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.
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.
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.
A recent essay for Foreign Affairs, “The State of the State”, criticises Western governments for failing to innovate. The authors make an unfavourable comparison with China, which, though still autocratic in nature, has at least looked abroad for ways to make the state work better (if only in a necessarily limited scope). One doesn’t need to look much farther than France to see what happens when the state fails to innovate. President Hollande has done his very best to inculcate a backward ideology of indolence among its workers, but the negative effects of over-regulation have been present in France for some time. One major step that is in drastic need of undertaking is the simplification of France’s opaque labour laws, the code for which runs to 3,492 pages, according to a recent article in The Economist. A stark and laughable example of the limits of such a code is elaborated on below,
“[The code] impose[s] rules when a firm grows beyond a certain limit: at 50 employees, for example, it must create a works council and a separate health committee, with wide-ranging consultative rights. So France has over twice as many firms with 49 staff as with 50.”
France of course also has a strong sense of state oversight and sponsorship when it comes to the media industry. L’exception culturelle has long dominated discourse about what content is appropriate and designated to be high art. Such safeguarding of domestic product has been a thorn in the side of late of the EU / US trade partnership, threatening to derail negotiations. Some have argued that such promotion of homemade productions serves not to diminish foreign imports – a love of Americana has not subsided in France – but rather only to preserve a niche. Regardless, argues a recent editorial in one of France’s national newspapers, it has left the country’s media sector susceptible to disruption.
Today’s Le Monde newspaper features a front page editorial on the arrival Monday to the country of Netflix. The company announced its plans for European expansion at the beginning of the year. It won’t have everything its own way, though. Netflix will have to adapt to a very different market environment. The Subscription Video On Demand (SVOD) market is well-established, and it will see much competition from incumbents (last year annual revenues for companies based in France providing such services exceeded EUR10m). These incumbents charge little or nothing for their services, relative to the $70-80 a month Americans pay to a cable company to watch television, according to The Economist, which states “Netflix struggled in Brazil, for example, against competition from local broadcasters’ big-budget soaps”. Moreover, current government policy dictates a 36-month long window from cinema release to SVOD. We’ve argued against the arbitrariness of such windows before, for a variety of reasons, but here such policy surely negatively impacts Netflix’s projected revenues. Such projections will be curbed further by stringent taxes and a further dictat that SVOD services based in France with annual earnings of more than EUR10m are required to hand over 15% of their revenues to the European film industry and 12% to domestic filmmakers, according to France24. As well as traditional competition, Netflix also faces threats from OTT rivals, such as FilmoTV. One possible way around such competitor obstacles is the promotion of itself as a complementary service. The New York Times earlier this spring elaborated,
“Analysts say Netflix, which has primarily focused on older content more than on recent releases, could also survive in parallel to European rivals that have invested heavily in new movies and television shows. Netflix in some ways serves as a living archive, with TV shows like “Buffy the Vampire Slayer” from the 1990s or movies like “Back to the Future” from 1985. Such fare has enabled the company in Britain, for example, to partner with the cable television operator Virgin Media, which offers new customers a six-month free subscription to Netflix when they sign up for a cable package.”
Such archive content will come in handy, particularly given that, as Le Monde points out, Netflix had previously sold the rights to its flagship series ‘House of Cards’ to premium broadcaster Canal Plus’ SVOD service Canal Play (which itself is investing in new content). The article hesitates to guess how much of a success the service will be in France – something Citi has no problem in doing, see chart below – instead looking to the music industry for an analogy, where streaming has become a dominant form of engaging with the medium. As in other markets, streaming services have met with increasing success, particularly with younger generations. For Le Monde, the arrival of Netflix will undoubtedly ruffle a few feathers, but the paper also hopes it will blow away the cobwebs of an industry that has become comfortable in its ways; it hopes the company will provide a piqûre de rappel (shot in the arm) for the culture industry. Netflix’s ingredients – by no means impossible to emulate – of tech innovation, easy access and pricing and a rich catalogue, should be a lesson to its peers. The editorial only laments that it took an American company to arrive on French shores for businesses to get the message.
UPDATE (16/9/14): TelecomTV reported this morning that Netflix has partnered with French telco Bouygues. The company will offer service subscriptions “through its Bbox Sensation from November and via its future Android box service. Rival operators are refusing to host Netflix on their products”.
“The film market in China is like an experimental supermarket – with more and more racks but only one product… The viewers don’t care what they see as long as it’s a film. They’ll watch whatever is put in front of them.”
