Media & Tech firms on corporate governance and shareholder responsibility

In this post we’ll be looking at a variety of firms in the media and tech sector as we examine how their vision impacts on the broader economy.

• Short-termism and misdirection (Amazon and legacy players)

In March, Zeitgeist was privileged enough to attend an intimate dinner (well, fifty guests or so-type intimate), hosted by the CEO of a major media company. Much of his speech during our meal was focused on his relatively pessimistic outlook for global growth. One of the key causes of this, he noted, was firms and their fanatical focus on what is known as “short-termism”.

Much editorial ink has been spilled on this concept, one which is hardly new. The argument being that, because of a public company’s fiduciary responsibility to shareholders – who are becoming increasingly activist in nature – the C-suite in turn must increasingly focus on quarterly activities that deliver fat returns for said shareholders. This, at the expense of a longer-term vision or strategy that creates, for example, more sustained competitive differentiation, better margins or improved products. Indeed, in Zeitgeist’s view, many organisations, particularly those in legacy industries, are caught in a difficult Catch 22 situation; they need to maintain investor confidence in order to keep share prices stable while simultaneously investing heavily for the medium term in order to reinvent their business and avoid disintermediation from start-ups. Sony is a great example of this We won’t mention any names here of particular examples, of course…

However, what was interesting was that in February, The Economist published an editorial in its Schumpeter section, detailing how “short-termism” was not only a vague term but also misdiagnosed the root cause of the problem. One symptom of short-termism is share buybacks; the article argues that this is more to do with the fact that larger companies are growing more successful (a worrying trend we have touched on before, which puts paid to the idea that digital disruptors are in themselves value-laden orgs). As a consequence of their increasing success, they have more cash than they know what to do with (look at Apple), and so don’t spend it in a constructive way (look at Apple’s acquisition of Beats). These profits, as the article puts it, are “put to no use”. This won’t change unless competition policy improves; that is unbelievably unlikely to happen in a Trump administration.

Of course there are outliers to every argument. Thankfully there is one to be found here in the shape of Amazon. We mentioned The Economist earlier; the company appeared on the cover of last week’s issue, depicted as a fleet of enormous drones from some future time and place. Amazon’s investors seem to be made of an unusual crowd of people with an exclusively long-term outlook. As the article points out: “Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020“. While nothing seems to be getting in the way of Amazon’s approach for now, regulation will inevitably come into play (though, as mentioned above, perhaps less so in the US), as it becomes an ever more dominant, global force.

• Accountability and Purpose (BuzzFeed, Snap)

While incumbents are hammering out an approach, newer firms are trying to wind their way to going public. News of an IPO for BuzzFeed recently has raised many eyebrows. As the Financial Times pointed out last year, the company has “missed revenue targets in 2015 and halved its projections for 2016 from $500m to $250m”. Not a shining endorsement. Even without its prior performance taken into consideration, its business model is not guaranteed to woo investors, who are not usually won over by ad-supported models, or by firms that make viral videos, which rely on the fickle interests of the masses to make them profitable.

At the other end of the spectrum was the frothiness and exuberance that greeted Snap’s recent, enormous, IPO (albeit, as above, with some skeptical heads). This despite its existential challenges as platforms like Instagram et al seek to emulate what currently sets it apart from its rivals. In addition to this, there has been concern over the opacity of the company’s structure and shareholding rights, indicative of what the FT called a “21st century governance vacuum”. Snap’s IPO was the first ever in the US to issue shares with no voting rights at all. The newspaper elaborated,

By any standard Snap’s governance arrangements are flawed and its directors minimally accountable. Anne Simpson, a leading governance expert at the California pension fund Calpers, dubs this “a banana republic approach” to corporate governance.

Though the worst sinner, it is also indicative of a larger, worrying trend that is particularly common at tech companies (see Google, Facebook and Alibaba). The reason for going public has changed. As the FT points out, the principle reason for doing so now is so that “fresh equity fills the yawning gap between revenue and expenditure”. A lack of investor oversight means that accountability is less prevalent than ever.

