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(R)evolutions in television and film – Peter Pan and The Player

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What goes around, comes around…

Plus ça change, plus c’est la même chose… TV executives’ concern over changing viewing habits is nothing new. Sports coverage continues to deliver; it’s such thinking that pushed BT to pay almost GBP900m to show some football matches. But it’s not just knowing the score as it happens that has kept audiences from time-shifting. We wrote a piece back in 2011 detailing how the industry was trying to put a renewed focus on live events. Social media have contributed to this; having a constant stream of wry comments on Twitter to snark at while watching Downton Abbey can vastly improve the viewing experience. This is somewhat lost if viewing the show later.

There was a time when live events were much more common on network TV. Back then it was other formats – radio and cinema – that were running scared from the box in the corner. Now it is television that is trying to retain eyeballs; DVRs and OTT rivals are diminishing its sway; the cable industry lost 2.2m subscribes last quarter and Fox COO Chase Carey recently conceded the cable cord was “fraying”. TV viewing in general dropped 4% last quarter, Nielsen reported on Friday. Mobile use in general seems to be the largest culprit (see chart, below). As part of a strategy to keep viewers glued to scheduled, linear TV, NBC has previously screened the live performance of Sound of Music, and recently announced plans for a live rendition of A Few Good Men. Like the latter piece on content, Peter Pan similarly began as a play, and this past week saw its own broadcast, live, on NBC. It was a fine tactic in a broader strategy. Sadly, execution, and timing, are everything. Salon saw much room for improvement. The New Yorker compared it with earlier TV adaptations (NBC did a live version back in 1955) and found it lacking. More damningly, it also saw a broader disconnection from reality, as protests swept the nation in reaction to events unfolding in Ferguson. Viewing figures were half what the network got for Sound of Music. As The Wall Street Journal points out, live events may be losing their pull; both the Emmys and MTV Music Awards saw dips in ratings this year. Meanwhile though, marketers are still willing to pay a premium for advertising during such shows. Brands are said to have paid as much as $400,000 per-30 second commercial for the telecast.

The nature of the internet as a platform for art is double-edged. The thing that makes it attractive — the fast turnover of content produced by unusual, gifted people — may be what stops it from bringing about a Golden Age 2.0.”

- India Ross, Financial Times

Another tactic in the strategy to retain eyeballs has been to license old seasons of shows still running to OTT providers like Hulu, Amazon and Netflix. On the one hand this may cannibalise viewers who are just as happy watching old episodes as new ones. On the other, it could provide a new platform to find audiences and increase advocacy and engagement. What Nielsen has found is that both are happening. As the WSJ reports, “Dounia Turrill, Nielsen’s senior vice president of client insights, said she analyzed the results of 16 such shows and found an even split of shows that benefited and those that didn’t”. Netflix, meanwhile, closed down its public API and is seeking world domination with culturally diverse content in the form of Marco Polo. Such OTT providers have their own problems to worry about, too; their niche is becoming increasingly cluttered. Vimeo is not mentioned often as a competitor to the likes of Amazon’s services, but it too is now producing original content for streaming, in much the same way as its peers, where shows are greenlit by popular demand and creatives given full rein. An article in this weekend’s Financial Times points out the limits of such a business model, “the internet audience — vehement but fleeting in its interests — may not always know what makes the best content for a more substantial series… returns are unreliable in a marketplace where even established services suffer at the hands of a capricious audience”.

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In film, new possibilities arise in the form of ticket-booking innovation. While TV is recycling old ideas of content and engagement, these new tactics look to push the industry onward. This month through January 17, New York’s MOMA hosts a Robert Altman retrospective. One of his seminal films, The Player, shows in some ways how far the film industry has come, and in others how we haven’t moved on at all. The New Yorker wrote a brief feature on the retrospective. It’s insightful enough to quote at length, below:

“In the opening shot of “The Player,” from 1992, Robert Altman makes an explicit attempt to outdo Orson Welles’s famous opening to “Touch of Evil.” He has the camera zoom in and out, track left and right, pan one way and the other, and, before a cut finally comes, pick up with most of the major characters of the film. The scene also situates “The Player”—a movie about a studio created on a Hollywood studio lot—in film history, with passing references to silent film, forties genre work, the sixties, and, finally, the Japanese, who were then moving in on Hollywood, and are seen looking the studio over.

When it came out, “The Player” was regarded as a scorching attack on greedy and unimaginative Hollywood: in the film, the industry’s shining past surrounds the executives at the studio and shames many of them. Twenty years later, the huge profits from big-Hollywood movies—digital fantasies based on comic books and video games—have washed away that shame. The executives in “The Player” have stories pitched to them constantly by writers, and then they say yes or no. They don’t consult the marketing division on what will sell in Bangkok and in Bangalore. The thing that Altman may not have anticipated was that one would be able to look back at the world of “The Player” with something almost like nostalgia.”

TMT Trends 2015 – Star Wars, Tech Wars & Talent Wars

A MATTER OF LIFE AND DEATH

Our most popular article this year by far was a piece we wrote on trends in the media and entertainment industry for the coming twelve months. That nothing has been written since January that has proved as popular as that is a little disappointing, but it is a good indication of what users come to this blog for.

It’s been an interesting past month or so in the Technology, Media and Telecoms sector. We’re going to attempt to recap some of the more consequential things here, as well as the impact they may have into next year.

Star Wars – And the blockbuster dilemma

Friday saw the release of the first trailer for Star Wars Episode VII, due for release December 2015. CNBC covered the release at the coda of European Closing Bell, around the point of a segment a story might be done about a cat caught up a tree (“On a lighter note…”). They discussed the trailer and the franchise on a frivolous note at first, mostly joking about the length of time since the original film’s release. One of the anchors then went on to claim that Disney’s purchase of “Lucasfilms” [sic] and the release of this trilogy of films, given the muted reaction to Episodes I-III, constituted a huge bet on Disney’s part. This showed a profound lack of understanding. Collectively, Episodes I-III, disappointing artistically as they may have been, made a cool $1.2bn. And this is just at the box office. Homevideo revenues would probably have been the same again, almost certainly more. Most importantly (whether we like it or not), are revenue streams like toy sales, theme park rides and the like (see below graphic, from StatisticBrain). So we are talking about a product that, despite many not being impressed with, managed to generate several billion dollars for Fox, Lucasfilm, et al. With a more reliable pair of hands at the helm in the form of J.J. Abrams, to say Episodes VII-IX are a huge bet is questionable thinking at best.

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It can be easy for pundits to forget those ancillary streams, but in contemporary Hollywood it is such areas that are key, and fundamentally influence what films get made. Kenneth Turan, writing in mid-September for the LA Times, echoed such thinking. As with our Star Wars example; so “with the Harry Potter films, and it is happening again with ‘Frozen’, with Disney announcing just last week that it would construct a ‘Frozen’ attraction at Orlando’s Disney World”. It is why studios have scheduled, as of August this year, some 30 movies based on comicbooks to be released over the coming years. Of course, supply follows demand. Such generic shlock wouldn’t be made again and again (and again) if consumers didn’t exercise their capitalist right to choose it and consume it. We have been given  Transformers 4 because the market said it wanted it.

But is this desire driven by a faute de mieux – a lack of anything better – in said market? David Fincher may not have been far off the mark back in September when he mentioned in an interview with Playboy that “studios treat audiences like lemmings, like cattle in a stockyard“. But a shift from such a narrow mindset may prove difficult in a consolidated environment – Variety’s editor-in-chief Peter Bart pointed out recently that “six companies control 90% of the media consumed by Americans, compared with 50 companies some 30 years ago”. Some players of course are trying to change the way the business this works. The most provocative statement of this was in September when Netflix announced a sequel to “Crouching Tiger, Hidden Dragon”, to be released day-and-date across Netflix and in IMAX cinemas. Kudos. It’s the kind of thing this blog has been advocating since its inception. Though not in accordance with a capitalist model, the market is certainly showing a desire for more day-and-date releases. Netflix isn’t a lone outlier as on OTT provider trying to develop exclusive content that goes beyond comicbooks (that in itself should give Netflix pause; about a fifth of its market value has eroded since mid-October). Hulu’s efforts with J.J. Abrams and Stephen King, as well as Amazon’s universally acclaimed Transparent series (full disclosure, a good friend works on the show; Zeitgeist was privileged to take a look around the sets on the Paramount lot while in Los Angeles this summer). And that’s not to say innovative content can’t be developed around blockbuster fare; we really liked 20th Century Fox’s partnership with Vice for ‘Dawn of the Planet of the Apes’, creating short films that filled the gaps between the film and its predecessor. Undoubtedly the model needs to change; unlike last summer, there were no outright bombs this year at the box office, but receipts fell 15% all the same. The first eight months of 2014 were more than $400m behind the same period in 2013. Interviewed in the FT, Robert Fishman, an analyst with MoffettNathanson put it wisely, “It always comes down to the product on the screen. And the product on the screen just hasn’t delivered.” An editorial in The Economist earlier this month praised Hollywood’s business model, suggesting other businesses should emulate it. But beyond some good marketing tactics there seems little that should be copied by others. Indeed, lots more work is needed. Perhaps the first step is merely rising that not all blockbusters need to be released in the summer. Next year, James Bond, Star Wars and The Avengers will all arrive on screens… spread throughout the year. Expect 2015 to feature more innovation on the part of exhibitors too, beyond having their customers be rained on.