- Zhang Xiaobei, CCTV
LA is “a favourite place for Chinese businessmen to do business”, according to the objective opinion of China’s general counsel to Los Angeles. And that was back in 2011, before China extended its annual quota of foreign films allowed to be exhibited on the mainland. We’ve written before about the relationship between Hollywood and China, which in the two years since we wrote that piece has only deepened. It’s little wonder; EY has predicted China will be the largest film market in the world by 2020. Revenue is being squeezed in the film industry as millennials hang out on their smartphones and games consoles. When they do pay for movies, it’s more likely to be streamed rather than owned. Worse, that stream may be hosted by someone like Netflix, whose burgeoning clout makes negotiations for license fees increasingly difficult. So China provides a timely cash cow; an antidote to Western media fragmentation and fatigue. But at what cost?
China’s economic rise to superpower status has logically meant a rise in its viability as a place to invest in. From infrastructure, where cinemas screens have been springing up at the unbelievable rate of seven a day (as of May this year), to co-productions between Hollywood and homegrown Chinese outfits. These collaborations have resulted in overt references to China in storylines, such as that seen in The Mummy: Tomb of the Dragon Emperor, The Karate Kid and the Kung Fu Panda franchise, or the additional scenes filmed for Iron Man 3. This also includes the more recent Transformers: Age of Extinction, which saw not only a large part of the film take place in Hong Kong, but also included local talent and featured a mind-boggling amount of inappropriate product placement from Sino brands. The few production companies in China are also expanding, looking beyond more traditional propaganda fare, as well as to foreign markets, as is the case with China Film Group.
But the film industry in China is not quite as rosy as it appears. Interestingly, there have been few efforts at US talent getting involved in Chinese productions. This may be partly due to the mess that was The Flowers of War, starring Christian Bale, which was reportedly little more than a propaganda piece. And from a content point of view, caution has been the watchword for studios; The producers of World War Z removed a discussion over whether the zombie apocalypse started in China; Chinese villains were edited out of Pirates of the Caribbean: At World’s End and Men in Black 3. Is that really necessary? And while scripts are edited to appear more appealing to China, so are balance sheets. For while Transformers 4 is now China’s highest-grossing movie of all time, according to The Hollywood Reporter, what THR don’t mention was the way the gross is measured. For, says Julie Makinen, a China correspondent for the Los Angeles Times, box office revenue is arbitrarily inflated. She elaborates,
“I think everyone agrees there’s some fudging that goes on… It’s fairly common to go into a theater, say, ‘Hi, I’d like to buy a ticket for Transformers,’ and they say, ‘Great,’ and they print out your ticket for a local romantic comedy. So I’m pretty sure the 20 bucks I just handed over is being counted in someone else’s basket. Things like that happen; a lot of statistics in China are suspect.”
Moviegoers aren’t being particularly discriminating yet because the act of going to the cinema as an event or experience is still a relatively new phenomenon for many. Product placement, which we referred to earlier, while an opportunity for some synergy between film and brands, risks being too commercial and overt if done without context. A recent article in the Financial Times said such promotions in Transformers 4 quickly “start flying faster than bullets from an Autobot’s wrist-mounted Gatling gun”. Apart from bringing viewers out of the fictional narrative into reality, creating a disappointing experience, inappropriate product placement can also cause ire between businesses. (We’ve written several times over the years about product placement, here.) Such an occurrence took place at the end of July when a tourism group in China sued Paramount Pictures for failing to show a logo of the park that the company had paid to be prominently displayed in the movie. The implementation of co-productions between the two countries evidently needs work too. Scenes added exclusively for a Chinese version of Iron Man 3 added little except some questionable product placement as well as the dubious plotline of Tony Stark heading to China, of all places, for medical convalescence. Lastly, the current quota of films to be exhibited in China means that many good-quality US films fail to be seen in the country. Much like bans on US games consoles and the Android app store, Google Play, the result of this has been an explosion of home-grown imitators. In this case, films in China are made that precisely mimic the formula and set-up of popular American franchises like The Hangover, which was never seen by Chinese audiences, thus the extent of emulation isn’t evident. Assuming that eventually the quota will be entirely relaxed, this type of tactic can only ever be a short-term measure.
