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Adjacencies & Disruptions – Amazon, Armani and identifying corollaries

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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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Cost-cutting consoles

September 13, 2013 2 comments

Zeitgeist finally got around to seeing “Elysium” last night. Typical of the current climate in film distribution, it was disappearing from all of Zeitgeist’s local screens in central London, after a mere 3-4 weeks of release. The above trailer screened before the film. Videogames have been trying to sell themselves as films for years, since the likes of “Metal Gear” and “Max Payne”. (The picture becomes even more blurred as more videogames attempt to make the transition to feature franchises). This tactic was nothing new, moreover it was somewhat underwhelming. The graphics looked pixellated, the movement clunky, and any sense of verisimilitude was lacking. It is difficult to put a finger on what exactly the problem was, but patching polygons together is not the same as making all the parts interact with one another. It was surprising, given that the game is to be made available on the as-yet unreleased Playstation 4, a console which, going from the launch event months ago, is capable of some stunning graphic simulation. The market has gone for longer than usual without a new stream of console launches, so it seemed puzzling that not all that much seems to have changed.

It was somewhat reassuring then to read today The Economist’s Technology Quarterly supplement, which featured as its lead article an overview of the videogames industry, and how high costs have produced diminishing technical returns in the latest bout of releases from Sony, Microsoft and Nintendo. The article states the newest consoles look “surprisingly underpowered”:

“At previous console launches, executives have boasted about their boxes’ whizzy technological innards. Sony in particular was a dab hand at this sort of thing, coming up with names like “Emotion Engine” and “Reality Synthesiser” for the chips that powered its previous consoles. But this time neither Microsoft nor Sony seems very keen to talk up the technical prowess of their new boxes… new consoles will be merely catching up with the current state of the art, rather than defining it. Both consoles… are, for all intents and purposes, ordinary PCs in fancy boxes.”

The market hasn’t found a way to substantially raise prices on games, while at the same time the cost of developing them has “ballooned”. Moreover, due to rising costs of customised chips and increasing competition from those with lower fixed costs (think videogame mobile app developers, and Ouya), Sony and Microsoft are now using standardised chips in their consoles.  The article was also keen to note that graphics are no longer the be-all-and-end-all of a console’s power and reputation (as it was in the days of 32 and 64-bit machines). Indeed gaming itself is argubaly no longer front and centre of console strategy, as manufacturers seek to diversify into other areas of entertainment. Just in time as well, as a recent report from Accenture predicts the end of single-use devices.

UPDATE (15/9/13): The New York Times points out that often the best games take a while to appear on new consoles, with Nintendo devices tending to be the exception.

Creative Destruction in Electronic Arts

Super Famicom box

The videogame industry, like many of the protagonists in the games it creates, is under attack. The competition is fierce. Not only is there healthy competition amongst legacy companies – including Nintendo, Sony and Microsoft – but new devices are increasingly distracting consumers, and digital disruption elsewhere is changing the way these companies do business.

Part of the problem is cyclical; the market has gone longer than usual without a major new console launch from either Sony or Microsoft, which in turn makes game manufacturers hesitate from making new product. But the industry needs to be wary that their audience has changed, in multiple ways. Sony are now starting to talk about their PS4 (due to be released in around six months’ time), beginning with a dire two hour presentation recently that failed to reveal price, release date, or an image of the console. And the word over at TechCrunch? “A tired strategy… [O]verall the message was clear: Sony’s PS4 is an evolution, not an about-face, or a realization that being a game console might not mean what it used to mean.”