On the bright side, some companies are looking beyond simply maximising shareholder returns to see how they can benefit society. Last year, Boston Consulting Group wrote an unusually whimsical thought piece on the impact businesses could have if they imbued themselves with purpose, acknowledging that with globalisation and technology trends, there are sometimes losers. Deloitte worked with the UK government to publish a report (also last year), detailing how businesses with a purpose beyond traditional financial returns – aka “Mission-led” – were more successful than those without.

• Next steps

Such thinking and work needs scaling, and needs to be evangelised beyond the traditional boundaries of Davos seminars. Without it, increasing deregulation and opaque public offerings are likely to hasten the end of an already long-ish period of global economic growth. Media and technology firms of today tend to provide products that are mostly services, i.e. intangible to the end-user but imbued with value. It would be prudent for them to think about where transparency and accountability adds purpose to their vision, structure, strategy and communication.

 

TMT Trends 2017 – Oscars Oversight, MWC Mediocrity, Publishing Problems, M&A Mistakes Avoided

Nostalgia as the name of the game

Nostalgia has been the name of the game for many in the world of TMT [technology, media, telecommunications] for a couple of years now, as TV series are rebooted and eras brought back to life (think Fox’s The X-Files and Netflix’s Stranger Things, FX’s The Americans respectively), movie franchises are retooled (think Kong: Skull Island, Beauty and the Beast) and books also drag people back to the 80s (think Entertainment Weekly’s number 1 book of 2016, The Nix).

Nostalgia is almost certainly an appealing emotion for many media executives today too. In entertainment, they may look back to fond days before PwC screwed up who won an Oscar and who hadn’t; in technology, vendors are leveraging “digital detox” trends as an excuse to remake old products and in publishing many are surely screaming for the days before digital, when staff at the likes of Conde Nast were still allowed to throw “hissy fits” (to quote British Vogue’s Lucinda Chambers from the recent BBC documentary on the magazine). The empire is having to fast come to grips with a world of declining print revenue shared by all in the industry, as comprehensively covered in a recent piece by the Financial Times.

The one outlier to this trend, fortunately for them, is Viacom, which recently decided that instead of seeking refuge in the past (and in sheer scale) by re-teaming with CBS after splitting over ten years ago, it would instead streamline its operations down to six “flagship brands”. Undoubtedly the wiser move (if only based on the above cheat sheet from The Hollywood Reporter).

This article will focus on those first two issues, last weekend’s Academy Awards and last week’s Mobile World Congress event in Barcelona.

Oscars oversight

Talk about your burning platform. Last night Zeitgeist sat down to watch Deepwater Horizon, last year’s film an avoidable disaster in an event involving a lot of due diligence, seemingly little of which was executed properly.

So it was – far less catastrophically – with the 89th Academy Awards last weekend. PwC were caught out for the first time, having overseen the awards ceremony’s handing out of winning envelopes, among other things, for 83 years. In their apology, the firm explicitly made reference to the fact that a) such an incident had been foreseen b) protocols had been prepared, in case of such a rare eventuality c) these were not followed through quickly enough on the night. As with many cases of significant error, the fault appears to be with an excess of comfort.

• Firstly, PwC as a firm, it could be argued, had become too comfortable in the role of auditor. In an interview before the ceremony with one of the two partners involved, it was revealed the opportunity to be auditor for the awards had never gone out to tender. This is poor due diligence on the part of the Academy.
• Secondly, Brian Cullinan, one of the PwC partners, seemed himself to have acquired too much comfort with his role. Whether this was tweeting (hastily deleted) pictures of Emma Stone at the moment he should have been concentrating on his work (see picture above), as Variety revealed, or – as the same publication also uncovered the other day – that he wanted to have an on-stage presence, involving a skit with the host, Jimmy Kimmel.
• Thirdly, we would also add that – having worked for Deloitte in a strategy role in days gone by – PwC should never have let these two individuals stand in the limelight. Any project, however glamorous (or not), should always have only one face, that of the company as a whole, not an individual.