Tech wars – Hacking, piracy and monopolies

Sony Pictures faced some embarrassment this week when hackers claimed to have penetrated the company’s systems, getting away with large volumes of data that included detailed information on talent (such as passport details for the likes of Angelina Jolie and Cameron Diaz). The full story is still unfolding. We’ve written a couple of times recently about cybersecurity; it was disappointing but unsurprising to see the spectre of digital warfare raise its head again twice in the past week. The first instance was with Regin, an impressive bit of malware, which seems to be the successor to Stuxnet, a spying program developed by Israeli and American intelligence forces to undermine Iranian efforts to develop nuclear materials. Symantec said Regin had probably taken years to develop, with “a degree of technical competence rarely seen”. Regin was focused on Saudia Arabia, Russia, but also Ireland and India, which muddies the waters of authorship. However, in these post-Snowden days it is well known that friendly countries go to significant lengths to spy on each other, and The Economist posited at least part of the malware was created by those in the UK. Deloitte, ranked number one globally in security consulting by Gartner, is on the case.

The news in other parts of the world is troubling too. In the US, the net neutrality debate rages. It’s too big an issue to be covered here, but the Financial Times and Harvard Business Review cover the topic intelligently, here and here. In China, regulators are cracking down on online TV, a classic case of a long-gestating occurence that at some arbitrary point grows too big to ignore, suddenly becoming problematic. But, if a recent article on the affair in The Economist is anything to go by, such deeds are likely to merely spur piracy. And in the EU this past week it was disconcerting to see what looked like a mix of jealousy, misunderstanding and outright protectionism when the European Parliament voted for Google to be broken up. No one likes or wants a monopoly; monopolies are bad because they can reduce consumer choice. This is one of the key arguments against the Comcast / Time Warner Cable merger. But Google’s share of advertising revenue is being eaten into by Facebook; its mobile platform Android is popular but is being re-skinned by OEMs looking to put their own branding onto the OS. And Google is not reducing choice in the same way as an offline equivalent, with higher barriers to entry, might. The Economist points out this week:

“[A]lthough switching from Google and other online giants is not costless, their products do not lock customers in as Windows, Microsoft’s operating system, did. And although network effects may persist for a while, they do not confer a lasting advantage… its behaviour is not in the same class as Microsoft’s systematic campaign against the Netscape browser in the late 1990s: there are no e-mails talking about “cutting off” competitors’ ‘air supply'”

The power of lock-in, or substitute products, should not be underestimated. For Apple, this has meant the acquisition of Beats, which they are now planning to bundle in to future iPhones. For Jeff Bezos, this means bundling in Washington Post into future Amazon Fire products. For media and entertainment providers, it means getting customers to extend their relationship with the business into triple- and quad-play services. But it has been telling this month to hear from two CEOs who are questioning the pursuit of quad-play. For the most part, research shows that it can increase customer retention, although not without lowering the cost of the overall product. Sky’s CEO Jeremy Darroch said “If I look at the existing quadplays in the market, not just in the UK, but pretty much everywhere, I think they’re very much driven by the providers who want to extend their offering, rather than, I think, any significant demand from customers”. Vodafone’s CEO Vittorio Colao joined in, “If someone starts bidding for content then you [might] have to yourself… Personally I have doubts that in the long run that this [exclusive content] will really create a lot of value for the platform. It tends to create lots of value for the owner”. Sony meanwhile are pursuing just such a tack of converged services in the form of a new ad campaign. But the benefits of convergence are usually around the customer being able to have multiple touchpoints, not the business being able to streamline assets and services in-house. Sony is in the midst of its own tech war, in consoles, where it is firmly ahead of Microsoft, who were seeking a similar path to that of Sky and Vodafone to dominate the living room. But externalities are impeding – mobile gaming revenues will surpass those of the traditional console next year to become the largest gaming segment; no surprise when by 2020, 90% of the world’s population over 6 years old will have a mobile phone, according to Ericsson. So undoubtedly look for more cyberattacks next year, on a wider range of industries, from film, to telco (lots of customer data there), to politics and economics.

Talent wars – Cui bono?

Our last section is the lightest on content, but perhaps the most important. It is the relation between artist and patron. This relationship took a turn for the worse this year. On a larger, corporate side, this issue played itself out as Amazon and publisher Hachette rowed over fees. Hachette, rather than Amazon, appears to have won the battle; it will set he prices on its books, starting from early 2015. It is unlikely to be the last battle between the ecommerce giant and a publisher, and it may well now give the DoJ the go-ahead to examine the company’s alleged anti-competitive misdeeds.

Elsewhere, artist Taylor Swift’s move to exorcise her catalogue from music streaming service Spotify is a shrewd move on her part. Though an extremely popular platform, driving a large share of revenues to the artists, the problem remains that there is little revenue to start with as much of what there is to do on Spotify can be done for free. The Financial Times writes that it is thanks to artists like Swift that “an era of protectionism is dawning” again (think walled gardens and Compuserve) for content. The danger for the music industry is that other artists take note of what Swift has done and follow suit. This would be of benefit to the individual artists but detrimental to the industry itself. And clearly such an issue doesn’t have to be restricted to the music industry. It’s not hard to anticipate a similar issue affecting film in 2015.

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There’s a plethora of activity going on in TMT as the year draws to a close – much of it will impact how businesses behave and customers interact with said media next year. The secret will be in drawing a long-term strategic course that can be agile enough to adapt to disruptive technologies. However what we’ve hopefully shown here in this article is that there are matters to attend to in multiple sectors that need immediate attention over any amorphous future trends.

Adjacencies & Disruptions – Amazon, Armani and identifying corollaries

Zeitgeist likes thinking about adjacencies. We’ve written about it before when looking at the art market, but it’s also prevalent in other industry sectors. Think of the UK übergrocer Tesco. The company has expanded into movie distribution – with Blinkbox – as well into banking and mobile, albeit as an MVNO. Why? To diversify its revenue streams; the grocery market is a cutthroat place of late; Morrisons recent conceding that it would be setting off another price war among its peers was hardly greeted with cheers by shareholders. How? By using the equity of trust they have built up with shoppers over the years, they are able to expand into other, similar territories, where their (claimed) competitive advantage of good value and good customer service can be similarly applied.

Amazon has been nothing if not a company constantly on the hunt for the efficient exploitation of adjacencies. A recent article in The New Yorker detailed how CEO Jeff Bezos got into books because he saw the market was ripe for disruption; he saw the Internet was the perfect platform to sell such a product:

It wasn’t a love of books that led him to start an online bookstore. ‘It was totally based on the property of books as a product’, Shel Kaphan, Bezos’s former deputy, says. Books are easy to ship and hard to break, and there was a major distribution warehouse in Oregon. Crucially, there are far too many books, in and out of print, to sell even a fraction of them at a physical store. The vast selection made possible by the Internet gave Amazon its initial advantage, and a wedge into selling everything else.

Zeitgeist remembers buying his first book from Amazon back in 1999. It wasn’t long before the company expanded into music, and from there into myriad other offerings. Like Tesco, Amazon found its original industry to be a highly competitive one – at least in terms of margins. It has become a fairly ruthless behemoth in the publishing industry, acting as monopoly in its rent-seeking tactics. The Kindle was an extension of its strategy to ‘own’ the territory of books, and as a publishing company itself it has so far had mixed success, according to The New Yorker. The Kindle Fire addresses its new media offerings, principally video. Just as a recent Business Insider article identified the Xbox 360 as Microsoft’s short-term ploy to encourage a customer to funnel all entertainment through their device before the launch of its successor Xbox One, so with Amazon and its Kindle Fire before this week’s release of Fire TV. The Financial Times featured good coverage of the device here, quoting an analyst at Forrester,

It is a slightly faster Roku box combined with voice recognition to make search easier and then they have created a full Android gaming device. This puts the product into a whole class of its own.”