One of the greatest opportunities the film industry in China has is in part due to one of its greatest weaknesses. Because of historically protracted release windows, and a narrow selection of films making it to cinemas, piracy has been rampant. Indeed, infringement has been widespread enough that the industry has had seemingly no choice but to innovate. We reported back in April how China has relaxed its embargo on foreign games consoles, and, more to the point, how Tencent, in partnership with Warner Bros., were making the latest 300 film available to rent, while the film was still in cinemas in the US. Such forward-thinking is welcome. As well as offsetting any losses from piracy, it also hopefully points the way to a more open business environment in China, at least for TMT companies. Such innovative thinking will need to be extended, however, to the structure of China’s film industry itself, which is reportedly a vertically integrated engine driven almost entirely at the whim of the state.
Just as China’s tastes have held increasing sway over the production of art and wine in recent years, so with film. The middling global box office performance of Pacific Rim found salvation in Asia, and that was all the justification needed for a franchise to be developed. There is certainly much to be gained from investment and co-productions in China’s films industry, especially while it is still relatively nascent, not least of which are the financial returns. How such relationships impact the content itself is another matter. Hopefully some of the approaches China is taking with regard to multi-platform releases might even trickle over to Western markets. Studios should also be wary about putting all their eggs in one basket; CNBC reports that growth in ticket sales for Hollywood films in mainland China hit a five-year low in 2013. Only three US movies made the top ten highest-grossing films in China last year, down from seven in 2012. One reason for the slowdown is a lack of variety. And yet don’t expect the blockbuster formula to change anytime soon; as much as it was born in the USA, it is also what audiences in the worldwide market love to gobble up. (Michael Bay’s films – expertly dissected in the above video – prove that point no end, and it has been particularly driven home recently as Bay himself as well as sometime employee Megan Fox have expressed nonchalance about any negative press from critics, knowing their products make millions despite nasty reviews. Specifically, actress Fox told naysayers to “F*ck off”.) There is a certain amount of momentum behind the two industries’ relationship with one another, but recent productions have shown that future projects should perhaps be treated with a little more caution, particularly as Chinese audiences tastes mature. Last month the film historian Neal Gabler was quoted in the Financial Times, in a point that usefully sums up this piece,
“The overseas market has changed the DNA of American movies… The bigger-faster-louder aesthetic is very deeply embedded in the American psyche. No one else can do it. It’s one of the reason they export so well. It’s so much a part of who we are. But we have been victims of our own success. It’s a Catch-22. The things that make our movies so popular overseas are now larger than the American market can support by itself.”
UPDATE (30/8/14): The production side of the industry continues to evolve, as China’s largest video website Youku Tudou demonstrated on Friday when it promised to produce 8 films for cinema release and 9 to premiere on the internet. Chairman and Chief Exec Victor Koo pointed out to the Financial Times that there was a gap in the market left by Hollywood, “The US film industry is highly developed. It tends to be either blockbusters or franchise films. But in China you’re talking about small to mid to large budgets…”. The logistics of creating a film for online release – more than likely to be consumed on a smartphone – must consider important limiting factors such as, according to Heyi Film chief exec Allen Zhu, smartphones in China running films get “very hot after 20 mins”. Youku Tudou’s plans may seem ambitious – particularly given it reported a $26m loss for the second quarter – but when 18 screens are erected in China every day (last year more cinema screens were added in China than the total in France), it seems a risk some are willing to take.
It’s not quite as cool as Bond in his Tom Ford suit leaning on his wonderful Aston Martin while he plots his next move to unseat some despot. All the same, Germany’s recent apparent spate of typewriter purchases points to a renewed sense of fear of being overheard and compromised in an era of digitally pervasive content, vulnerable networks and indelible conversations. Spying and intelligence concerns coalesced with subject matter we’ve previously written about – including online privacy, governance, security and the internet of things – in a special report in last week’s The Economist, which produced eight articles on the subject of security in a digital landscape. Some highlights:
- Cybercrime is costly. The Centre for Strategic and International Studies estimates the annual global cost of digital crime and intellectual-property theft at $445 billion – a sum “roughly equivalent to the GDP of a smallish rich European country such as Austria”.
- Focus on prevention rather than reaction. As with many things, the best way to make sure cyberattacks aren’t too damaging to your business is to make sure they never happen in the first place. It’s more difficult (and costly) with digital security because the process can easily feel like a Sisyphean struggle; businesses invest in new technology only to see it circumvented by more hacking, perhaps exposing a different loophole or vulnerability. But an iterative approach is better than leaving the door open and spending more money after the fact.