The eventual winner, Moonlight, was praised by The Economist (among many others) for being a wonderful film, and one that deserved to win the coveted Best Picture award. Interestingly, it noted how it had been made for “a tenth” of the budget of films that had won in the past several years. This is a worrying trend, as these prior winners were already considered to be of a small budget; minnows that did not attract the attention of the studios, who increasingly find themselves in the comic-book franchise game, rather than the Oscar race. It bodes poorly in the medium-term for the release and backing of films that try to tell human stories about real life; art that may actually have an impact on others. It is these types of films that, with current political turmoil, are needed right now.

MWC mediocrity

Innovation in mobile is becoming harder and harder to come by. If, as Forrester reported recently, smartphones are in the hands of 40% of the global population (even including those people hanging out with penguins in icy tundras and running away from lions on barren plains) then such a product is in need of something new to differentiate the market for consumers. At the annual Mobile World Congress, such things were in short supply. This week’s Economist quoted Ben Wood of CCS Insight summarising the event as a “sea of sameness”.

Indeed, ZTE (as above), had a gloriously twee “fairy garden” on display, which seemed very very similar to the one we saw at MWC in 2016. From a product point of view, Nokia (yes, Nokia) seemed to generate the most buzz for its revamped 3310, a resurrected product from a bygone mobile age. A feeling of sameness hung in the air from those reporting from the ground too; cynicism was prevailing.

Last year, Zeitgeist found that if you didn’t have Oculus at your stand (for any reason, no matter how inconsequential), you were a nobody. You also needed to be talking about 5G (no matter how vaguely). The same seemed to be the case this year, except more so. This, despite the fact that Oculus has squandered an eighteen-month lead in the market, now with a position of third in the VR marketplace by revenue. VR in general has yet to transfer to a mainstream pursuit, to the surprise of analysts. 5G, on the other hand, saw some glacial movement. While operators in Japan and South Korea had already begun investment and deployment of the networks before standardisation, the UN’s ITU body has now set those standards, laying the way for other markets to begin upgrading their networks. Their challenge is a formidable one, and to be honest they should not expect it to be anything other than a thankless task. Their main approach to this eventuality at the moment seems to be bigging the technology up beyond all recognition, which has started a backlash of sorts among the more experienced in the sector.

New realities of competitive advantage

This week’s purchase of Yahoo suggests Verizon’s strategy department thinks much the same way as myriad other organisations; “size matters”. Whether it’s about minimising risk or increasing economies of scale, such logic has steered many companies to successful tenures. However, there are new trends in the marketplace that make such aphorisms more and more contentious.

It was a couple of years ago now that Rita McGrath wrote about “the end of sustainable competitive advantage”. Prior to this, the arrival of digital was, in general, supposed to have done away with such things. But perhaps the most recognisable face of the digital revolution over the past decade has been none other than Facebook. Facebook has consistently maintained competitive advantage through a savvy use of lock-in via network effects and an aggressive proclivity to buy out any competition (see Instagram, Whatsapp). Users spend about 50 minutes per day across these platforms.

What about organisations outside of TMT? For several years now, Zeitgeist has seen qual data showing the waning power of branding. As we’ve written extensively about in previous posts, this is partly to do with information asymmetry. In the early days of advertising, it wasn’t easy for an average person to be able to know much about a product like Colgate; a brand identity was a quick way to communicate what expectations a consumer should have. Nowadays, almost entirely due to the internet and digital communication, we are able to quickly ascertain what products meet our requirements (what size tube do I need), which are bullshitting (how much whiter teeth?) and which our friends use (still ranked as the most important data point for trying a new product). Companies like Colgate sit in the Consumer Packaged Goods [CPG] category, where most of the world’s most instantly recognisable brands reside. But according to research from Boston Consulting Group, between 2011 and 2015, CPG companies lost nearly three percentage points of market share in the US. Nestle has missed its sales growth targets for the past three years.