It will be interesting to see how the device competes with the much cheaper Chromecast, from Google, itself an exploiter of adjacencies. Google relies less on an equity of customer trust to move into new industries and more an innate belief that tech can be used to solve pretty much any problem. The search engine provides an affordable smartphone OS platform, connected glasses, globe-trotting balloons and driverless cars.

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In the world of luxury, that essence of trust is treated with far greater reverence. This is principally why fashion brands have been such laggards when it has come to embracing digital communications and ecommerce solutions. tIronically, this approach, which by extension neglects a dedicated approach to holistic Customer Experience Management (or CEM) is arguably beginning to have a negative impact on how people perceive and interact with these companies. It is why adjacencies seem to happen less than temporary collaborations, an impressive recent example of which can be seen in BMW’s recent tie-up with Louis Vuitton.

It was gratifying to see Giorgio Armani, a company that has carefully crafted diffusion lines as well as adjacencies into hotels and homeware over the years, recently buck the trend, sending out communications over its newest line, Armani Fiori. While style can be eternal, fashion can be quite ephemeral – as with flowers. It’s not clear how much of a market there is for this. That being said, the sector is not exactly brimming with ultra-premium florists. And it might provide a certain level of reassurance for the man purchasing flowers, who can rely on the brand’s prestige to assuage any feelings of whether he is picking a good bunch. Where it might prove especially successful though is in the B2B sector; the lobbies of corporate headquarters and luxury hotels could soon be awash with the fragrance of a designer flower or two.

Adjacencies tend to work best then when they start by identifying qualities inherent in the brand as it currently exists. I.e. what is our current competitive advantage? Is that scaleable or transferable to a related field? Often, as with the cases above, such acquisitions and movements arise when traditional margins are being eroded or under threat of such. Prada, a leader in the luxury sector, has as that leader borne the brunt of strong headwinds recently as the sector as a whole experiences a slowdown. Its own adjacent acquisition? Last month it bought an 18th-century Milanese pastry shop.

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TV’s bloody disruptions

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Last night, Zeitgeist eagerly devoured the first episode of the new season of Netflix‘s House of Cards, a series that has received lavish praise  – not least from us – both for its content and its position as vanguard of a new wave of television distribution, production and consumption. The series lead, Frank Underwood, takes on his competition with a ruthless lack of morality that is unlikely to jar with those in the cutthroat television industry. The New York Times recently featured an excellent piece on the series, focusing on the showrunner Beau Willimon, the unique nature of doing such a show with Netflix, which among other things guaranteed 26 shows upfront, and the new mood of “post-hope” politics. Is traditional linear TV entering its own post-hope state?

Such talk of impending doom makes for nice editorial (which Zeitgeist is not averse to), but how true is it? To some extent, such new forms of consumption are being hampered by externalities as the platforms make the switch from early adopters to the everyday consumer. Indeed, Netflix’s sheer popularity is proving to be a thorn in its side. In November last year, Sandvine reported that the content Netflix provides now accounts for almost a third of internet traffic in the US. This staggering figure no doubt accounts for at least part of why internet speeds take such a distinct hit during primetime viewing hours (see chart below). As Quartz has the insight to point out, such issues are less to do with intentional throttling and more to do with peering agreements between ISPs and content providers.

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Download speeds happen to take a significant hit right around the time people are looking to kick back with some Netflix

Such issues are likely to be ever more prevalent as the notion of net neutrality continues to come under attack. At the end of last month, a federal appeals court overturned the Federal Communication Commission’s Open Internet Order, which had stipulated that ISPs could not prejudice one type of internet traffic over another. The fear of any such policy being overturned has always been one of the creation of a two-tier internet, where people who can afford faster internet get preferential access, and companies are free to charge distributors differing amounts based on the type or amount of content they are delivering. Such consternation was also felt in government, where five US senators called on the FCC chairman to “act with expediency” to preserve the open internet. The news immediately caused concern for Netflix, as shareholders fretted that ISPs might start to charge the company for the traffic it takes up. CEO Reed Hastings responded categorically,

“Were this draconian scenario to unfold with some ISP, we would vigorously protest and encourage our members to demand the open Internet they are paying their ISP to deliver.”

Consolidation and the narrowing of choice took a further hit on Wednesday this week when Comcast announced it would buy all of Time Warner Cable for $44.2bn. The choice on cable landscape is already limited for the US, so it will be interesting to see what regulators make the deal. Chad Gutstein, former COO of Ovation, an independent arts-focused cable channel, penned an article in Variety saying that any concerns over the deal should be restricted to the possibility of abuse of a dominant position, rather than simply market share.Columbia Law School professor Tim Wu, writing in The New Yorker, rightly points out that the FCC should be approving such mergers only if they serve the public interest. He sees no such possibility in this instance, where the most pressing need for cable customers is lower prices. Last year, he writes, Comcast collected about $156 a month on average, per customer. For cable. Professor Wu contends that the merger would put Comcast in a position that would make it easier to raise prices further. This, despite the fact that conditions created via the merger would technically put the company in a position where it could create savings, both through economies of scale and more advantageous negotiating positions with programmers like ESPN and Viacom. Of course, Comcast is probably keen on preserving if not extending margins as it faces increasing competition from players like Netflix and Amazon. Cord cutting may be in vogue now, but Comcast will try to combat this by creating what is called ‘lock-in’. Craig Aaron, president of Free Press, a consumer advocacy group, is quoted in the New York Times; “Comcast and the new, giant Comcast are going to do as much as they can to stop you from unbundling. In order for you to get content you like, you’re going to be pushed to pay the cable bill, too”. Such tactics will test the limits of customer inertia, but only if they have somewhere else to go as a viable alternative.

The switch to online viewing is also raising issues of policy change in the UK. Public service broadcaster the BBC has long left it unclear as to at what point requiring a TV licence is mandatory, leaving citizens to infer that simply owning a television set is reason enough. Recently though, the broadcaster finally clarified that owners can use their TV, with no fee, to play games, watch DVDs, basically do anything that doesn’t involve watching live television. For the moment, this also includes their IPTV offering, iPlayer. In an article earlier this month, The Economist said the fee was “becoming ever harder to justify”. Antonella Mei-Pochtler of the Boston Consulting Group, quoted in the article, believes the increasing trend of young people to timeshift their viewing is likely to become ingrained. Coupled with the growth of internet-connected TVs, this is bound to accelerate a shift away from traditional linear consumption. The BBC is soon to begin developing premium content for its iPlayer service in order to seek additional revenue streams that may offset a decline in fees paid. But as The Economist points out,

“[T]hat would suggest, dangerously, that the BBC is like any other optional subscription service. Folding on-demand services into the licence fee could also amplify calls for the BBC to share its cash with other broadcasters, not least because such consumption may be precisely measured.”

When we look at the market for television sets and set top boxes, the news isn’t that superb either. The curved TVs debuted at CES in January are surely little more than a distraction. Last week, Business Insider reported that Sony is to finally spin off its TV operations into a separate unit, amongst news of $1.1bn in losses and 5,000 job cuts. But while we’ve talked of consolidation and narrowing choice, we also need to recognise this is also a period of unprecedented choice for consumers. As a recent article on GigaOm points out, there are millions of channels on YouTube alone. There are growing pains. As consumption of such content moves “to the living room”, the article details various sub rosa negotiationsby retailers like Walmart with their own video market, or players like Netflix willing to pay top dollar to put branded buttons on remote controls. What is clear, with all the issues described in this post, is that consumer choice needs to be preserved in an open market with plenty of competition. Such an environment will always foster innovation. This may breed disruption, but that doesn’t have to mean devastation. The age of linear TV viewing may be at the beginning of its end, but that doesn’t mean there’s still a lot to fight for, even if it’s a scrap. Frank Underwood wouldn’t have it any other way.

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Netflix has similar revenues but lower earnings than HBO, for now.

UPDATE (22/02/14): The New York Times published an interesting article comparing Netflix and HBO recently, showing how the two companies are faring financially (see image above), as well as their approaches to developing content, which started off as opposing ideologies but are slowly starting to meet in the middle as they borrow from each other’s playbook. The article quotes Ted Sarandos, Netflix’s chief content officer: “The goal is to become HBO faster than HBO can become us.”

