Mischief, managed – digital disruptors in need of legacy structures

“Move fast and break things”. That is the motto of Facebook, and unofficially many of its contemporaries. While much of the most visible impact of new digital organisations has been on how they respond to, engage with and influence user behaviour, just as significant has been the extent to which these organisations have eschewed traditional business models, ways of working and other internal practices. This includes traditional measures of success (hence the above cartoon from The New Yorker), but also of transparency and leadership. Such issues will be the focus of this piece, to compare the old with the new, and where opportunities and challenges can be found.

What makes digital-first organisations different

It’s important to acknowledge the utterly transformative way that digital-first companies do business and create revenue, and how different this is from the way companies operated for the past century. Much of this change can be summed up in the phrase “disruptive innovation”, coined by the great Clayton Christensen way back in 1995. I got to hear from and speak to Clay at a Harvard Business Review event at the end of last year; a clear-thinking, inspiring man. There are few things today that organisations would still find use in from the mid-90s, and yet this theory, paradoxically, holds. The market would certainly seem to bear this concept out. Writing for the Financial Times in April, John Authers noted,

Tech stocks… are leading the market. All the Fang stocks — Facebook, Amazon, Netflix and Google — hit new records this week. Add Apple and Microsoft, and just six tech companies account for 29 per cent of the rise in the S&P 500 since Mr Trump was inaugurated.

The FANG cohort are entirely data-driven organisations that rely on user information (specifically user-volunteered information) to make their money. The more accurately they can design experiences, services and content around their users, the more likely they are to retain them. The greater the retention, the greater the power of network effects and lock-in. (Importantly, their revenue also make any new entrants easily acquirable prey, inhibiting competition). These are Marketing 101 ambitions, but they are being deployed at a level of sophistication the likes of which have never been seen before. Because of this, they are different businesses to those operating in legacy areas. These incumbents are encumbered by many things, including heavily codified regulation. Regulatory bodies have not yet woken up to the way these new companies do business; but it is only a matter of time. Until then though, the common consensus has been that, working in a different way, and without the threat of regulation, means traditional business structures can easily be discarded for the sake of efficiency; dismissed entirely as an analogue throwback.

The dangers of difference

One of the conceits of digital-first organisations is that they tend to be set up in order to democratise the sharing of services or data; disruption through liberalising of a product so that everyone can enjoy something previously limited via enforced scarcity (e.g. cheap travel, cheap accommodation). At the same time, they usually have a highly personality-driven structure, where the original founder is treated with almost Messianic reverence. This despite high-profile revelations of the Emperor having no clothes, such as with Twitter’s Jack Dorsey as well as Google, then Yahoo’s, now who-knows-where Marissa Mayer. She left Yahoo with a $23m severance package as reward for doing absolutely zero to save the organisation. Worse, she may have obstructed justice by waiting years to disclose details of cyberattacks. This was particularly galling for Yahoo’s suitor, Verizon as information came to light in the middle of its proposed purchase of the company (it resulted in a $350m cut to the acquisition price tag). The SEC is investigating. The silence on this matter is staggering, and points to a cultural lack of transparency that is not uncommon in the Valley. A recent Lex column effectively summarised this leader worship as a “most hallowed and dangerous absurdity”.

Uber’s embodiment of the founder-driven fallacy

Ben Horowitz, co-founder of the venture capital group Andreessen Horowitz, once argued that good founders have “a burning, irrepressible desire to build something great” and are more likely than career CEOs to combine moral authority with “total commitment to the long term”. It works in some cases, including at Google and Facebook, but has failed dismally at Uber.

– Financial Times, June 2017

This culture that focuses on the founder has led to a little whitewashing (few would be able to name all of Facebook’s founders, beyond the Zuck) and a lot of eggs in one basket. Snap’s recent IPO is a great example of the overriding faith and trust placed in founders, given that indicated – as the FT calls it – a “21st century governance vacuum“. Governance appears to have been lacking at Uber, as well. The company endured months of salacious rumours and accusations, including candid film of the founder, Travis Kalanick, berating an employee. This all rumbled on without any implications for quite some time. Travis was Travis, and lip service was paid while the search for some profit – Uber is worth more than 80% of the companies on the Fortune 500, yet in the first half of last year alone made more than $1bn in losses – continued.