Part of what’s hitting the CPG sector is a sustained enthusiasm for “local”. Zeitgeist first saw this trend emerging in 2011 when he worked in a strategic capacity for retailers who were increasingly looking to tailor their store design and offering to the area they were in. This is happening in media too, where local content in the Chinese market is quickly adapting to the pyrotechnics and thrills of imported Hollywood fare, and reaping the rewards. Many of China’s businesses are built on being the home-grown version of x foreign product. Uber’s recent deal with Didi Chuxing is an example of this. Moreover, if you’ve decided you’re happy to pay a premium for a product, it is increasingly unlikely you’ll choose a mass produced one. A real treat would be buying a nice cheese from Jermyn Street’s Paxton & Whitfield, not from one of the thousands of Waitrose stores in the country. Deloitte report that US consumers would pay at least 10% more for the “craft” version of a good, a greater share than would pay extra for convenience or innovation.

Of course, as mentioned earlier, digital has had a profound impact on lowering barriers to entry. From The Economist,

[New entrants] can outsource production and advertise online. Distribution is getting easier, too: a young brand may prove itself with online sales, then move into big stores. Financing mirrors the same trend: last year investors poured $3.3 billion into private CPG firms, according to CB Insights, a data firm—up by 58% from 2014 and a whopping 638% since 2011.

Digital’s impact has also been to dovetail with the trends already mentioned. Consumers’ turning away from brand messaging and interest for local is a quest for authenticity in a crowded market. Rightly or wrongly, no other tactic has proved so successful to communicate a roughshod authenticity as the viral video over the past ten years. New entrants are communicating using different channels but also in different ways, that make incumbents uncomfortable. As pointed out though in an editorial from the FT this weekend, “It is tempting to see these young companies as miracles of branding. In fact, they expose outdated industry structures and offer dramatically more value to consumers.”

Large organisations, sensing the eroding advantage, are responding in different ways. P&G is increasingly focusing on its top tier brands, selling off or consolidating around 100 others. Unilever recently bought the famous Dollar Shave Club, and VC arms are popping up at companies like General Mills (think Lucky Charms) and Deloitte, which like other firms is also thinking about how to avoid disruption.

At the start of this piece we mentioned two reasons that going big could lead to sustained advantage: minimising risk and establishing economies of scale. In our eyes, the former is more at risk than ever, as firestorms on platforms like Twitter and Periscope can eviscerate a brand more quickly than ever; VW’s vast operations have not saved it from significant reputational damage. Economies of scale are also a risky proposition, as The Economist points out “Consolidating factories has made companies more vulnerable to the swing of a particular currency, points out Nik Modi of RBC Capital Markets”.

But what about Facebook? At the start of the article we talked about its ongoing rule of the social world, but that definition seems too narrow for what the platform is trying to accomplish. Zuckerberg has talked about Facebook becoming a “utility” as part of a long-term vision over the coming decades. This is interesting given this is exactly what every mobile phone network operator in the world is trying to avoid. Reflecting on Yahoo’s demise last week, the Financial Times wrote that “the Achilles heel of each new wave of technology is that it eventually turns into a utility”. Teens don’t tend to find utilities exciting, and perhaps then it is no surprise that Pew reports declining usage and engagement with the platform from this age group. For Facebook then, commoditisation is as much a risk as disruption by a new entry.

 

Trends, threats and opportunities in the film industry

“In the 1950s… 80 per cent of the audience was lost. Studios tried many ways to win back this audience, including new technologies such as Cinerama, but none of these worked. What did work was to view the entire business as basically an intellectual properties business where they optimised on as many platforms as possible. That’s the business today.”

– Ed Epstein

Strategy is something that this blog has in the past accused the film industry of lacking, particularly when it comes to issues of development (over-leveraging risk with expensive tentpoles) and distribution (a lack of progressive thinking when it comes to day-and-date openings across platforms). This piece takes a look at how, in some areas, there are kernels of hope for the industry, as well as some specific areas that are ripe for improvement.