- Honesty is the best policy. After being hacked, a company can find it hard to admit it. This is understandable. Not only is it somewhat embarassing, it admits to customers and shareholders that the company is vulnerable, but it also suggests that their data is not safe with said company; perhaps they should shop elsewhere. However, transparency in such a situation is paramount if others are to learn how to combat such attacks. One suggestion is that the US government “create a cyber-equivalent of the National Transportation Safety Board, which investigates serious accidents and shares information about them”.
- Who to complain to? The perpetrators of cybercrimes are no longer limited to the teenaged hackers of yesteryear. Though ideological groups like Anonymous serve as a disruptive influence, often the biggest problems are caused by the governments charged with protecting things like individual privacy, security and freedom of speech. From the US to China, authorities “do not hesitate to use the web for their own purposes, be it by exploiting vulnerabilities in software or launching cyber-weapons such as Stuxnet, without worrying too much about the collateral damage done to companies and individuals”.
- External trends point to a worsening of the problem. The Internet of Things as a trend will have billions of devices connected to each other via the Internet over the next few years. With one of the fundamental ideas being that the user isn’t really aware of the connection, the likelihood of spotting a hacked device becomes all the smaller. This isn’t a huge problem in cases like a connected fridge receiving spam email, but it becomes more of a problem when hackers can gain remote control of your car. One of the barriers to improved security for everyday devices is that the margins are razor-thin, as are the chips to connected to the devices, in order to keep the product small. Any added security software or hardware and the cost and size of the product increases.
Zeitgeist believe the risk to IoT devices will be one of the key areas that businesses and regulators will need to focus their efforts in the future. Because it is still a relatively fledgling sector, the issue is not being discussed yet in many places. Deloitte, in association with the Wall Street Journal, recently reported on the nature of cyberrisks and how companies can help mitigate them. Well worth a read.
A recent McKinsey report declared that, for businesses, “The age of experimentation with digital is over“. That may be for most B2B and B2C private sector companies, but not for the luxury goods industry. Bemoaning the woeful development and investment in strategic initiatives for luxury brands online is something this blog has done once or twice before. There are understandable reasons why the industry has been reticent to commit to online retail, based on customer insight (the assumption that HNWIs don’t like to shop for something without being able to see and touch it for themselves) and conflicting priorities (physical store expansion into China and more experiential events has been the name of the game in recent years). But with a China slowdown mooted, particularly in the area of luxury gifting, and no real concrete research to show that HNWIs aren’t just as digitally savvy as their less liquid counterparts, there becomes less and less justification for what are, across the industry, woeful examples of digital strategy and innovation.
It can’t be easy for profitable businesses like LVMH, with an eye on quarterly earnings, to make drastic investments in the online space. Luxury’s brand equity often comes from provenance and tradition; a company’s roots are in its founding stores, the connotations of Milan, Florence, Paris, etc. They also worry about their neighbours; a flash-sale site or, worse, one full of counterfeit knock-offs, is always just a click away. From a logistical point of view, there is also the issue of back-end infrastructure to contend with. For several years, PPR (now Kering) ran much of its e-commerce business through Yoox, as we’ve talked about before. It would be wrong to single out those in luxury. L2 Thinktank recently tweeted with much excitement about Bacardi’s “cocktail discovery site” that worked seamlessly across web, mobile and tablet. Well, forgive us if we don’t leap for joy in an ecstasy of delirium, but this is 2014, that should be the minimum deliverable. Still, luxury is a sector in blatant need of redirection.
Burberry is lauded by many as an outlier in this world of luxury goods, a company that has truly embraced digital. For all the talk of such innovation though, the website itself is utterly dominated by a rote e-commerce site, as are its social networks such as Google+. It is the physical stores where technological innovation has been injected. And this is supposedly the company pushing the rest of its peers forward. It comes as little surprise then that eConsultancy published a superb piece at the end of April excoriating the sector, leaving no brand unscathed. Headlines included, “painfully slow load times“, “awful UX” and “not making much effort“. But the worst and most perplexing atrocity had to be the above screengrab on the purposeful hiding away of an e-commerce platform, one that was presumably quite expensive to source and implement in the first place. We can’t overestimate the necessity of having a clear user journey through to purchase, just as it would be difficult to overestimate the amount of luxury good companies that are guilty of this sin for which Dolce & Gabbana have been singled out for here.
On this note, Gucci’s recently relaunched mobile site – replacing among other things a tablet site that had been left to wither since 2010 – was welcome news to us, as it seemed to be also (logically) to those wishing to actually part with their money on Gucci wares. L2 in May reported the news, saying that the new site now accounts for 27% of all traffic, a 150% YoY increase. Sounds good, except that means traffic through the mobile site in 2013 was a miniscule 0.18%, right? Terrible.