We’ve written before on creative destruction in other industries, and talked before about shifting parameters for companies like Nintendo. The inventor of NES and Game Boy is currently struggling with poor sales of its new console, while at the same the chief executive of Nintendo America recently stated that digital downloads of videogames were becoming a “notable contributor” to their bottom line. Companies like Apple are surrounded by perpetual rumours of developing their own videogame platform. New companies in their own right, such as the Kickstarter-funded company producing the $99 Ouya, is among several players shaking up the industry. The upshot of such turmoil – a “burning platform” as the Electronic Arts CEO described the situation in 2007, referring to the dilemma of holding onto the burning oil rig and drowning in the process, or risk jumping off into who-knows-what – is a loss of market share. Accenture in January published a report predicting the demise of single-use devices such as cameras and music players whose revenues would be eaten into as more and more consumers flocked to tablet and other multi-purpose gadgets. Videogame console purchase intent was not researched, but it is not hard to make the analogy.

It was enlightening and reassuring then to read McKinsey Quarterly’s interview recently with Bryan Neider, COO of Electronic Arts. Some interesting take-outs follow. First, in 2007, the company recognised there was a problem: “game-quality scores were down and our costs were rising”. The company wanted to shift from having a relationship with retailers to having one with gamers. This meant having a focus on digital delivery. This fiscal year, digital is forecast to represent 40% of the overall business. Neider recognises this closeness to the consumer makes them even more susceptible to their whims and preferences, so they’re relying far more on data-backed analysis than they have before, including a system with profiles of over 200m customers. This data is used for everything from QA to predicting game usage. Neider elaborates,

“Key metrics answer the following questions: where in the game are consumers dropping out? What is the network effect of getting new players into the game? How many people finish a game? Did we make it too difficult or too long? Did we overdevelop a product or underdevelop it? Did people finish too fast? Those sorts of things are going to be critical… However, the challenge is that parts of the gaming audience are pretty vocal—they either really like a game or they really don’t like it. The trick is to find ways to get feedback from the lion’s share of the audience that is generally silent and make sure we’re giving these people what they want.”

Interestingly, the company’s structure was changed to reflect individual fiefdoms according to franchise – be it FIFA or Need for Speed – the needs for which are managed in that line of business. Each vertical competes with the others to deliver the highest rates of return, while also being able to draw on central resources (marketing, for example). Electronic Arts, as a developer of software for other manufacturers, will to some extent always be at the mercy of which devices are in vogue and the cycle of obsolescence. It is impressive though to see that the company has recognised the need to change the way it does business. The operational and technological sides of business don’t seem to have distracted Neider from the key insight in the industry, “Ultimately, we’re in the people business“.

On movie release windows – I love the sound of breaking glass

December 1, 2012 4 comments

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It’s fair to say that in the past ten years, the pace of technology has evolved at an ever-increasing rate. The way in which devices have changed, and with it our use of them, was humourously summed up in the above cartoon from The New Yorker. Digital trends have affected the way we communicate, the way we consume media, and indeed the way we consume goods and services, i.e. shop.

So it is a little surprising to many – your humble correspondent included – that we still have to put up with a film being released in one country one day, and in another months later. That we still have to wait a certain number of months for a film to amble its way from the cinema screens to our home, whether on Blu-ray / DVD or on VOD. It’s interesting to note that vertical integration isn’t a key issue; Disney recently launched the second subscription video on demand (SVOD) service in Europe, with a library of constantly refreshed titles that can be viewed on platforms ranging from TVs to Xbox to iPads. Indeed, Disney’s CEO Bob Iger announced way back in 2005 in an interview with The Wall Street Journal that he foresaw a day of collapsed release windows, when a film came out the same day at the cinema as it was available to watch in the home:

We’d be better off as a company and an industry if we compressed that window. We could spend less money pushing the box office and get to the next window sooner where a movie has more perceived value to the consumer because it’s more fresh.

So there is money to be saved in such an exercise. Yet seven years later, such a situation is still mostly a fantasy for major films. Studios have undoubtedly dipped their toe in the water, and some moderate success has been seen on the indie scene, specifically with recent films like Margin Call, Melancholia and Arbitrage. The former film was released simultaneously in the cinema and on VOD (seemingly only in the US, however), eventually recording strong results, months after its initial release at Sundance Film Festival. Again, what is the justification for such a change in platform release timings? Not meeting consumer desires and addressing piracy, but simple cost savings. Variety reports:

“We’re a star-driven culture, and on a crowded (VOD) menu, what are you going to be drawn to?” posits WME Global head Graham Taylor, who adds that with marketing budgets skyrocketing, the ability to use a single campaign across closely spaced bows on multiple platforms is an important cost savings.