Given our initial contention, It was refreshing to discover this gem of an illustration (see top image) from none other than Walt Disney himself that was recently recovered from the archives, according to Harvard Business Review, showing “a central film asset that in very precise ways infuses value into and is in turn supported by an array of related entertainment assets”; all that’s missing is the strategic goal. Such forethought, of complementary assets combining to drive value, is arguably a symptom of the much-ballyhoed “synergy” and convergence the industry has undergone over the past ten to fifteen years; here was Walt writing about in 1957. The HBR article contends that it is not just synergy that is important, but in identifying those areas where you possess “unique synergy”. Disney’s current state, with Pixar, Marvel and Lucasfilm as content production houses, is an impressive pursuit of such a unique synergy, helped in no small part by having the impressive Bob Iger at the helm. The recent announcement of a Han Solo origin story, with the pair behind 21 Jump Street attached to direct, would have been to music to many a filmgoer’s ears. Unfortunately, the danger of undue risk from arranging a surfeit of tentpole releases remains, and is unlikely to be challenged while films such as Tomorrowland tank and Jurassic World soar. A brilliant piece on the evolution of the summer blockbuster, featured in the Financial Times recently, can be found here.

The film industry in China is a subject we last wrote about around a year ago. It’s a booming scene out there (last year China added as many screens as there are in all of France), which despite a quota on foreign film has proved enormously profitable to Hollywood. And while some films have had to seek opaque deals that ensure the inclusion of Chinese settings and talent in order to get the thumbs up for exhibition in China – e.g. the latest iteration of Transformers – others pay scant attention to such cultural pandering, and meet with similar success. In June, the Financial Times wrote that Furious 7 had no Chinese elements, but still managed to break “all-time box-office records since its release in China in April, taking in almost $390m”. Importantly, the figure beat the US’s taking of $348m. China is due to be the largest movie market in the world in less than three years. As we have written before, part of this is due to the cultural interest in moviegoing; people will see pretty much anything in China while the experience is still new and tantalising. While good for revenues, it does imply that content produced will be increasingly skewed – at least for a while – to lowest common denominator viewing that titillates rather than stimulates. The sheer volume of takings for such fare is ominous; of the fastest films ever to reach $1bn globally at the box office, three are from this year. China has played no small role in this development.

However, all is not as rosy as it could be. Traditional players in the industry are wary of new entrants. Domestic companies Baidu, Alibaba and Tencent, YoukuTudou and Leshi have either partnered with studios for exclusive distribution deals over online platforms – irking the exhibitors – or simply investing in developing their own studios and content production. The FT writes, “[c]ollectively, these internet firms co-produced or directly invested in 15 films in 2014, which earned more than Rmb6bn ($965m) at the box office last year – a fifth of total receipts… Industry participants worry that these internet giants may soon seek to cut them out of the equation altogether“.

How to respond to such disruption? Well, they might for a start take a step up in their customer engagement management, from developing more complex segmentation to encouraging retention, whether it be to a particular studio or a particular cinema. At a simple level, this might mean things like not revealing the twists of films in the trailer. At a more complex level, it might involve working with social networks, perhaps even some of the very ones otherwise considered as competitors, listed above, to gain Big Data insights that can better inform messaging, targeting and identification of high-value users. Earlier this year, Deloitte worked with Facebook to produce a piece of thought leadership that looked to do just that, helping telcos with what was defined as “moment-based”, dynamic segmentation, with initial work and hypothesis from Deloitte and their Mobile Consumer Survey correlated against Facebook’s data trove. Using different messages over innovative channels, for example on WeChat, would also likely prove fruitful. Luxury brands, long the laggards in digital strategy, have recently been making headway in customer engagement via such methods. Looking further ahead, they might also consider how their “unique synergy” will be positioned for future consumer trends. The Internet of Things is set to fundamentally change the way we go about our lives, including the relationship businesses have with their customers. How will it impact movie-going and people’s relationship with the cinema? For all the global talk on the impact of such devices, the film industry has yet to develop any coherent thinking on it. One bright area is the subject we mentioned at the beginning of our article; collapsing release windows. Paramount announced earlier this month they have reached an agreement with two prominent US exhibitor chains, Cineplex and AMC, to “reduce the period of time that movies play exclusively in theaters” to just 17 days for two specific films, according to The Wrap. It’s not clear what financial (or otherwise) incentives the theater chains received for such a deal.