There are signs of hope. Gucci’s move to invest in a new mobile site, though monumentally belated, is a welcome one. As more brands cotton on to the importance of online, the Financial Times recently reported on the moves many are making to secure ‘.luxury’ suffixes, in the wake of IPv6, if only to avoid the complications of cybersquatting. And Michael Kors, which seems only to be going from strength to strength every quarter, has praised its own social media presence for “driving international sales”. We’ve almost entirely focused on fashion brands here, but other companies within the luxury sector are getting the message loud and clear. Take the auction house Christie’s, a legacy company if ever there was one, having been founded in 1766. Not only have they dedicated time and energy to investing in major online auctions, they have also recently created a new sector vertical of ‘luxury’ within the house itself. New thinking might well take new talent, it will also take C-suite buy-in, as well an acceptance that digital commerce is an integral part of business now, no matter how exclusive your product is.
Having studied policy and regulation at university, Zeitgeist is often compelled to look at many issues facing companies today through a regulatory lens. But even the most dispassionate fan of rules and laws would have to concede that as digital innovation disrupts multiple sectors around the world, the way these new innovations and businesses are governed is an important consideration. In this piece we’ll be looking at regulatory concerns for disruptors like Uber and Netflix, as well as how regulation effects legacy companies like Microsoft and Comcast. As with many of our articles on this blog, we’ll be taking a particular look at the TMT sector. (Bitcoin will have to wait for another article).
Regulators often find themselves caught between a rock and a hard place. Should the emphasis be placed ex-ante, to ensure compliance, or ex-post to apply punitive measures and fix problems once they have become apparent? The former seems wise as it sets initial goals for companies. But it also risks opening loopholes, as well as being overly prescriptive and thus failing to adapt. It can also lead to the development of overly-familiar relations between regulator and industry, leading to what is known as ‘capture’. Currently, the US favours an ex-ante approach, but as Edward Luce detailed recently in the Financial Times, this has led to a “creeping impulse to micro-regulate“. The FDA’s recent announcement that they would regulate e-cigarettes, despite no proof it encourages the take-up of smoking tobacco, is such an example. Ex-post – regulating after an event – seems just as bad, mostly because the damage has already been done at that point. While it means that all problems addressed are real-world and practical, they can also be applied with too much emphasis. Above all, regulation ultimately risks stifling innovation; Edison moved to the West coast because he was fed up of the stringent regulations in the East. A recent lead article in The Economist asserted that, far from too little regulation, the global recession was caused by too much state involvement in the wrong places. Too little oversight though, and companies can be allowed to run wild.
Earlier this month, The New York Times featured an op-ed on regulating the online world. It is written by New York State attorney general Eric Schneiderman. As might be expected, he quickly attacks online start-ups saying it is “amazing” that they think just because their business is online, that “somehow makes them immune from regulation”. This is all well and good, but it masks the fact that clear regulations have not been established. Schneiderman is right to point out that just because a business now has an app instead of a high street store doesn’t mean its responsibilities to the law have changed. It is an apt analogy. But in practice the story is different. As with most innovations, from film to Napster and Airbnb, regulators must constantly be playing catch-up. The complaints of new businesses are not that they should be subject to regulation, rather that those rules are onerous or outdated, applying to a different time. The sharing economy works because it has found cheaper, more efficient ways of offering services that hitherto were more restricted; regulations need to be appropriately dispensed. Sadly, many cities in the US have simply blocked allowing such services to operate. Uber – a car pickup service – is probably not wholly repulsed by the thought of regulation, but they are resistant to rules put in place by entrenched interests and unions. Airbnb might violate the letter of the law, but not the spirit surely. People have always let out their living space to others. The only thing that has changed is scale. Why does scale suddenly make something legally problematic? Schneiderman points out that some lettings are so large, with multiple rooms let at once, that they are essentially hotels. True enough, perhaps, but Zeitgeist has certainly never come across such a property, and they are certainly small in number, and no more represent Airbnb’s ethos than any hotel violating its own (regulated) terms. A recent article in The Economist argued for “adaptation, not prohibition“. Schneiderman’s sentiment is that these start-ups need to work more closely and proactively with regulators, but this fails to recognise that regulators need to also fundamentally change their approach.