Uber’s cultural problems eventually reached such levels (from myriad allegations of sexual harassment, to a lawsuit over self-driving technology versus Google, to revelations about ‘Greyball’, software it used to mislead regulators), that Kalanick was initially forced to take a leave of absence. But as mentioned earlier, these organisations are personality-driven; the rot was not confined to one person. This became apparent when David Bonderman had to resign from Uber’s board having made a ludicrously sexist comment directed at none other than his colleague Arianna Huffington, that illustrated the company’s startlingly old-school, recidivist outlook. This at a meeting where the company’s culture was being reviewed and the message to be delivered was of turning a corner.

A report issued by the company on a turnaround recommended reducing Kalanick’s responsibilities and hiring a COO. The company has been without one since March. It is also without a CMO, CFO, head of engineering, general counsel and now, CEO. Many issues raise themselves as a start-up grows from being a small organisation to a large one. So it is with Uber – one engineer described it as “an organisation in complete, unrelenting chaos” – as it will be with other firms to come. There is only a belated recognition that structures had to be put in place, the same types of structures that the organisations they were disrupting have in place. The FT writes,

“Lack of oversight and poor governance was a key theme running through the findings of the report… Their 47 recommendations reveal gaping holes in Uber’s governance structures and human resources practices.”

These types of institutional practices are difficult to enforce in the Valley. That is precisely because their connotations are of the monolithic corporate mega-firms that employees and founders of these companies are often consciously fighting against. Much of their raison d’être springs from an idealistic desire to change the world, and methodologically to do so by running roughshod over traditional work practices. This has its significant benefits (if only in terms of revenue), but from an employee experience it is looking like an increasingly questionable approach. Hadi Partovi, an Uber investor and tech entrepreneur told the FT, “This is a company where there has been no line that you wouldn’t cross if it got in the way of success”. Much of this planned oversight would have been anathema to Kalanick, which ultimately is why the decision for him to leave was unavoidable. Uber now plans to refresh its values, install an independent board chairman, conduct senior management performance reviews and adopt a zero-tolerance policy toward harassment.

Legacy lessons from an incumbent conglomerate

Many of the recommendations in the report issued to Uber would be recognised by anyone working in a more traditional work setting (as a former management consultant, they certainly ring a bell to me). While the philosophical objection to such things has already been noted, the notion of a framework to police behaviour, it must also be recognised, is a concept that will be alien to most anyone working in the Valley. Vivek Wadhwa, a fellow at the Rock Center of Corporate Governance, clarified, “The spoiled brats of Silicon Valley don’t know the basics. It is a revelation for Silicon Valley: ‘duh, you have to have HR people, you can’t sleep with each other… you have to be respectful’.”

Meanwhile, another CEO stepped down recently in more forgiving circumstances, recently but which still prompted unfavourable comparisons; Jeff Immelt of General Electric. As detailed in a stimulating piece last month in The New York Times, Immelt has had a difficult time of it. Firstly, he succeeded in his role a man who was generally thought to be a visionary CEO; Jack Welch. Fortune magazine in 1999 described him as the best manager of the 20th century. So no pressure for Immelt there, then. Secondly, Immelt became Chairman and CEO four days before the 9/11 attacks, and also had the 2008 financial crisis in his tenure. Lastly, since taking over, the nature of companies, as this article has attempted to make clear, has changed radically. Powerful conglomerates no longer rule the waves.

Immelt has, perhaps belatedly, been committed to downsizing the sprawling offering of GE in order to make it more specialised. Moreover, the humility of Immelt is a million miles from the audacity, bragaddacio and egotism of Kalanick, acknowledging, “This is not a game of perfection, it’s a game of progress.”

So while the FANGs of the world are undoubtedly changing the landscape of business [not to mention human interaction and behaviours], they also need to recognise that not all legacy structures and processes are to be consigned to the dustbin of management history, simply because they work in a legacy industry sector. Indeed, more responsibility diverted from the founder, greater accountability and transparency, and a more structured employee experience might lead to greater returns, higher employee retention rates and perhaps even mitigate regulatory scrutiny down the line. The opportunity is there for those sensible enough to grasp it.

Media Trends 2016

The most enjoyable pieces we pen for this blog are our looks ahead to TMT trends in the next year (they also, coincidentally, happen to be our most popular articles). Do check out our 2015 and 2014 trends, too.