So while the threat of disruption is ever-present – as it is for so many industries around the world right now – there are ample opportunities for studios and exhibitors to up their game, through better targeting, better communication, better distribution deals, and, just maybe, better product.

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.

Cyberattacks and espionage – Risks and Prevention

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.

This Thanksgiving, demanding shoppers

PSFK this week wrote about a subject Zeitgeist have taken great interest in over the years, that of tech layering over retail to create unique experiences. Our focus on this blog with regard to retail has often been the way that new technologies are disrupting traditional bricks-and-mortar establishments, sometimes for the better, sometimes for the worse. PSFK take data strategy back to basics, pointing out quite rightly,

“To succeed retail brands need to provide what has been called over the years ‘a value exchange’. In others words, to learn more about a customer, we must always provide them something in return. This may manifest itself as discounts and other perks, but what if the reward was simply a better brand experience in itself?”

Earlier this week, as a precursor to the US going crazy for the Black Friday shopping extravaganza (even though The New Yorker tells us everything we know about Black Friday is wrong), Deloitte released new research on the way consumers like to buy their wares. Unsurprisingly, it seems shoppers are now keen for an omnichannel experience. Some of this talk may be a bit premature, or vary by retail sector. Online groceries, for example, though seemingly prevalent, are having little impact on grocers’ bottom lines. In the UK, where the march of online shopping is advanced, grocery shopping online may account for just 5% of sales this year, according to Datamonitor analysis. Select highlights from Deloitte’s report below – which mostly reads like customers are wanting to have their cake and eat it – full report here.

• The high street remains the number one destination for shops, services and leisure, compared to online and out-of-town: 59% use the high street for top-up grocery shopping, 58% prefer the high street for banking services, and 52% for cafés.
• Consumers still want more from their high street, and 73% believe that the consumers themselves should decide what shops and services should be available.
• The omnichannel experience is in demand with 45% wanting free high street Wi-Fi and 1 in 3 wanting to use a Click & Collect service.

UPDATE (13/12/13): The Economist this week published an interesting piece on the closing of UK department store Jacksons, which refused to keep pace with changing consumer demands. Interesting lessons on how to be cognisant of customer insight while trying to remain “authentic”.

Microsoft’s ‘New Coke’ moment – On knowing when your customer is dissatisfied

Microsoft has been trying its hand at a bit of innovation of late in an attempt to raise some of its lost brand equity, and stem the larger market decline in PC sales, which has recently started accelerating. (On a side note, Deloitte have a caveat to these figures, saying the true measurement is in usage, not units).

One of the ways this innovation has come about is in the release of its Surface product, which has interested many but earned the ire of erstwhile manufacturing partners as Microsoft has pursued its own path, making the product in-house. Its new operating system, Windows 8, has struggled to gain traction with consumers. The president of Fujitsu, one of Microsoft’s partners, declared interest to be “weak” back in December last year. The most obvious step-change from previous iterations is the slate screen that greets users upon booting up. On proceeding through this, users then come to a more familiar Windows layout.

In yesterday’s Financial Times, Microsoft said it was preparing to “reverse course over key elements of its Windows 8 operating system”. Envisioneering analyst Richard Doherty was quoted as saying it is the biggest marketing fiasco since New Coke. The only difference being, Doherty comments, that Coca-Cola acknowledged their error three months in, whereas Microsoft is pushing eight months now since launch; Coca-Cola conversely paid more attention to what its customers were saying about the product. “The learning curve is definitely real”, said head of marketing and finance for the Windows business, Tami Reller.

IDC research tells a discouraging story for businesses relying on PC sales

Today’s FT featured an editorial entitled “Steve Ballmer was right to gamble on change”. Opening with a quotation by Bill Gates, saying that to “win big you sometimes have to take big risks”, the editorial cites Kodak as a primary example of a company that refused to take risk, and ended up succumbing to creative destruction at the expense of trying to protect legacy revenue streams. We’ve written before about Kodak and creative destruction. The editorial calls for a revival of a “climate of creativity” at the company, and certainly that is what Ballmer is trying to instill, very nobly and with good reason. Zeitgeist’s bone of contention is with the following, seemingly logical statement,

“…disruptive innovations are disruptive precisely because the new technology does not appeal to traditional customers. Instead, it appeals to the customers of the future.”