UPDATE (22/02/14): Of course, commercial network television in general is also going through a period of consternation, slowly building since the day TiVo started shipping. At the end of last year, the Financial Times reported that share of advertising spend on television is set to end after three decades. This is partly due to a proliferation of new devices and platforms – not least of which is Netflix – but also partly due to the amount of people time-shifting their viewing and skipping through the ads along the way. Thinkbox, a lobbying arm for the television industry, recently published a blog article with accompanying chart. It illustrated how many people time-shifted a particular programme depending on the genre. For example, fewer people time-shifted the news than drama shows. But one of the key points made in the article is “that there is no significant difference in the amount of commercial TV which is recorded and played back compared with BBC equivalents. To put it another way: TV is not time-shifted in an attempt to avoid ads”. This is specious reasoning at best. While it may be true that, yes, people do not discriminate between whether they time-shift a BBC show or an ITV show, it would be totally wrong to infer that those viewers are not avoiding ads when they do appear. The article’s author is guilty of confirmation bias, not to mention grasping at straws.

Threats and Opportunities for the Entertainment Industry in 2014

January 11, 2014 1 comment

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*Our 2015 trends for the sector can be found here*

At the start of a new year, what to make of the entertainment sector? It depends where you look. One thing is for certain though; at the close of 2013 that old laggard the music industry upstaged its media cousins. For sheer daring and innovative nous, few initiatives could claim to beat Sony in its launch of Beyoncé’s new album. In the face of increasingly ailing streaming services, the album was released as a fixed bundle on iTunes, with no marketing behind it. The news of the release thus came as a last-minute surprise to the industry and consumers alike, creating a short but extreme burst of anticipation. The artist posted a message on Facebook saying she wanted to recreate the “immersive experience” she used to have listening to music. The album sold 80,000 copies in three hours. It is difficult to envision Sony’s film division at Columbia Pictures doing anything similar.

Near the end of last year, Zeitgeist was fortunate enough to be able to attend the 5th Annual GlobeScreen Conference at London’s May Fair Hotel. Eve Gabereau, the co-founder and MD of Soda Pictures lamented “nurturing a film is not possible any more… there is less opportunity for a film to find its audience”. Word of mouth, she said, had to be very good, and happen very quickly, in order for it to have an effect. Simon Crowe, founder and MD of SC Films International, disagreed with another speaker, who asserted that filmmakers were being hampered by a lack of data, in that they did not know who they were making films for. He dismissed the need for data, and, most worryingly, stated the primary focus should not be on the bottom line. This is dangerous thinking. Films may be art, but if the medium is to continue then it needs to be profitable. So the primary focus has to be ‘How will this product turn a profit?’. Zeitgeist asked him afterward about the viability of VOD (video-on-demand) as a channel; Crowe was not optimisitic about its future as a significant revenue producer, calling films that have found success on such platforms – such as Arbitrage and Margin Call – outliers. Zeitgeist offered that Netflix had not been considered a significant distribution channel for a while, until suddenly it was. Did he foresee a similar situation with VOD? “Don’t know”, was his retort. It was well worth staying late to receive such gems as answers. The whole conference spoke of an ignorance of the insight data can provide, a shunning of profit-focused management, and a general yearning for bygone times when the industry – not to mention the champagne and other substances – was flowing more freely.16-old-hollywood-is-dead-and-old-tv-is-dyingSuch anecdotal frustrations found company in the form of hard data. To cap off 2013, Business Insider published an article entitled ‘The US 20: Twenty huge trends that will dominate America’s future’. Number 16 was ‘Old Hollywood is dead…’. It noted that inflation-adjusted box office receipts were down around 8% from their 2004 high (see chart). Industry trade mag Variety reported recently that UK box office fell 1% in 2013, which was the first drop in ten years and the biggest in more than twenty. Of course, part of the reason for this was because 2012 had a rather suave helping hand from James Bond, in the form of Skyfall. When Zeitgeist prodded Cameron Saunders, Managing Director of 20th Century Fox UK, about the news over Twitter, he was quick to leap to into the fray, noting that it was “still the second biggest box office year on record”. He also went on to concede though that “UK admissions however have flatlined, despite lots more films = fewer people seeing each movie”. The same scenario is happening in the US. China is one of the few bright spots in the world of film, and has seen an explosion in the number of physical screens installed in the country over recent years. But even the Chinese film industry has medium to long term challenges it will need to overcome, if, as some predict, it is to become the world’s largest film market – overtaking the US – by 2019. It is still at the mercy of a government with strict controls and vague whimsical notions about what makes for permissible content; the state is involved at almost every level of production and distribution. Moreover, though the quota on foreign releases in the market has been relaxed slightly, it is by no means open season for Hollywood. In much the same way as the banning in China of Google’s app service and videogames consoles led to poor knock-offs, so with film. The restrictions have spawned poor remakes of American films that didn’t see a release on China’s shores, which inspires little creativity or excitement.

It was not all doom and gloom in the cinema of late of course. Gravity continues to light up screens across the world, and seems poised to do well come Oscar night. Its only obstacles come in the form of other films that critics and audiences have been similarly impressed with this season, including 12 Years a Slave and Captain Phillips. But such artistic achievements can hardly make us forget what was a poor summer for the film industry. We have written before about how films in development are increasingly either mega-blockbusters or niche arthouse films. Producer Kevin Misher, talking to The Economist last month, echoed our thoughts; “Hollywood is like America: the middle class has been squeezed”. The article went on to lament the unique situation the film industry finds itself in, relying on outsiders for both ideas (“imagine if Apple or Toyota did this”) and funding.

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Will more content producers partner up with those infringing intellectual property?

The challenges extend further. Though Kodak suffered from other problems too, one of the things that prevented it from ever laying down a long-term strategy to embrace digital photography was the revolving door of executives at the top. Hollywood is similarly afflicted. In the past 18 months, according to The Economist, four of the six main studios have seen change at the top. Perhaps some longevity in senior roles would have encouraged these companies to embrace new ways of delivering films to eager customers. Instead, most films, particularly the ones glutting the summer schedule, still cling to an outdated distribution strategy of staggering releases across platforms. Studios resist doing this – save for the odd arthouse release – because it risks the ire of exhibitors. We’ve written before about the antiquated nature of such thinking. Every delay in getting to a consumer increases the chances that customer will resort to piracy. Companies like Netflix are reporting that intellectual property rights infringement dips once legal alternatives are made available to people; there are signs of hope.

Piracy is of course playing a role in television, too. In Poland, consumers have to wait months after the US broadcast for their dose of Homeland. It is thus one of the more popular shows to be pirated. Making the most of this trend, a publishing company responsible for a new book detailing Carrie’s life before the start of the series has been inserting adverts into the subtitles for the show. The MD of the publishing company told TorrentFreak, “We decided to advertise via subtitles because we wanted to show the book to all the fans of the Homeland series in Poland, no matter where they watch the show”. You can’t argue with placing a promotion for where you know your likely customers are. It will be interesting to see if any other unlikely coupling between pirates and content producers emerge. For, as amusing as this news is, it does point to a fragmentation in audiences, and thus in places for advertisers to reach them. It should have come as little surprise then when, last month, the Financial Times reported that TV’s share of advertising spend will slip this year, after three decades of uninterrupted growth. Jonathan Barnard, ZenithOptimedia’s head of forecasting, warned, “After television ad spending has grown pretty consistently for at least the last 35 years… there will be quite a lot of disruption to come over the next 10 years.”

Of course, disruption will come to other sectors of the entertainment industry, too. This was apparent at the recent Consumer Electronics Show in Las Vegas, where Samsung and Sony, among others, held court. It wasn’t the best of showings for Samsung, where famed producer / director Michael Bay walked out seconds into a presentation on curved televisions after the autocue failed. Sony had its disruptor product to tout, a cloud TV service. Beyond the glitz and glam of such new product releases, a big question remains: Can Sony use what assets they have and combine them effectively? A great article in the FT probed deeper, asking whether all these new products and services – we would be remiss were we not to mention the PS4, currently outstripping the Xbox One in sales – can be successfully integrated into an ecosystem that Sony is desperately trying to create. The corporation dabbles in film distribution, film production, smartphones, music as well as videogames and is slowly trying to tie them all together. All this while seemingly trying to disrupt itself, with cloud gaming doing away with the need for a console and image projectors doing away with the need for physical screens (Sony loses about $80 on every set it sells currently). As the article concludes,

“[CEO] Mr Hirai is trying to pick up the pace as Sony searches for its digital destiny. But the familiar questions remain: can it execute on the plan, how fast can it move – and how much pain is it prepared to take along the way?”