The whole situation is quite frustrating for any fan of film or television. It is a frustration shared by Frederic Filloux, co-author of the excellent blog Monday Note, which Zeitgeist strongly recommends to anyone with an interest in insightful thoughts and reasoning on media industry goings-on.

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Their most recent post also happened to detail the author’s frustrations with such seemingly arbitrary release windows. One of the most pertinent charts displays the achingly slow rate of change in platform release changes, that is so at odds with the pace of change in other media (above). The content of the post has rational recommendations, which at first glance seem eminently appropriate and overdue for implementation. Some of the recommendations though fail to account for the fact that the film industry and its machinations are often governed by winds of irrationality.

To summarise, Filloux recommends a global day-and date, shorter, more flexible window of time between cinema and home release. There are a number of obstacles to these ideas though. Firstly, exhibitors must be placated. They hold such a sway over studios that they cannot easily be ignored. Bob Iger, in the interview mentioned earlier, mentions exhibitors as being a key obstacle. Think about it, why on earth would a cinema want their film to be available in the comfort of their audience’s home any sooner than it already is? It wants to enforce scarcity, so that when the film’s marketing machine is at its height, the cinema is the only place you can see it. As already mentioned, indie films have had some success with multi-platform releases, but even these have met with consternation from exhibitors, as a recent example in Canada shows. The consternation becomes outright war for larger films. Zetigeist reported when, in 2010, many exhibitors refused to show Tim Burton’s Alice in Wonderland when the studio, Disney, flirted with releasing the film to home release less than four months after its theatrical debut. After much back and forth, exhibitors eventually relented, and the film went on to gross over a billion dollars at the global box office. Exhibitors are not going to be convinced about flat release windows anytime soon. They are perhaps the largest roadblock to such a move, and the largest point of advocating a return to vertical integration of production, distribution and exhibition that was the case until the Paramount Decree in 1948.

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Studios can only flatter exhibitors for so long

Moreover, while the argument about having flexible, shifting window releases depending upon a film’s success is logical, it does not acknowledge the existence of sleeper hits, films which do not open to huge returns but gradually accrue it over months of release (as illustrated by Margin Call, mentioned earlier). It would also be hard to define when a movie “succeeds” or “bombs”. You could use box office as a figure, but would this be without context, as a ratio of the film’s budget, or against its current peers? Using box office fails to take awards – principally Oscar – coverage into consideration, which invariably adds its own box office bump to a movie when it is nominated or wins.

The recommendation for simultaneous worldwide release is also a valid point. Zeitgeist has written before on the ridiculous prices pirated films go for in markets that have no access to the official product. To their credit, studios are moving further toward a “day and date” system. However, doing so exclusively would be dangerous. Releasing some films market by market allows the studio to gauge audience reaction, and if necessary tinker with the marketing or the film itself. Staggering release dates is also necessary for cultural events, such as the World Cup, which may be more relevant to some countries than others.

It is the last point made in the article, that of making TV shows “universally available from the day when they are aired on TV” that Zeitgeist could not agree more with. Apart from audience frustration – and recent technological development such as DVR show how the opportunity can shape viewer habits – such a move would also surely divert people from resorting to illegal downloading.

To conclude, while there are caveats and significant roadbumps to be addressed, and some progress has been made over the years, the film industry has a long way to go in a short time if it wants to catch up with consumer habits. Flat release windows should be an inevitability, and a priority. Moreover, they should not be seen purely as cost-saving measure, but as an important way of keeping an increasingly technologically and globally savvy customer base happy.

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