for years. What’s changed is that social media has given restaurants the platform to ‘name and shame’ the people who cost them money by not keeping their reservations.
Frustrated at having to turn away guests because empty tables were being kept for people who had didn’t turn up as anticipated, Noah Ellis, the owner of Vietnamese fusion restaurant Red Medicine took full advantage of this opportunity. He took to Twitter, and under the guise of explaining why restaurants often overbook, proceeded to name all of the people who had recently no-showed at his establishment.
His annoyance is understandable, but there are a number of reasons why this is a bad idea.
Primarily, because like Celiac Supplies charging people for entry to their shop, it won’t solve the problem plaguing the business.
On one hand, people may not care about being named, which completely negates the impact of his actions. Worse still, potential diners may be so worried at being called out if they can’t make their appointment that they decide to book elsewhere to reduce the risk of embarrassment.
People are pretty quick at finding solutions to challenges, and Ellis’ approach could be easily circumvented by booking under a false name.
It could also backfire. What if perversely, being named and shamed became a ‘badge of honour’? Or Red Medicine found itself targeted by pranksters who reserve tables under a friend’s name? Both of which would exacerbate, rather than solve, the problem of no-shows.
And if a regular visitor fails to turn up, do you risk alienating them too with an angry Tweet?
Adopting such a confrontational approach is fraught with danger. Red Medicine isn’t alone in suffering from no-shows, and as this Wall Street Journal article demonstrates, many different solutions have been implemented to deal with them. The number of hoops a prospective diner is prepared to jump through in order to make a reservation will depend on how desirable the restaurant is.
It may be that no-shows are something that can’t be eliminated, and so the challenge becomes to minimise the consequences that they have on business. Looking at the problem this way, we can see why Ellis’s approach won’t solve the problem. He’s engaging with people AFTER they’ve cost him business.
If Red Medicine is so popular with walk-in trade, then limiting the number of tables available for reservations, particularly to new people or those with a history of no-shows would help reduce the impact on business. Similarly, releasing tables that aren’t taken within 15 minutes of their reservation time would allow them to be given to people turning up without a booking.
Sometimes the human touch works too. Rather than ranting after the event or imposing a system or barriers, simply ringing people on the day to confirm their reservation could help identify whether or not they were going to turn up on time.
Perversely, the publicity generated by both businesses could see a short term increase in interest. Their challenge now is to adopt policies that will remove any barriers that could prevent these new shoppers becoming loyal customers.
Let’s hope they identify it.
While it’s difficult nowadays to write about telecoms or the mobile sector without drifting off into other areas of the TMT industry, Zeitgeist spent an evening last month as a guest of Accenture in Cambridge, discussing the successes and failures of the recent Mobile World Congress in Barcelona. It came in the middle of a year so far that has already some significant shifts from mobile companies, in terms of branding, operations and revenue streams.
2013 has seen some interesting news in mobile. The week before last marked, incredibly, the 40th anniversary of the first phone call made from a mobile phone. This year also saw Research in Motion renaming itself to BlackBerry, with shares sliding 8% by the end of the product launch announcement for its eponymous 10 device. It saw Sky acquire Telefonica’s broadband operations, while responding to major complaints about the speed of its own broadband service. It has seen Huawei, which in Q4 of 2012 sold more smartphones than either Nokia, HTC or BlackBerry, come under scrutiny particularly in the US for its lack of transparency. Moreover, after much editorial ink spilled on Facebook’s lack of initiative and innovation in mobile, the release of the ‘super-app’ Chat Heads has piqued interest as it looks to compete with Whatsapp, Viber, iMessage et al., which Ovum reckons cost MNOs $23bn in lost revenue every year. This news mostly pertained to developed markets; JWT Intelligence’s interview with Jana CEO Nathan Eagle features some interesting insights on mobile trends in emerging markets.
Interestingly, 2013 thus far has also been witness to the beginning of more flexible contracts and payments. At the end of March, T-Mobile USA announced it would offer the iPhone to customers for cheaper than its rivals, and customers would not have to sign a contract. It effectively ends handset subsidies – something which Vodafone pledged to do last year and was punished by the stock market when it failed to do so – spreading the full cost of the phone over two years “as a separate line item on the monthly bill”, which may strike many as still quite a commitment. Customers must pay the bill for the phone in full in order to be able to end their tenure with the network. The New York Times elaborates, “Despite T-Mobile’s promise to be more straightforward than other carriers, some consumers might still find it confusing that they have to pay an extra device fee after paying $100 up front for an iPhone.” In the UK, O2 is going a similar route. At the end of last week the company announced similar plans to T-Mobile. While still keeping contracts as an option, the FT explained the company was looking to a plan, dubbed O2 Refresh, “that decoupled the cost of the phone from the cost of calls, texts and data. Customers will be able to buy a phone outright, or pay in instalments over time, and then sign up to a separate service contract that can be cancelled or changed at any time.” Although O2 said in the article that they expected customers to pay the same as they would on a standard contract, the new plans by both network providers will surely add to customer churn. Brands will have to work harder to develop true loyalty rather than relying on the lock-in feeling that adds to switching costs for many customers. Conversely, this added flexibility may make the providers feel less like utilities, creating more choice and differentiation.