Regulation in China has been a hot topic for a while now. This is principally because the region has a low tolerance of free speech. But it extends to cultural concerns as well; the Google Play store, Twitter, and most of Hollywood’s annual product do not make it onto Chinese shores (legally, anyway). What this creates is a secondary tier of companies who take Western business models and run with it. That’s why there are multiple Chinese Android app stores, why Sina Weibo is a fantastically successful service, and why many poor remakes of US films flood the Chinese market. It has been pleasing then to see two recent developments in the way China regulates the TMT sector that should be good news for consumers and Western companies. Today saw the announcement that Microsoft’s Xbox One is to be sold in China. It will be the first foreign games console to go on sale in the country, lifting a fourteen year ban. This would open up the company to the half billion active gamers in China. Additionally, as Michael Pachter, analyst at Wedbush Securities pointed out,
“The middle class in China is pretty large, and positioning the box as an over-the-top TV receiver gives it a lot of appeal to wealthier Chinese.”
Earlier this week, Warner Bros was the latest film studio to partner with Chinese site Tencent. The film 300: Rise of an Empire, is available to rent through the site, while it is still in cinemas in territories like the US. The points of the deal were very interesting. Zeitgeist has for a number of years now advocated an increased flexibility to film platform release windows. Such a rigid structure as the industry has in the US is not as apparent in China. This could help alleviate piracy in the country and separately could pave the way for a relaxing of the quota of US films that are let into the Chinese market every year. Hopefully this will be a precursor to more such moves in Western markets. As someone commented on the news when it was published on the Financial Times website,
“Maybe they can do the same in the rest of the world as well?
Or I could wait 2 months for something to come out on Bluray in the UK compared to the US. Or just pirate it when the US version is available since they won’t let me buy it in my country, but will let other people buy it in other countries.”
While China is taking steps forward, the US seems to be faltering in its regulatory approach. We mentioned the impending restrictions on e-cigarettes earlier, and let’s not even go into then-mayor Michael Bloomberg’s crusade against sugar. We’ve written about net neutrality before. The issue has been of interest to Zeitgeist since university days. It was thrust into the spotlight this year when a US court ruled that the FCC had “overstepped its authority” after a legal challenge from Verizon. Last week, new rules were proposed that will undermine the original purpose of the policy of treating all traffic the same, allowing ISPs to charge companies like Netflix more in order to reach consumer with greater quantity or quality, but only on “commercially reasonable” terms. These terms have yet to be defined. These moves touch on a related matter that has also been greeted with consternation by those who favour fairness. This is Comcast‘s proposed merger with Time Warner Cable. Netflix recently publicly came out against the move. It is easy to see why. As The Economist recently elaborated, such a deal would limit competition and reduce any incentive to innovate. It is also one more example of the assumption companies have that their problems can be solved with size. Comcast have admitted they will raise prices for the end user, while as much as conceding there will no be no discernible benefit to them. One might argue there is little more for such companies to do, but average internet speeds in Tokyo and Singapore are ten times as fast on average as in the US. Even the Financial Times, which can often be counted on to be a bastion of support for capitalists, compared Comcast to the Railway Barons of the past.
The sharing economy is creating difficulty for many sectors, and regulatory agencies have not escaped this. Such forces have been to slow to adapt to fundamental changes in the TMT sector, particularly in print, music and film industries. There certainly seems to be a tendency for over-regulation today, particularly in the US. Returning to an article we mentioned at the beginning of our piece, Edward Luce laments that America “no longer feels unusually free”. Perhaps this is part of a cyclical trend. Like the causes of the recession, perhaps the problem is a stifling caused by over-regulation in the wrong places, coupled with a lack of innovation in areas where sensible rules that do not cater to the established are in dire need. It is good to see rules and regulations around consoles and release windows are being relaxed in China, but the furore around regulating the sharing economy needs a similar dose of innovative thinking.
UPDATE (17/9/14): We’ve included some nice examples in this post of innovative thinking paired with light touch regulation going on in China’s entertainment sector. Sadly the pendulum swings both ways; though shows like BBC’s ‘Sherlock’ were made available with authorised translations mere hours after their original broadcast in Blighty, the state is cracking down hard in other ways. The Economist reports that last week, China’s TV regulator said that, from April, any foreign series or film would need approval before being shown online. It is looking for “health, well-made works” that “showcase good values”. This sounds like a vague excuse to arbitrarily censor content it doesn’t like. Explicitly, banned subject matter includes, according to The Economist, “superstition, espionage and—bizarrely—time travel”.