We’ll look at trends in the film industry, TV, telco and tech sector. These formerly discrete industries are now all blurring together. This should come as little surprise to most, after years of the word “convergence” being bandied about; AOL Time Warner was a misbegotten adventure on the back of this thesis. However, what is happening now is that these worlds are clashing. Techies push their platforms (e.g. the Amazons and Netflixs of the world), but increasingly follow in the footsteps of legacy media in creating a stable of content to offer viewers. But those legacy media players are fretting, according to the Financial Times,

According to cable industry die-hards who have the most to lose, the digital platforms have not done much to show they are appropriate guardians of media assets like these. According to cable pioneer John Malone, for instance, they do not do enough to differentiate media brands, they make it hard to get feedback about consumers (if the data are not passed on) and they are not conducive to the kind of advertising on which cable networks have long relied. The result is a giant searchable database, like Netflix.

Star Wars and the status quo

It would be difficult to write about the media sector currently without giving Star Wars: The Force Awakens at least a mention. The movie, which Zeitgeist saw last weekend, was huge fun, though we couldn’t help feeling like we were watching a re-imagining of the original, rather than a direct sequel. As fivethirtyeight notes, the prequels are out there now, and not going anywhere; this film faces a steep uphill battle if it is to redeem the franchise from the deficit of awfulness inflicted by the prequel triplets. The amount of money the film has made, and the critical caveats it has received, point to interesting trends in the film industry as a whole.

The Economist rightly points out how Bob Iger, since taking the reins of Disney from the erratic Michael Eisner in 2005, has made wise, savvy strategic moves, not least in content, through the purchases of Pixar, Marvel and Lucasfilm. But while most critics were pleased with the latest product to spring from this studio’s loins, there were some reservations. The FT, while largely positive about the film, lamented there was little in it to distinguish itself from the other tentpole films of the year:

What troubles most is that Star Wars is starting to look like every other franchise epic. Is that the cost of anything-is-possible stories set in elastic universes? I kept having flashes of The Hunger Games and The Lord of the Rings. The characters costumed in quasi-timeless garb (neo-Grecian the favourite). The PlayStation plots with their gauntlets of danger and games of survival.

Recent releases are increasingly making their way onto the best-performing list, with increasing speed, too. Three films have crossed the $1bn barrier this year alone

There’s no doubt this is a problem. It’s not per se a new problem, as originality has always been something Hollywood has struggled with. Let’s be honest, art has struggled with originality too; Shakespeare’s MO was derivative, and has there been anything new to say in art since Duchamp? But the fact remains that when studios have the technical sophistication to produce any visual feat, and this is executed again and again in much the same mode, the effect on an audience begins to wane, and everything begins to look much of a muchness (if not outright neo-Grecian).

Also somewhat unsettling is the financial performance of these films. Not so much because of the people who will still turn out in droves to see recycled content, but more the pace at which records are now being broken. The new Star Wars made $100m in pre-sales – a record – and went on to make $248m in its opening weekend, beating the previous holder, all the way back in the summer, Jurassic World. The speedy gains of lucre for such fare are increasing. Titanic took three months to reach the $1bn mark at the global box office; Jurassic World took 13 days, beating the previous record holder, Fast and the Furious 7, which had opened only a few months earlier in April. In the ten years after Titanic, only three films crossed the zeitgeist-worthy Rubicon of $1 billion; since 2008, 17 films have done so (see above graphic).

Such potential return on investment ups the ante for ever bigger projects, something Zeitgeist has criticised several times in previous articles, wary of some of the huge, costly flops that have come and gone with little strategic reflection. The latest Bond incarnation, Spectre, was always going to be something of a safe bet. But with so much upfront investment, such vehicles now need to make all the more in order to recoup what has been spent. Or, as Vanity Fair puts it, “yes, 007 made obscene amounts of money. But were they obscene enough?“. Tentpoles have taken on new meaning in an era of Marvel heroes, and even Bond itself has set new benchmarks with Skyfall, which crossed the hallowed billion-dollar barrier referenced earlier. This quickly begins to seem less earth-shattering when you consider the all-in costs for Spectre have been conservatively estimated at $625m. Even with Skyfall, Sony itself made only $57m in return.