At the aforementioned conference Zeitgeist attended last month, Accenture hosted an evening they dubbed “MWC: Fiesta or Siesta?”. It soon became apparent that many of the speakers invited were less than enthused with the conference this year. This was partly because there were no extraordinary leaps in technology or hardware on offer. It was also because of, as one speaker lamented, “the proliferation of suits”. Another speaker complained it was like listening to The Archers: long storylines “that ended up having no conclusion”. The very essence of the conference though is not about trendsetting, or cool new consumer devices. Mobile operators are utilities, the excitement around such an event is not going to be as visceral as that of SXSW or Embedded World. It led some to wonder whether the “real innovation was being developed in such ‘niche’ events, away from the “glitz”. Moreover, perhaps Samsung’s decision not to launch their new S4 handset at the Congress alluded to this lack of excitement, or at least a wish not to be drowned out by other announcements.
Among exciting trends on display at MWC, M2M – something Zeitgeist has written about before – was front and centre at the conference, particularly with regard to cars. Phablets continued to make their foray into the consumer’s view, with bigger screens meaning more data transfer. Zeitgeist wondered whether such a transition would put even more pressure on networks already struggling with large data handling. And although Firefox’s new OS gave some – including those at GigaOm – hope that it could provide more innovation through diversified competition in the marketplace, others, including Tony Milbourn, Executive Chairman of Intelligent Wireless, speaking at the event, thought it “underwhelming” after “lots of hype”. Bendable screens were also to be found at MWC, but those speaking at the Accenture conference like Richard Windsor of Radio Free Mobile said it was early days and much was still to be seen from this new type of phone. Its potential though, he readily conceded, was formidable. Wearable technology was a huge issue at the conference and one that Zeitgeist is particularly interested to see develop, especially as companies like Apple, Sony and Google enter the fray.
It seemed then that the Mobile World Congress failed to reflect what is turning out to be a tumultuous year in telecoms. Not only is there an increasing desire to address consumer needs – in the case of more flexible contracts and more consumer-facing company names – but as economies sputter their way toward ostensible recovery we are also starting to see M&A activity return to the sector. Time will tell whether new technologies, such as M2M or bendable screens can breathe new life into the sector.
The videogame industry, like many of the protagonists in the games it creates, is under attack. The competition is fierce. Not only is there healthy competition amongst legacy companies – including Nintendo, Sony and Microsoft – but new devices are increasingly distracting consumers, and digital disruption elsewhere is changing the way these companies do business.
Part of the problem is cyclical; the market has gone longer than usual without a major new console launch from either Sony or Microsoft, which in turn makes game manufacturers hesitate from making new product. But the industry needs to be wary that their audience has changed, in multiple ways. Sony are now staring to talk about their PS4 (due to be released in around six months’ time), beginning with a dire two hour presentation recently that failed to reveal price, release date, or an image of the console. And the word over at TechCrunch? “A tired strategy… [O]verall the message was clear: Sony’s PS4 is an evolution, not an about-face, or a realization that being a game console might not mean what it used to mean.”
We’ve written before on creative destruction in other industries, and talked before about shifting parameters for companies like Nintendo. The inventor of NES and Game Boy is currently struggling with poor sales of its new console, while at the same the chief executive of Nintendo America recently stated that digital downloads were becoming a “notable contributor” to their bottom line. Companies like Apple are surrounded by perpetual rumours of developing their own videogame platform. New companies in their own right, such as the Kickstarter-funded company producing the $99 Ouya, is among several players shaking up the industry. The upshot of such turmoil – a “burning platform” as the Electronic Arts CEO described the situation in 2007, referring to the dilemma of holding onto the burning oil rig and drowning in the process, or risk jumping off into who-knows-what – is a loss of market share. Accenture in January published a report predicting the demise of single-use devices such as cameras and music players whose revenues would be eaten into as more and more consumers flocked to tablet and other multi-purpose gadgets. Videogame console purchase intent was not researched, but it is not hard to make the analogy.
It was enlightening and reassuring then to read McKinsey Quarterly’s interview recently with Bryan Neider, COO of Electronic Arts. Some interesting take-outs follow. First, in 2007, the company recognised there was a problem: “game-quality scores were down and our costs were rising”. The company wanted to shift from having a relationship with retailers to having one with gamers. This meant having a focus on digital delivery. This fiscal year, digital is forecast to represent 40% of the overall business. Neider recognises this closeness to the consumer makes them even more susceptible to their whims and preferences, so they’re relying far more on data-backed analysis than they have before, including a system with profiles of over 200m customers. This data is used for everything from QA to predicting game usage. Neider elaborates,
“Key metrics answer the following questions: where in the game are consumers dropping out? What is the network effect of getting new players into the game? How many people finish a game? Did we make it too difficult or too long? Did we overdevelop a product or underdevelop it? Did people finish too fast? Those sorts of things are going to be critical… However, the challenge is that parts of the gaming audience are pretty vocal—they either really like a game or they really don’t like it. The trick is to find ways to get feedback from the lion’s share of the audience that is generally silent and make sure we’re giving these people what they want.”
Interestingly, the company’s structure was changed to reflect individual fiefdoms according to franchise – be it FIFA or Need for Speed – the needs for which are managed in that line of business. Each vertical competes with the others to deliver the highest rates of return, while also being able to draw on central resources (marketing, for example). Electronic Arts, as a developer of software for other manufacturers, will to some extent always be at the mercy of which devices are in vogue and the cycle of obsolescence. It is impressive though to see that the company has recognised the need to change the way it does business. The operational and technological sides of business don’t seem to have distracted Neider from the key insight in the industry, “Ultimately, we’re in the people business“.