It would be impossible to capture the disruptive influence the latest digital technologies are currently having on the world in a single blog post. But what Zeitgeist has collated here are some thoughts and happenings showing the different ways technology is changing our lives – from the way we do business to the way we interact with others.
Last night saw a highly enjoyable occurrence. No, not the Academy Awards in general, which as ever moved at a glacial pace as it ticked off a list of predicted favourites. Rather, it was a specific moment in the ceremony itself, when host Ellen DeGeneres took a (seemingly) impromptu picture of herself with a cornucopia of stars, tweeting it instantly. The host declared she wanted the picture (above) to be the most retweeted post ever. The previous holder was none other than the President of the United States, Barack Obama, whose re-election message saw over 500k retweets. It took Zeitgeist but a few minutes to realise that Ellen’s post would skyrocket past this. Right now it has been retweeted 2.7m times. Corporate tactic on the part of Samsung though it may have been, Zeitgeist felt himself feeling much closer to the action – being able to see on his phone a photo the host had taken moments ago several thousand miles away – and the incident helped inject a brief air of spontaneity into the show’s proceedings. Super fun, and easy to get definitive results in this case on how many people were really engaging with the content. But can we quantify how much Samsung and Twitter really benefited from the move, beyond fuzzy marketing metrics? Talking heads on CNBC saw room for improvement (see below).
The big news of late in tech circles of course has been Facebook’s $19bn acquisition of messaging application Whatsapp. Many, many lines of editorial have been spilled on this deal already. In the mainstream media, many commentators have found the price of the deal staggering. So it’s worth reading more considered views such as Benedict Evans’, whose post on the deal Zeitgeist highly encourages you to read. Despite the seemingly large amount of money the company has been acquired for – especially considering Facebook’s purchase of Instagram for a ‘mere’ $1bn – Evans sagely points out that per user the deal is about the same as Google made in its valuation when it purchased YouTube. So perhaps not that crazy after all. The other key point that Evans makes is on Facebook’s dedicated pursuit to be the ‘next’ Facebook, or conversely to stop anyone else from becoming the next Facebook. With a meteoric rise in members (see image below, as it outstrips growth by both Facebook and Twitter), Whatsapp was certainly looking a little threatening.
The worry for investors is how Facebook will monetise this platform, when the founders have professed an aversion to advertising. Is merely ensuring that Facebook is the ‘next’ Facebook a good enough reason for such acquisitions? Barriers to entry and sustainable advantages will be few and far between going down this route. The Financial Times, in its analysis of the acquisition, points out that innovation is quickly nipping at the heels of Whatsapp. CalPal, for example, is one example of a mobile application that lets users message each other from within an app. In the markets, there has been a relatively sanguine response to the purchase, but only because of broader trends. As the FT points out,
“External forces have also helped to push the headline prices of deals such as WhatsApp into the stratosphere. A global excess of cheap money, along with a scarcity of alternatives for growth-hungry investors, has boosted the stock prices of companies such as Facebook and Google.”
One of the most visibly exciting developments in technology in recent years is the explosion of the wearable tech sector. But it is Google’s flagship product, Glass, that has met with much ire and distress. An excellent piece of analysis appearing in MIT Technology Review last month hit the nail on the head when it identified why Glass was having trouble winning people over. The article rightly identifies the significant shift in external appearance inherent in making the switch from a device that needs to be taken out of a pocket as makes it clear when it is being interacted with (you need to cover half your face with the product to talk to someone, for example). The article also details the savvy approach Google have taken to the distribution of their product. It’s always sensible to try and mobilise the part of your base likely to be evangelists anyway, so as to build advance buzz before a full-blown release. But to get them to pay for the privilege, as Google are doing with their excitable fans, dubbed Explorers, is a stroke of genius for them. However, the key issue, and what the article states is an “insurmountable problem”, is that “Google’s challenge in making the device a successful consumer product will be convincing the people around you to ignore it”. It is this fundamental aspect of social interaction that is worrying many, and now Google is worried too. As detailed in the FT, the company has acknowledged that the product can look “pretty weird”. Recognising it has a “long journey” to mainstream adoption, it published a list of Dos and Don’ts. Highlights include,
“Ask for permission. Standing alone in the corner of a room staring at people while recording them through Glass is not going to win you any friends… If you find yourself staring off into the prism for long periods of time you’re probably looking pretty weird to the people around you.”