Trend implication: There is a glimmer of innovation in the Chinese film market, where blockbusters are being crowdfunded through WeChat. But in Hollywood, the focus of money on one type of film – and the attempt to capture only one type of audience – logically leads to a bifurcation in the market, with bigger hits, bigger misses, and a hole in the middle,which The New York Times points out is usually where Oscars are made. A large problem that will not be addressed in 2016 is the absence of solid research and strategic insight; studios don’t know when or whether they “have released too many movies that go after the same audience — ‘Steve Jobs’ ate into ‘The Walk’ ate into ‘Black Mass’, for example”. With Men in Black 4 on the way, Hunger Games prequels being mulled, another five years of Marvel movies already slated and dates booked in, look for such machinations to continue. Bigger budgets, more frequent records being broken and a stolid resistance to multi-platform releases. Even Star Wars couldn’t get a global release date, with those in China having to wait a month longer than those elsewhere to see it, more or less encouraging piracy. Let’s just pray that Independence Day 2 gets its right…

TV’s tribulations

Despite all our claims of problems with the film industry, we must concede its financial performance this year will be one for the record books (particularly with some added vim from Star Wars). The TV sector, on the other hand, has had a decidedly worse year. For while Hollywood’s problems may be existential and longer-term, television must really start fundamentally addressing existing business models, today.

The rise of OTTs such as Netflix – not to mention the recently launched premium content service from Google, YouTube Red – has no doubt contributed to a sudden hastening in young adults who have dropped (or simply never had) a cable subscription. In the US, latest data recently reported from Pew research show 19% of 18-29s in the US have dropped their TV / cable service to become cord-cutters (or cord-nevers). The pace of change is quickening, according to eMarketer, who recorded a 12.5% leap in cord-cutting activity YoY.

Cognisant of such shifts, organisations have begun seeking remedy. In November, Fox became the first broadcast network to drop same-day ratings provided by Nielsen to the press, recognising that they “don’t reflect how we monetise our content,” and hoping to “move the ratings conversation into the future”. General Electric meanwhile, is stop advertising on prime-time television, instead keeping its budget for live events. This makes sense as it is this type of programming that typically lures large, diverse and timely audiences to content. Most interestingly, however, Disney, who seems to feature a lot in this post, is launching its own digital subscription service, aggregating its film, TV, books and music assets together. The FT notes it will be “the biggest media company yet to stream its content directly to consumers online”.

With the increasing popularity of OTT platforms, some are trying to get audiences to rediscover the joy of serendipity again. A new company, Molotov, aims to combine “the best elements of schedules, streaming and social media… Even if it does not take off, it neatly identifies the challenge facing broadcasters and technology companies: how can TV be better? And is there still life in the television schedule?“. Its UX has been compared to Spotify, allows a personalised programming guide, as well as bookmarking shows, actors and politicians. Moreover, Molotov also lets viewers know which shows are particularly popular on social media, as well as which of their Facebook friends like particular shows. “The idea”, written in the FT,  “is to be a one-stop shop for audiences by replacing dozens of apps on Apple TV, or indeed an entire cable box”. Indeed, China is struggling with the linear world of television and film, uncertain about how to regulate offensive or violent content in a world without watershed or clear boundaries for regulation beyond towing the political line. For its part, the BBC will be fervently hoping that there remains life in the television schedule. With its Charter up for review, the future of the organisation is currently in question, to the extent that anyone can try their hand at getting the appropriate funding for the Beeb, with this handy interactive graphic.

Trend implication: OTTs like Netflix will continue to gain ground as they publish more exclusive content, though there is a risk such actions lead to brand diffusion, and confusion over what audiences should expect from such properties. Business models for content are increasingly being rewritten; excited as we are that The X-Files is returning to Fox in January, the real benefactor is apparently Netflix. Like it or not (we happen to think it’s a savvy strategic move), Disney’s plan to launch a subscription service online is innovative in its ambition to combine multiple media under one roof, and illustrates the company has recognised it has a sufficiently coherent brand (unlike Netflix) that can make for competitive differentiation as it faces off against other walled gardens. Advertising revenues, like cable subscription revenues, will continue to slide; there’s not much anyone, even Disney can do about that. Such slides though are unlikelt to deter continued mergers on the part of telcos; one in five pay TV subscriptions now go to these companies. Molotov sounds like an intriguing approach to reinventing a product long overdue for a renaissance… will such a renaissance come too late for the BBC though?