We would argue that Microsoft’s customer base is made up overwhelmingly of what might be considered “traditional” customers. Users who find familiarity with a long-established incumbent, who have no interest in OS alternatives like Linux, Apple, Android or Mozilla. They are not looking for a revolution. By all means change your product, but it must evolve, not look like a completely different way of computing when you switch it on. This point is confirmed nicely by a recent piece in Harvard Business Review, which details how to get customers to value your product more. The author, Heidi Grant Halvorson, describes the importance of knowing the right emotional fit for your customers’ mindset. The article elaborates,

“motivational focus — whether he tends to view his goals as ideals and opportunities to advance (what researchers call “promotion focus”), or as opportunities to stay safe and keep things running smoothly (“prevention focus”). While everyone has a mix of both to some extent, most of us tend to have a dominant focus.”

We would argue that users that prefer Microsoft Windows OS to other systems would strongly fall into the latter category. Change is perhaps inevitable, but Microsoft are choosing a precarious path with such radical changes aimed at a group little interested in such fundamental alterations to the way they interact with such an integral device.

Beyond the Linear – New ways of entertaining

The days of P.T. Barnum, and the sense of spectacle an audience received from seeing a live performance have long passed; codified, commodotised, sanitised and made instantly available. Or have they? The way we entertain ourselves nowadays has changed greatly, and keeps changing. But are our tastes evolving or revolving? Is there hope for such seeming anachronisms as the TV, the live performance and even the book?

Two years ago, Zeitgeist wrote a brief article on the nature of contemporary consumption of media. It began with the headline that 8-18 year olds in the US spend a quarter of their media time with multiple devices. Furthermore, almost a quarter of that age group use one other device most of the time while watching television. In 2013, this preference for multiple stimuli has only accelerated. 80% of UK smartphone owners (making up over half the phone-owning population) use their phones while watching the TV. Similar figures were reported in the US, and similar figures were also reported for tablet owners.  Such figures give marketers pause for thought as they begin to approach these complementary devices as ways to extend their brand from the television onto the second screen. JWT Intelligence has a great report on this.

However, it is easy to overstate the arrival of shiny, new devices, and the apparent death of television. The blame for this misconception lies partly with the media itself; journalism is less engaging when it merely reports on the maintenance of the status quo (i.e. ‘people are still watching TV’). Far more interesting to hear about what new objects are showing a bit of ankle at CES, and that us mere mortals might one day dare to dream of owning ourselves, at which point all other material objects become unnecessary. All the more so when the journalistic integrity is compromised by corporate meddling, as was the case with CNET’s reporting this year. It was refreshing then to read TechCrunch’s recent article with the headline, ‘TV still King in Media Consumption’. The article, quoting a recent report by Nielsen, was particularly interesting in noting the prevalence of TV when it referenced that almost half the homes with TVs in the US owned four or more sets. Startling. More startling, the average household spends six days a month watching television, far ahead of other media consumption (using the Internet on a computer, at a little over 28 hours a month, came a distant second). The FT writes,

Over the past decade, despite the proliferation of video content on the web, TV consumption in the UK has remained steady with the average person watching about four hours a day. Almost 80 per cent of this viewing is on the top five channels, virtually unchanged from 10 years ago.

Creative destruction is something Zeitgeist takes an active interest in and has written about several times before on this blog. It takes hold in some industries (and households in this case) more quickly than in others. The same Nielsen study found that over 55% of US homes still had working VCRs. Moreover, despite much editorial to the contrary over recent years, the PC has not yet been wiped out by creative destruction and remains a staple for several reasons in both Western and emerging economies. According to Deloitte’s recent publication, “Technology, Media and Telecoms Predictions 2013”, although the attraction of tablets – and now ‘phablets’ – mean powerful computing and a cheaper cost, allowing the potential for leapfrogging of PCs in emerging markets, qualitative research shows a small but significant demand remains for PC ownership. Moreover, many businesses in the West, currently struggling with the implications of BYO devices, are not about to jettison the PC either. Switching costs, Zeitgeist suspects, are at play here, as with those stubborn VCR owners. Click here for more of our thoughts on switching costs.