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Where next for Sony?

Certainly if companies like Samsung and Sony wish to succeed in the coming years, they will have to do away with the obsession of focusing on hardware. It is plain now that, in consumer’s eyes, technology has reached a tipping point where the specifications of an object are no longer a unique selling point; they are a redundancy. This became clear at the Mobile World Congress in 2012, when PC Magazine published its event wrap-up under the headline “The End of Specs?”.

There are some companies that are embracing disruption, or at least, trying to hire those who started it in the first place. Disney, which often seems to have a strong strategic head on its shoulders, recently made the eminently sensible move of hiring the chairman of Twitter Jack Dorsey to join the Walt Disney board. This was no isolated occurrence for Disney, who had previously had Steve Jobs on the board and who have also hired Facebook COO Sheryl Sandberg. Elsewhere, the canny Weinstein brothers, who rarely miss an opportunity to make impressive artistic works that turn a decent profit, reteamed with their old company Miramax to develop further iterations of their film library. Seeing the opportunity for increased creativity in television, as well as new channels like Netflix and Amazon, they will also be developing new television series. And while online takes away advertising spend from other channels under the promise of reaching the right people at the right time, new local television development in the UK promises to do similar as it targets localised areas. Still, the film industry as a whole seems to be outright resisting any changes to the calendar; schlock in the summer sun, followed by arty pretense come Oscar time. Repeat. A writer in the New York Times elaborates,

“And then, after the Oscars, the machine picks up speed and starts excreting ghastly product like Oz the Great and Powerful, one of the worst movies of 2013 and the eighth highest domestic grosser of the year. Then the fall hits, and we cling to movies like Gravity and insist that, really, it isn’t all bad. And it isn’t, of course, even if creating a Top 10 list is finally an exercise in exceptionalism.”

The worry is that any shift in the schizophrenic nature of film scheduling and creation will probably involve at least a short-term hit to the bottom line. And a recent dismissal hints that no such shift is underway at the moment. In October, the great James Schamus of Focus Features was let go by Universal. Schamus was instrumental in bringing director Ang Lee to the US, distributing his Crouching Tiger, Hidden Dragon before going on to make The Pianist, Far From Heaven and Brokeback Mountain, among many other extraordinary films. Doug Creutz, senior media and entertainment analyst for Cowen & Company, told the New York Times in December,

“The major media companies are so big that nothing but a blockbuster really makes sense. Say you make a low-budget comedy and it brings in $150 million. So what? That doesn’t move the needle. You make a blockbuster… You can do the sequel and the consumer products and a theme park attraction. The movie itself is almost beside the point. All Disney is going to be doing is Marvel, Star Wars and animation.”

That would be a great shame for those who like artistic diversity, as well as sensible financial returns, in their film studio output. Current business models seem to be producing diminishing returns. This is true for videogames, movies and music. Experimentation, such as that by Sony’s music division mentioned at the beginning of the article, must be more widespread to engage with new consumer habits and to rekindle jaded minds. Consumer engagement and feedback as a whole is largely missing from much of the strategy with which the entertainment industry steers itself. Shareholder returns and operational logistics occupy most of their time. A far more rigourous approach to data – collecting and analysing it – and a more open ear to one’s customer base, might prove beneficial.

Embracing digital – New moves for old companies

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Are incumbent companies starting to see the light when it comes to embracing digital? Evidence is slowly starting to point in that direction.

Artists are known for embracing change and innovation, but the art market itself has been slow to adapt to changing consumer behaviour. Now mega e-tailer Amazon is selling art on its site, and venerable auction house Christie’s is pushing headlong into online-only sales, as Mashable recently reported. And while fashion designers know how to use digital to push the envelope, the fashion industry as a business has been notorious for their skittishness at investing in efficient, immersive digital experiences for their customers, so worried are they about detracting from the brand. So it was reassuring to see during Paris Fashion Week recently that French marque Chloé had gotten the message. As Zeitgeist’s dear friend and fashion aficionado Rachel Arthur details on her blog, the brand launched a dedicated microsite for their runway show. Brands like Burberry and Louis Vuitton have been doing this for at least three years, so in of itself it’s nothing new. What made the experience different were two things. Firstly, the site created a journey that started before the show, and continued after it, rather than merely offering a stream of live video and little else. More importantly, it tried to make the experience one that reflected the influence of those watching. As Rachel points out,

“As the event unfolded, so too did different albums under a moodboard header, including one for the collection looks, one for accessories, another for the guests, and one from backstage. Users could click on individual images and share them via Twitter, Facebook, Pinterest or Weibo, or heart them to add them to their own personal moodboard page.

‘[We] are excited to see how you direct your own Chloé show,’ read the invite.”

The recognition of platforms like Weibo should be seen as another coup for Chloé. Too often, companies send out communications to global audiences with perfunctory links to Facebook and Twitter. Not only is there no call to action for these links (why is it that the user should go there?), but there is no recognition that one of the world’s most populous and prosperous markets are more into their Renren and Weibo.

Elsewhere, despite what seems like some niggling problems, Zeitgeist was excited and intrigued to read about Disney‘s latest foray into embracing how consumers use digital devices, this time creating a second-screen experience in movie theaters. Second Screen Live, as Disney have branded it, doesn’t immediately sound particularly logical, as GigaOm point out,

“Of all the places I’d thought would be forbidden to the second screen experience, movie theaters were near the top of my list. After all, you’re paying a premium ticket price for the opportunity to sit in a dark theater and immerse yourself in a narrative — second screen devices operate in direct opposition to that.”

And yet the Little Mermaid experience that the writer goes on to describe cannot be faulted for its attempt at innovation, at reaching beyond current thinking (not to mention revenue streams), in order to forge a new relationship between the viewer and the product. Kudos.

Lastly, Zeitgeist wanted to mention the US television network Fox as a classic example of a company that has slowly come to realise the power of working with digital, rather than against it. In years passed, companies like Fox were indisputably heavily involved in digital, but only from a punitive standpoint. Fox and others were ruthless in their distribution of takedown notices to sites hosting content they deemed to infringe on their product. Fan sites that exploded in support and admiration for shows like The X-Files were summarily threatened with legal action and closed. There was little thought given to the positive sentiment sites were creating around the product, and little thought given to the destruction of brand equity that such takedown notices brought about. Not to mention the dessication of communities that had come together from different parts of the world, their single shared attribute being that they were evangelists of what you were selling. Clips of shows, such as The Simpsons, appearing on YouTube would be treated with similar disdain. So it shows how far we’ve come in a few years that this morning when Zeitgeist went onto YouTube he was greeted on the homepage with a sponsored link from Fox pointing him to the opening scenes of the latest Simpsons episode, before it aired. Definitely a move in the right direction.

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Once notorious for their stringent outlook on content dissemination online, Fox now pushes free content across multiple digital channels

The “Jaws” of death? – Rethinking film industry strategy

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Steven Spielberg on-set for “Jaws”. The Leviathan gave birth to the summer blockbuster

This past week, Zeitgeist had the pleasure of enjoying a new adaptation of Shakespeare’s “Much Ado about Nothing”. This adaptation was not performed at the theatre but at the cinema. It was not directed by Kenneth Branagh or any other luminary of the legitimate stage, but rather by the quiet, modest, nerdy Joss Whedon, who until a few years ago was best known to millions as the brains behind the cult TV series phenomenon “Buffy the Vampire Slayer” (full disclosure: Zeitgeist worked on the show in his days of youth). Whedon was picked to direct a film released last year that can, without much difficulty, be seen as the apotheosis of the Hollywood film industry; “The Avengers”. A mise-en-abyme of a concept, involving disparate characters, some of whom already have their own fully-fledged franchises, coming together to form another vehicle for future iterations. “The Avengers” became the third-highest grossing film of all time, and it is a thoroughly enjoyable romp. Moreover, to go from directing on such a broad canvas to shooting a film mostly with friends in one’s own home – as with “Much Ado…” – displays an impressive range of creative ingenuity.