It indicates that Google may have a significant ‘Glasshole‘ problem it needs to attend to. The case may be overstated though. One of the problems may just be that potential customers have yet to see any practical uses for it. This is beginning to change. Last week, Virgin Atlantic announced a six-week trial of both Glass and Sony smartwatches. The idea will be for check-in attendants to use the devices to scan limousine number plates so that passengers can be greeted by name and be instantly updated on their flight status.
In the arts, digital technology has inspired much innovative work, as well as helped broaden its audience. David Hockney, one of England’s greatest living artists, recently exhibited a series of works produced entirely on his iPad at London’s Royal Academy of Arts. He is far from alone. Last week’s anniversary issue of The New Yorker featured work from Jorge Colombo on its front cover, again produced entirely on an iPad. Such digital innovation allows for increased productivity as well as new aesthetics. When done well, art can also involve the viewer, encouraging interaction. Digital technology helps with this too. Earlier in the year The New York Times covered how the New York City Ballet redesigned part of their floor in a new scheme to attract new visitors to the ballet. The result, roughly life-size pictures of dancers arranged on the floor, has seen great success, and an explosion of content on social media platforms like Instagram, where users have taken to posing on the floor as if interacting with the images (see above). It’s a simple tactic that now reaches a far greater audience thanks to new digital technologies.
A recently published book, ‘Now I know who my comrades are: Voices from the Internet Undergound’, by Emily Parker, seeks to demonstrate the ways in which digital technology has made helped to coalesce and support important activism in regions such as China and Latin America. But, as The Economist points out in its review, the disappointing situation in Egypt puts pay to some of the author’s claims; there are limits to how productive and transformative technology can be. In business, these hurdles are plain to see. A poll taken by McKinsey published last month shows that “45% of companies admit they have limited to no understanding on how their customers interact with them digitally“. This is staggering. For all executives’ talk of the power of Big Data, such technology is useless without the proper structures in place to successfully analyse it. We also perhaps need to think more about repercussions of increased technological advances and how they influence our social interactions. In the recently opened film Her (starring Joaquin Phoenix, pictured below), set in the very near future, a new operating system is so pervasive and seamless that it leads to fraught, thought-provoking questions on the nature and productivity of relationships. When does conversation – and more – with a simulacrum detract from interactions with the physical world? These considerations may seem lofty, but as we illustrated earlier, the germination of such thoughts are being echoed in discussions over Google Glass.
So technology in 2014 heralds some promise for the future. Wearable tech as a trend is merely the initial stage of a journey where our interaction with computing systems becomes seamless. It is on this journey though that we need to make sure that businesses are making the most of every opportunity to streamline costs and enhance customer service, and that individual early adopters do not leave the rest of us behind to deal with a bewildering and alarming new way of living. One of our favourite quotations, from the author William Gibson, is apt to end on: “The future’s already here, it’s just not very evenly distributed“.
First aired on PBS in 1985, filmmaker Ken Burns’ documentary on the Statue of Liberty was on Zeitgeist’s TiVo watch list this weekend. It’s really quite staggering to note how issues being discussed then are even more relevant three decades on.
It goes back to an article we wrote recently on the US government’s more legitimate efforts to collect data. These myriad agencies are working so fast to see whether it’s possible to collect this or that piece of data on someone, they are not stopping to think whether they should, and what the long-term implications are. By long-term, we mean what such a “Faustian bargain” means for the civil rights of citizens – particularly of course in the relation of the right to privacy – and what such machinations do to the long-term standing of the country as a whole – particularly from the outside looking in.
“Spying in a democracy depends for its legitimacy on informed consent, not blind trust”, wrote The Economist in this week’s lead article. Not so anymore, seemingly. The recent revelations that the NSA have been collecting masses of data from Facebook, Twitter, Google et al., with little thought for due process and with a focus on communications outside the US, and that at least one telco, Verizon, was ordered to provide significant amounts of user data to the government, is disconcerting to say the least. Zeitgeist wrote a letter, recently published in the Financial Times, before this story broke, that attempted to convey that the true worry for those opposed to such overreach is the high possibility of neglect or abuse, rather than intentional Machiavellian manipulation. Government ineptitude is more likely, and far more dangerous. Clarity and transparency are the enemies of such ineptitude.
As former New York governor Mario Cuomo admits in the clip at the beginning of this post, it can be very tempting to squash a little liberty here and there in return for added security. The situation, which arises at a time when the US is supposed to be taking China to task over its own extensive cyber-espionage (see above graphic), where we are, as one CNBC commentator described recently “hacking ourselves”, must give us pause, and begs us to re-examine what our notions of liberty are in an age of digital disruption.