The X-Files returns to the Fox network in January, but it is Netflix that will really benefit

Tech opportunities and pitfalls

The tech sector as a whole, which continues to spit out unicorns, was deemed to be heading for a burst bubble, according to The Economist: “There are 144 unicorns valued at $505bn between them, about five times as many as three years ago. Most are unprofitable”. Equally disconcerting for the sector must have been Donald Trump, who has been consistently dismissed by mainstream media types since the summer but continues to roll on through the Republican presidential primaries. In his most recent itchy trigger-finger solution to the world’s woes, he suggested simply turning off the Internet in certain places. Apart from our understanding and appreciation of the Internet as one of the world’s liberating platforms that is one of the most tangible examples of man’s desire to communicate as one, this would apparently also be quite difficult.

Trend implication: Startup valuations do seem to be increasingly on the wild side, and there’s a good case to be made about the double-edged sword of such high valuations that dissuade companies from going public. There may possibly be a correction sometime next year; look for it to separate the wheat from the chaff. And while the idea of turning off the Internet is not without precedent, when did Iran last do something that the rest of the world thought was a good idea to emulate? Depriving people of the internet necessarily deprives people of information. On a macro level this can only be a bad thing. Its technical complexity and ethical murkiness make this an unlikely candidate for impact in 2016.

Amazon is having a rare sojourn in the black of late, with two consecutive quarters of profit. This is a rareity not because of any malpractice on Jeff Bezos’ part, rather because the mantra of the company has consistently been over the years to reinvest revenues into new development. Its brief profitability comes as the company’s cloud services, Amazon Web Services [AWS], become increasingly popular. As the Financial Times notes,

“In the latest quarter, [AWS profits] came to $521m on revenues of $2bn. That is roughly equivalent to the operating income of the entire core North American retail unit — a business with eight times the sales.”

Trend implication: Amazon’s growth may give some investors with a short-term eye succour for 2016 and a more profitable Amazon. But they should not be taken in so easily. Bezos’ long-term strategy remains investment for the future rather than a quick buck.

Facebook has been in the news for things positive and otherwise as it pushes the limits of innovation and unsurprisingly finds itself coming up against vested interests and the remits of regulatory bodies. It must also combat the same issues faced by other maturing companies, that of lower engagement and rising age groups. For example, 37% of users shared photos as of November, down from 59% a year earlier. In the meantime it is deploying some interesting tactical maneuvers, including more prominent featuring of events you are going to go, as well as ones you might be interested in attending. It also suggests events directly into status updates. Other timely reminders, reported in the WSJ, include “On Sept 27, it displayed an image of a crescent moon as a prompt about the supermoon lunar eclipse. In October, it worked with AMC Network Entertainment LLC to remind fans of “The Walking Dead” about the show’s season premiere”.

And while its partnership with Uber – embedding the service directly into its Messanger platform – is to be commended (WeChat’s ARPU by contrast is $7), it has struggled abroad. In India, one of several regions where it has agreed to zero-rated services with operators, net neutrality proponents are lobbying to have its Free Basic services shut down (while also raising noise about T-Mobile’s similar Binge On service in the US). Meanwhile, Whatsapp, the platform Facebook now owns, whose use has exploded in popularity in Jakarta, recently saw its service shut down for 12 hours in Brazil, affecting around 100 million people. Telco operators have been lobbying the government to label OTT services as illegal, but it seems that the government shut the service down in order to prevent gang members from communicating. This provoked much derision.

Trend implication: As Facebook’s audience continues to mature, macro engagement may continue to dip. Data on metrics such as average pieces of content shared by a user per month have not been updated since the company’s IPO. Facebook, as well as other OTT plaforms will continue to struggle in some respects in 2016, as both traditional players (e.g. telecom operators) and regulators seek to contain their plans. Operators in particular will have to increasingly lay ‘frenemies’ with OTTs that may offer value-add and competitive differentiation with the right partnership, yet at the same time eat away at their revenues. Continued security threats, whether cyber or physical terrorism, may mean, that, like Trump’s comments above, services continue to see brief disruption in 2016 in various regions. Net neutrality rulings in the US and Europe will also have an impact on the tech sector at large. It is likely to be laxer in Europe, which The Economist predicts will hurt startups.

Similarly impactful was the recent video of a drone crashing to the ground at a World Cup ski competition this week, which missed a competitor by what looked like a matter of feet and would have caused serious injury otherwise.

Trend implication: Despite such potential for grievous harm, there should generally be a quite liberalised framework for drone use. However, this needs to start with more prescriptive regulation that identifies the need for safety while recognising individual liberty

Oh, and Merry Christmas.