Sadly for shareholders and studio executives’ career aspirations, not every film is as sure-fire a hit as “The Avengers”, try though as they might (and do) to replicate the same mercurial ingredients that lead to success. Marvel, which originally conceived of the myriad characters surrounding The Avengers mythology, was bought in 2009 by Disney for $4bn. Disney for all intents and purposes have a steady strategic head on their shareholders. They parted ways with the quixotic Weinstein brothers while welcoming Pixar back into the fold. They were one of the first to concede the inevitability of closed platforms release windows – something Zeitgeist has written about in the past – they are debuting a game-changing platform, Infinity, which might revolutionise the way children interact with the plethora of memorable characters the studio have dreamt up over the years. However, such sound business strategy could not save them from the uber-flop that was 2012’s “John Carter”, which lost the studio $200m. This summer, the rationale for their biggest release has been built on what appears to be sound logic; taking the on- and off-screen talent behind their massively successful “Pirates of the Caribbean” franchise, and bringing them together again for another reboot in the form of “The Lone Ranger”. The New York Times said the film “descends into nerve-racking incoherence”; it has severely underperformed at the box office, after a budget of $250m. Sony’s “After Earth” similarly underperformed, suddenly throwing Will Smith’s bullet-proof reputation for producing hits into jeopardy.

These summer films – “tentpoles” to use the terminology bandied about in Los Angeles – are where the money is made (or not) for studios. As an industry over the past ten years, Zeitgeist has watched as these tentpoles have become more concentrated, more risk-averse and therefore less original, more expensive and more likely either to produce either stratospheric results or spectacular failures. Paramount is an interesting example of a studio that has made itself leaner recently, releasing far fewer films, and relying on franchises to keep the ship afloat. Edtorial Director of Variety Peter Bart seems to think there’s a point when avoiding risk leads to courting entropy. It’s an evolution that has escaped few, yet is was still notable when, last month, famed directors Steven Spielberg and George Lucas spoke out publicly against the way the industry seemed to be headed. Indeed, the atmosphere at studios in Hollywood seems to mimic that of a pre-2008 financial sector; leveraging ever more collateral against assets with significant – and unsustainable – levels of risk. The financial sector uses arcane algorithms and has a large number of Wharton grads whose aim should be to preserve stability and profit. Yet even with all this analysis, they failed to see the gigantic readjustment that was imminent. In the film industry, Relativity Media’s reputation for rigorous predictive models on what will make a film successful is rare enough to have earned it a feature in Vanity Fair. So what hope is there the film industry will change its tune before it is too late? Spielberg pontificates,

“There’s eventually going to be a big meltdown. There’s going to be an implosion where three or four or maybe even a half-dozen of these mega-budgeted movies go crashing into the ground and that’s going to change the paradigm again.”

Instead of correcting course as failures at the box office failed to abate, studios have dug in harder. Said Lucas,

“They’re going for gold, but that isn’t going to work forever. And as a result they’re getting narrower and narrower in their focus. People are going to get tired of it. They’re not going to know how to do anything else.”

Such artistic ennui in audiences is admittedly sclerotic in its visibility at the moment. “Man of Steel”, another attempt at rebooting a franchise – coming only seven years after the last attempt – is performing admirably, with a position still firmly in the top ten at the US box office after four weeks of release, with over $275m taken domestically. It’s interesting to note that audiences have been happy to embrace the new version so quickly after the last franchise launch failed; though actor James Franco finds it contentious, the same has been true with the “Spider-Man” franchise relaunch.

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Is M&A finally out of vogue in the Media and Entertainment sector?

Part of the problem in the industry, some say, is to do with those at the top running the various film studios. In “Curse of the Mogul”, written by lecturers at Columbia University, the authors contend that since 2005 the industry as a whole has underperformed versus the S&P stock index, yet such stocks are still eminently attractive to investors. The reason, the authors say, is that those running the businesses frame the notion of success differently. They argue that it takes a very special type of person (i.e. them) to be able to manage not only different media and the different audiences they reach and the different trends that come out of that, but more importantly (in their eyes) to be able to manage the talent. They asked to be judged on Academy Awards rather than bottom lines. The most striking thing in the book – which Zeitgeist is still reading – is the continual pursuit by said mogul of strategic synergies. This M&A activity excites shareholders but has historically led to minimal returns (think Vivendi or AOL Time Warner), often because what was presented as operational or content-based synergy is actually nothing of the sort. It’s a point Richard Rumelt makes in his excellent book, “Good Strategy / Bad Strategy”. Some companies are beginning to get the idea. Viacom seemed an outlier in 2006 when it divested CBS. Lately, News Corporation has followed a similar tack, albeit under duress after suffering from scandalous revelations about hacking in its news division. A recent article in The Economist states,

“Most shareholders now see that television networks, newspapers, film studios, music labels and other sundry assets add little value by sharing a parent. Their proximity can even hinder performance by distracting management… they have become more assertive and less likely to believe the moguls’ flannel about ‘synergies’.”

So in some ways it was of little surprise that Sony came under the microscope recently as well, part of this larger trend of scrutiny. The company has experienced dark times of late, with shares having plunged 85% over the past 13 years. The departure of Howard Stringer in 2012 coincided with an annual loss of some $6.4bn. Now headed up by Kazuo Hirai, the company has undoubtedly become more focused, with much more being made of their mobile division. Losses have been stemmed, but the company is still floundering, with an annual loss reported in May of $4.6bn. It was only a couple of weeks later that hedge-fun billionaire Dan Loeb – instrumental in getting Marissa Meyer to lead Yahoo – upped his ownership stake in Sony, calling on it to divest its entertainment division in a letter to CEO Hirai. Part of the issue with Sony is a cultural one, where Japan’s ways of working differ strongly from the West’s. This is covered in some detail in a profile with Stringer featured in The New Yorker. In a speech he gave last year, Stringer said, “Japan is a harmonious society which cherishes its social values, including full employment. That leads to conflicts in a world where shareholder value calls for ever greater efficiency”. But Sony’s film division – which includes the James Bond franchise – is performing well; in the year to March 2013 Sony’s film and music businesses produced $905m of operating income, compared with combined losses of $1.9 billion in mobile phones, according to The Economist. It ended 2012 first place among the other film studios in market share. Sony is the last studio to consistently deliver hits across genres, reports The New York Times in an excellent article. The article quotes an anonymous Sony exeuctive, “We may not look like the rest of Hollywood, but that doesn’t mean this isn’t a painstakingly thought-through strategy and a profitable one”. Sadly the strategy behind films like ‘After Earth’ begin to look flimsy when one glances at the box office results. While Hirai and the Sony board concede that have met to discuss the possibility of honouring Mr. Loeb’s suggestion – offering 15-20% of it as an IPO rather than selling it off in full – Mr. Hirai also commented in an interview with CNBC, “We definitely want to make sure we can continue a successful business in the entertainment space. That is for me, first and foremost, the top priority”. In mid-June Loeb sent a second letter, advocating the IPO proposal and saying “Our research has confirmed media reports depicting Entertainment as lacking the discipline an accountability that exist at many of its competitors”. The question is whether selling off its entertainment assets would remove any synergies with other divisions, thus making the divisions left over less profitable, or whether such synergies even existed in the first place. For Loeb, the “most valuable untapped synergies” are still in the studio and music divisions yet after decades as one company they still remain untapped. That point won’t make for pleasant reading at Sony HQ.

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Another problem is the changing nature of media consumption habits. Not only are we watching films in different ways over different platforms, we are also doing much else besides, from playing video games, which have successfully transitioned beyond the nerdy clique of yesteryear, to general mobile use and second screening. This transition – and with it a realisation that competition is not likely to come from across regional boarders but from startup platforms – is largely being ignored by the French as they insist on trade talks with the US that centre on the preservation of l’exception culturelle. Such trends are evident in business dealings. The Financial Times this weekend detailed Google’s significant foray into developing content, setting up YouTube Space LA. The project gives free soundstage space to artists who are likely to guarantee eyeballs on YouTube, and lead to advertising revenue for the platform. From the stellar success of the first season of “House of Cards”, to DreamWorks Animation’s original content partnership announced last month, Netflix has become the bête noire for traditional content producers as it shakes up traditional models. We have written before about the IHS Screen Digest data from earlier this year, showing worrying trends for the industry; as predicted, audiences are beginning to favour access over ownership, preferring to rent rather than own, which means less profit for the studio. As much due to a decline in revenue from other platforms as growth in of itself, cinemas are expected to be the major area of profit going forward to 2016 (see above chart). We’ve written before about the power cinema still has. Spielberg and Lucas pick up on this;

“You’re going to end up with fewer theaters, bigger theaters with a lot of nice things. Going to the movies will cost 50 bucks or 100 or 150 bucks, like what Broadway costs today, or a football game. It’ll be an expensive thing… [Films] will sit in the theaters for a year, like a Broadway show does. That will be called the ‘movie’ business.”

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In a conversation over Twitter, (excerpts of which are featured above), Cameron Saunders, MD of 20th Century Fox UK told Zeitgeist that “major changes were afoot”. Such potential disruption is by no means unique to the film industry, and should come as a surprise to one. Zeitgeist recently went to see Columbia faculty member Rita McGrath speak at a Harvard Business Review event. In her latest book, “The End of Competitive Advantage”, McGrath discounts the old management consultant attempts at providing sustainable competitive advantages to business. Her assertion is that any advantage is transient, that incumbency and success often lead to entropy, unless there is constant innovation to build on that success. Such a verdict of entropy could well be applied to the film industry. The model has worked well for decades, despite predictions of doom at the advent of television, the VCR, the DVD, et cetera ad nauseum. But fundamental behavioural shifts are now at play, and the way we devise strategies for what content people want to see and how they wish to see it need to be readdressed, quickly. Otherwise all this deliberation will eventually become much ado about nothing.

UPDATE (15/4/13): Of course, context is everything. The New York Times published an interesting article today saying investing in Hollywood is less risky than investing in Silicon Valley, though the returns in the latter are likely to be greater. Neither are seen as reliable.

This issue isn’t going away. We write again about it, here.

How the Obama 2012 campaign harnessed tech to win votes

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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.

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Any success in Harper’s tech strategy must be qualified against the sheer unpopularity of Obama’s rival candidate

Taking flight – Opportunities and obstacles in democratising luxury

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I don’t think democratic luxury exists. I don’t believe in something for everyone… How can we possibly put these products on the Web site without the tactile experience of luxury?”

- Brunello Cucinelli

The democratisation of fashion took a beating this past week as news reached Zeitgeist that Fashion’s Night Out was to be no more. Spearheaded by Anna Wintour at the height of the global recession, the idea was for a curated evening; a chance for stores to open their doors late, inviting a party atmosphere and focussing spend on a calendar event. The Wall Street Journal wrote that last year, “Michael Kors judged a karaoke competition at his store on Madison Avenue, rapper Azealia Banks performed at the MAC store in Soho and a game night was held at a Kate Spade store.” The evening festivities were replicated across New York, London and other cities.
Zeitgeist happened to be on Manahattan’s Spring Street last September when the most recent FNO was held, waiting patiently for a perenially-late friend who works next door to Mulberry. While waiting, it was absolutely fascinating to see the sheer of variety of people out on the street. While the crowds were mostly composed of women, the groups ranged from college-aged JAPs and the avant-garde to hipsters and stay-at-home mothers. Most gawped excitedly as they beheld the Mulberry boutique, enticed by the glimpses of free food and drink, as well the sultry bass tones of some cool track. One elegantly dressed fashionista strode hurriedly past Zeitgeist, lamenting to her cellphone “Oh God, it’s Fashion’s Night Out tonight”.
Ultimately perhaps it was such feelings among the fashion set that caused FNO to come to an abrupt end. But Zeitgeist got the sense that, while undeniably a celebration of fashion and an opportunity for brands to showcase their attractively experiential side – particularly to those who might usually be deterred by luxury brands and their perceived sense of formality – there weren’t a great deal of people actually buying things. It’s quite possible that the whole strategy of attracting a crowd who would not otherwise frequent such stores backfired; they turned up, sampled the free booze, felt what it must be like to shop at such-and-such a label, then moved on to the next faux-glitzy event with thumping music. This then was a failed attempt to bring luxury to the masses.

On a macro scale, the cause for democratisation is hardly helped by the global financial crisis. Although over four years old, the ramifications and scarring done to the economy are still sorely felt. This is illustrated in the unemployment figures around the world, tumultuous elections and anecdotal tales of hardship. More starkly, they are being backed up by solid quantitative research that proves we as a world are less connected now than we were in 2007. In December last year, The Economist reported on the DHL Global Connectedness Index, which concluded that connections between countries in 2012 were shallower (meaning less of the nation’s economy is internationalised) and narrower (meaning it connects with fewer countries) than before the recession. Meanwhile, just this past week, the McKinsey Global Institute published a report showing financial capital flows between countries were still 60% below their pre-recession high. This kind of business environment hardly fosters egalitarian conduct, and indeed such isolationist thinking was on show at Paris Fashion Week recently, where designers clung to their French heritage as a badge of honour. Exactly at the time when art needs to be leading the way in cultural integration, as emerging markets not only continue to make up a larger part of the customer base, but also develop their own powerful brands, it seemed that designers, like the financial markets, retreated to what they knew and found safe.

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The world is less connected today than in 2007

Where the ideology of democratising fashion has seen more success is of course online. We’ve written before about how luxury is struggling with the extent to which they invest in e-commerce. One of the principle hurdles is that the nature of luxury – elite, arcane, exclusive – is more or less diametrically opposed to the nature of the Internet – open, borderless, democratic.
Yet the story of Yoox – the popular and, in online terms, long-lasting fashion ecommerce platform – and its founder is one of just such democratisation. (It is particularly stunning to read of the difficulties the founder, a Columbia MBA graduate, Lehman Brothers and Bain & Co. alum, had in attracting VC funding). It also, crucially, points to the importance of recognizing multiple audiences, and how they like to shop differently depending on context. John Seabrook, writing in The New Yorker, reports that when Federico Marchetti set up Yoox in 2000, the world of ecommerce for fashion was regarded as a not particularly salubrious environment. Rather, the magazine compares it to outlet stores like Woodbury Common, fifty miles north of New York. Luxury brands like Prada and Marni could be found there, offering deep discounts on their wares, and it was for that reason – and the lack of control over their own brand – that they didn’t like much to talk about such places. This, despite the fact that they attracted 12 million people in 2011, “almost twice the number of visitors to the Metropolitan Museum”. Yoox was likewise greeted with much trepidation by fashion retailers. The article quotes an analyst from Forrester Research:

“It was a matter of principle with luxury brands that only people who shop on eBay use the internet – and their only interest was in getting a low price.”

Marchetti’s only available source of designer clothing was from last season and beyond, as no brand would sell their current collection. He curried favour with some of them though by advertising the prices without noting the discount customers were getting. Other than that, luxury brands took little or no notice.

Online shopping though would prove to be “one of the largest disruptions of the luxury-goods industry since the birth of the department store”. There are three kinds of online store today; those that sell deep-discounted goods on end-of-season wear, those that sell in-season clothing, and those that have flash sales of small numbers of clothing or accessories. It turned out there was an audience for all of these types of website. Bridget Foley, executive editor of WWD is quoted in the article saying “[T]here has been a sea change in attitude… I think [it] surprised the fashion industry… Just because you love clothes doesn’t mean you love shopping“. This struck Zeitgeist as one of the more important insights in the lengthy article. Though retailers often harp on about the importance of the retail environment, the need to touch the product, to be in an atmosphere where everything has been curated down to the finest detail, online neutralises all of that. This idea threatens those in the luxury sector, as the thinking goes that any such premium on products may seem less justifiable away from a Peter Marino-designed armchair and a nice glass of champagne. Such ideas are being challenged though. Not only is the nature of the store changing – from robotic sales staff to customers as models on the catwalk – but so is the view of the luxury customer as a homogenous, static group, devoid of context. Zeitgeist was at a Future of Media summit at the Broadcast Video Expo last week, where, as behavioural economics suggest, MD of Commercial, Online and Interactive for ITV Fru Hazlitt insisted that consumers had to be targeted in ways that were pertinent to them, not only as demographic groups, but in ways that recognised the context of how approachable they were likely to be at the time, given the programming they were watching. Fru admitted that in years past, broadcasters like ITV had seen advertising as “space to rent out”. Now they were thinking deeply about how and when is the right moment to reach their target consumer. It is the same in fashion. There is not one single way to reach the consumer; buyers of luxury goods do not want to be solely restricted to being able to buy your wares in a physical store.