Trials and tribulations for film franchises in 2015

It’s sequel season. While the Mission: Impossible franchise looked set to continue unabated – with, in Zeitgeist’s opinion, a superb Rogue Nation – others were not so fortunate. The revival of the Fantastic Four franchise by Fox saw far less solid returns and though it publicly remains committed to the franchise, it does have several directions it can now go, according to The Hollywood Reporter.

Two of this year’s – and of all time – uber-franchises are of course Star Wars and James Bond. Slated for release at the end of the year (December and November, respectively), trailers for the films are already out in the wild; the Star Wars second trailer set a Guinness World Record. Incidentally, both franchises have made a home out of Pinewood studios in the UK, where a mix of highly-skilled labour and tax incentives are a potent attraction. Both franchises, with roots going back decades, will look to exploit a popular desire for nostalgia that is also playing out in television with the arrival of reboots like Twin Peaks and The X-Files. Recently, however, both franchises have faced existential questions; one over how to promote a film that for many already has high awareness, while managing equally high expectations; the second over ownership.

How to market Star Wars?

Last month’s Comic-Con, a densely-packed meeting place for mega-nerd and studio exec alike, would have been, one would think, a superb place for some exclusive footage, interviews or other filmic crumbs from the Star Wars reboot to be shared to the salivating masses. However, as The New York Times reported, the presence of Star Wars: The Force Awakens was “strangely invisible”, while films as far away as 2017 adorned many a banner or trolley cart. It was not until the end of the week that J. J. Abrams emerged, refusing to divulge any plot details. Much as with knowing the ideal time to start the promotional blitz so that a film remains in an Academy voter’s mind come Oscar voting time, Disney does not want to risk creating excitement in the marketplace too soon, only to have such buzz die down by the time the film is released. Eagle-eyed fans will also be on the lookout for the equivalent of a Jar-Jar Binks in this franchise, something that will immediately turn them off. These fans don’t want to be left out in the cold either, as they very much felt they were when George Lucas tinkered with the original trilogy to add new digital elements (i.e. “Why was I not consulted?”).

Disney have played this long game before. Five years ago we wrote about the careful marketing activity behind the sequel to Tron – another franchise with a long history and a rabid fan base that formed part of a nerd’s cultural pantheon. All in all, the marketing activity spanned three and a half years. Adding to the difficulty of the long lead time is the industry’s second biggest market, China, where Star Wars was never theatrically released. Different tactics for raising awareness might be needed here, but in full knowledge that any materials will quickly make their way online and around the world.

Until now, prominent activity has been otherwise limited to a Vanity Fair cover article and a Secret Cinema screening of Empire Strikes Back that has had most of London’s 20-30somethings raving all summer. It will be difficult to gauge how much or little the marketing activity has to do with the latest iteration of such a powerful icon of culture and film; Disney must do its best to ensure its fans are kept happy but craving until December.

Who will own the right to show Bond?

Skyfall, released in 2012, was Bond’s most successful offering to date. But this year’s outing, Spectre, will be the last before a deal ends between Sony Pictures and MGM / EON, the latter being the rights owners, who plan to shop distribution rights to a different studio. This would be a significant hit to the brand equity of a studio that has seen too few box office successes of late, arguably too many Spider-Man reboots, and the too-sorry tale of a cyberattack that exposed painfully frank emails, budgets, and salaries. Its stable of franchises is low compared to its peers; Universal finds itself with a newly-rejuvenated cash cow in the form of Jurassic World; Warner Brothers has its DC Comics franchise.

Outside of the brand though, the financial impact could be limited. While Sony had a 50% equity stake in Casino Royale and Quantum of Solace, according to the FT this was reduced to 20% for Skyfall and Spectre. “While it’s a good piece of business the financial upside or downside is not significant on either end”, a person close to the studio told the paper.

Likely suitors look to be 21st Century Fox – which has enjoyed a long relationship with MGM as its home entertainment distribution partner for a decade – or Warners, which distributed MGM’s Hobbit trilogy. Furthermore, the FT reports that “Kevin Tsujihara, the Warner Bros chairman, is a close friend of Gary Barber, his opposite number at MGM. The two have invested in several racehorses together, including Comma to the Top, which they bought for $22,000 and which had career earnings of more than $1.3m”. As with all things, timing will be everything as MGM ponders an IPO, which might see a higher valuation with a new studio deal in the offing.

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

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*Our 2016 trends for the sector can be found here*

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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.

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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.