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Chanel are one of the few remaining luxury brands to resist fully integrating online

Behavioural economics played a role in Marchetti’s initial framing of the audience for the website as well. He hired pedigreed fashion writers, as well as artists, architects and designers to make special projects that lent the website an air of curation, of something more special and rarefied that what one might find – or more importantly the way one might feel – at an outlet mall. Marchetti wanted the customers “to see themselves as connoisseurs, even if they were really just hunting for bargains”. The New Yorker article goes into some anecdotal detail about the way people shop on Yoox, which crucially differs not only from the way they would shop in-store, but also from other e-tailers. For online shopping in general, the experience is one where you can purchase ten items, and return nine of them with very little hassle, with credit for multiple rather than a single brand, and certainly no raised eyebrow from a pretentious shop assistant. Regarding specific sites, Yoox, unlike Net a Porter, for example, does not try to force a set of looks onto the user. Behavioural economics tell us that people irrationally value something more when they’ve been made to work a bit to get it. Such is the case now shopping for luxury items, which makes clothing not in-season (i.e. not currently in every shop window), both cooler and cheaper. It’s an act not to be discouraged. A Saks representative says customers who shop online as well as in store buy four times as much merchandise as customers who shop only in the store. What will worry retailers though is that the convenience of the online store outweighs the experience of the physical boutique. The New Yorker quotes a shopper: “I’ll never buy a dress at the Prada boutique again after getting these really amazing ones on Yoox.”

As well as setting up the Yoox website, Marchetti’s company now also powers the online stores of more than thirty fashion houses, including Armani and Jil Sander. Last summer, PPR joined in too, after conceding that their in-house expertise was not up to snuff. The latest development is making designs available to any customer as soon as it hits the runway. Burberry, as well as separate sites like Moda Operandi, have spearheaded this innovative change, which is effecting editorial as well as buying methods previously seen as unshakeable. The demand for this type of instant purchasing seems to be fueled by a niche – albeit a sizable one – that is not representative of the majority of luxury shoppers. The accessibility of a brand and its products is a tricky one to tread, one which Zeitgeist has written about several times before. Tom Ford performed a volte-face this year, after debuting his womenswear collection with no press and VIPs only, relented this year at London Fashion Week by letting bloggers write about the show. Chanel still steadfastly refuses to fully engage with online shopping. The tension is keenly felt in the New Yorker article, where Amazon’s new entry into the world of fashion is referenced. The CEO of Valentino is unconvinced: “Valentino is high luxury… People going to Amazon are not going to Valentino“. This smacks a little of pride and ignorance, for they most assuredly are, though perhaps not with luxury purchases in mind… yet.

It comes back to the idea that there are myriad types of luxury consumer. The industry has not fully acknowledged as of yet that the buying behaviour of a descendant of the ancien regime in Paris is unlikely to buy in the same way as a newly-minted businessman in Shenzhen. They may know that these types of buyers exist, and they may even create different products for each. Importantly though, they are not recognising that these people may go about purchasing in a different way. It’s not just a purchase journey that has changed massively in recent years, as McKinsey’s consumer decision journey illustrates above. It’s also, as ITV’s Fru Hazlitt insists, about recognising that different people shop in different ways, wholly dependent on context. Though Fashion’s Night Out may be on permanent hiatus, and though the global economy may be sputtering along in second gear, the opportunities to leverage deep insights into consumer purchase preferences are there for the taking. Yoox, along with a deeply complicated algorithm, are trying to tap into just this. But the process must start with realising that yes, actually, someone might want to pick up that Valentino dress while surfing on Amazon.

Netflix: House of Cards and Castles in the Air

February 8, 2013 2 comments

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“If you have built castles in the air, your work need not be lost; that is where they should be. Now put foundations under them.”

- Henry David Thoreau

Though the brouhaha over the series House of Cards has been building steadily since its announcement almost two years ago, through rumours of budget battles between director and studio, it was upon the release of the series this week that the media meta-echo chamber really went into overdrive. The first season, with a budget far north of $100m, debuted to ebullient praise from critics. But what does it signify for the trail-blazing company’s future?

Aside from the mostly positive reviews, the series piqued the media industry’s interest for other reasons too. It is the first to be created and screened exclusively by Netflix, a company previously known for striking deals with studios to distribute and stream their content. Not satisfied solely with such (sometimes pricey) deals, the company also saw an opportunity for greater brand visibility and a separate revenue stream – assuming it eventually licenses the show regular TV networks – in fully-fledged independent production. What is also interesting is that the entire first season was made available for instant viewing, all 12 hours. By doing this the company recognised and capitalised on a trend that has been accelerating for almost a decade; people like to watch multiple episodes at once. This has never not been the case, but the weekly episodic installments of shows on network television have allowed the audience little say in the matter, and thus no room for such a habit to develop. This changed dramatically with the arrival of the DVD, specifically with affordable boxsets, as those that had missed the zeitgeists of West Wing, The Sopranos and 24 were able to quickly catch up with their obsessed brethren. Critics have often noted how the viewing of multiple episodes at once – which is how such reviews are often conducted as they usually receive a disc with several shows to consider – particularly for shows like Lost, improves the structure and narrative flow. With the arrival of boxsets, such opportunities were available to all. Indeed, marketers leveraged this enthusiasm for consecutive viewing, creating events around it. Netflix saw this with absolute clarity and allowed viewers to watch as much or little as they desired. Many, it seemed, chose to devour the whole first season in one weekend, which entertainment trade Variety covered with humourous repercussions to the viewer’s psyche, across now fewer than six stages of grief. Zeitgeist has written before about the increasing popularity of streaming, and the complementary preference that audiences have for the type of films (action, romcom, broad comedy) they like to watch when choosing such a distribution method. It is interesting to consider then just how much the viewing experience differs between a 12-hour marathon over two days, and a one-hour slice over a period of three months. As the article in Variety half-jokingly posits, “Is tantric TV viewing a thing? If it’s not, should it be?”.

Of course, Netflix aren’t alone in seeing an opportunity to delve into developing complementary products and assets. Microsoft are using the functionality of Kinect to pair with their own content development, letting children “join in” with Sesame Street, for example, and are in the process of setting up a dedicated studio for production, in Los Angeles. Amazon, which owns the streaming service LoveFilm, is also getting into the game, recently setting up Amazon Studios for original content production. At the end of last year, The Hollywood Reporter announced Amazon would be greenlighting twenty pilots, all of which were “either submitted through the studio’s website or optioned for development”. YouTube recently launched twenty professional channels on its UK website, Hulu is following suit… It really is quite startling to see such fundamental disruption and turmoil in environments where incumbent stalwarts (such as 20th Century Fox in film and Walmart in retail,) have long been accustomed to calling the shots. Could the model become completely inverted, such that the Fox network and HBO become the “dumb pipes” of the TV world, showcasing the best in internet-produced television? Maybe so, and this is not necessarily a bad thing. The Economist this week argue that one of the most important factors in Liberty Global’s recent purchase of Virgin Media was the avoidance of paying corporate tax for “years” to come. If content is still king though, a problem remains for those incumbents. The New Yorker astutely points out,

“An Internet firm like Netflix producing first-rate content takes us across a psychological line. If Netflix succeeds as a producer, other companies will follow and start taking market share… When that happens, the baton passes, and empire falls—and we will see the first fundamental change in the home-entertainment paradigm in decades.”

Netflix must tread carefully. Crucially, what seems like competitive differentiation and all-quadrant coverage now can quickly shift. Amazon’s ventures into content production will be backed up with a sizeable and perpetual stream of revenue that it derives from its e-commerce platform, which isn’t going away anytime soon. The BBC are publicly welcoming new entrants, and is devising its own tactics, such as making episodes available on iPlayer before they screen, if at all, on television. Interesting but hardly earth-shattering, and likely to make little difference to viewer preference. Netflix will have to do better than that if it wants long-term dominance of this market. It will have to be increasingly careful with its partners, too. Recent, though long-running, rumblings of discord with partners like Time Warner Cable, though seemingly innocuous, tend to be indicative of a larger battle ensuing between corporate titans. Moreover, though the act of providing a deluge of content seems new and sexy now, what about when everyone starts doing it? Chief content officer for Netflix Ted Sarantos told The Economist last week, “Right now our major differentiation is that consumers can watch what they want, when they want it, but that will be the norm with television over time. We’re getting a head start”. Fine, but about when that is the norm, what is the strategy for differentiation then? Netflix have made some lofty, daring, innovative moves here, exploiting consumer trends and noticing a gap in the competitive environment. But they will need firm foundations to support this move into an adjacent business area, of which they know relatively little, in the years to come. As President Bartlet of West Wing was often heard to say, “What’s next?”.

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