VCR owners though will one day cease to be in the majority. New avenues of distribution and consumption are opening up, though not as quickly as first thought in some cases, particularly in that of live, streaming TV, which has faced many regulatory hurdles. Variety elaborates, “Loudly trumpeted efforts have fallen short, victims of poor design decisions, overpriced services and/or confusion about the target audience”. Yet alternatives are there. One of the more interesting streaming TV options in the US currently is that of Dyle, with 90 stations in 35 markets. It is run by a partnership that includes Fox, NBC, Hearst Television and others. The really interesting thing about the service is that it neutralises the problem many smartphone users will have of returning data caps by streaming off a separate network spectrum, which doesn’t impact on data allowances. Nice thinking.

Is the increasing popularity of streaming, and the content viewers prefer to watch over such a channel, already beginning to effect the types of films being produced?

Though new technology has not created new tastes in content or viewing habits, it has undeniably acted as a catalyst to desires already present. Zeitgeist remembers hearing a LoveFilm representative speak last year at AdTech in London about the increasing share streaming films took in the marketplace. Nothing too extraordinary in that statement, especially from a purveyor of streaming content. The rub came when he went on to elaborate that people tend to stream films when they are in the mood for instant gratification, in the form usually of an action film or romantic comedy. The increasing popularity of streaming, and therefore the increasing popularity of these particular genres, means the way the medium is distributed may very likely have a very significant influence on the type of content in the future that is commissioned. It was no surprise then to see, on a recent cinema trip, trailers for three films that neatly fit into that category for instant gratification (see above). Zeitgeist wrote at length on the need for film studios to address arbitrary platform release windows at the end of last year. Our article was mentioned in the lead editorial of entertainment trade paper Variety. Part of our argument is beginning to be addressed already. The FT recently published news that studios had managed to stem the six year decline in home viewing figures for films last year. The article elaborates that this is in part due to the strength of digital downloads, with films sometimes being available for digital distribution before they were available on DVD. Taken 2, a superb candidate for streaming given the previous statement by LoveFilm, was released Christmas Day in the US on digital platforms, “weeks before its release on DVD”. Such thinking goes hand-in-hand with the new UltraViolet format, to which several studios are subscribing. This allows those purchasing a movie on DVD – such as the recent Dark Knight Rises – to watch it with ease on multiple platforms. Mashable carried an article last week stating that several electronics firms have now also signed up to the UltraViolet partnership. Consumers will receive ten free movies when they sign up to the service, as incentive.

The example of Netflix is an interesting one in trying to understand the balance between consumers’ desire for multiple media and instantly-accessible content, and content owners desires to drive maximum revenue from their product. The company has been making a bigger push into providing TV shows of late, and is being rewarded for it, particularly with regard to older shows. A cultural trend many a pundit has put their finger on since the credit crunch began to bite back in 2008, nostalgia has manifested itself in consumers’ desire for old shows, including Midsomer Murders and Rising Damp, reports the FT. This long tail effect is turning a tidy profit for Netflix, as well as the original broadcaster, ITV. As a complement to this, the company is also fostering new partnerships, first with Disney in December, giving it “exclusive rights from 2016 to movies from Disney, Walt Disney Animation Studios, Pixar Animation Studios, Marvel Studios, and Disneynature”. Then, at the beginning of this year, it inked a deal with Warner Brothers, to show new and old TV shows from the studio. It should be noted however, as with all these new deals and technological developments and marches into previously uncharted territory, regulatory wranglings have ensued, in this case with sister company Time Warner Cable. The problem in this situation is not perhaps so much that Netflix is trying hard to push its availability into lateral markets, but that it is not trying hard enough to create a cohesive platform that is available across all complementary platforms and devices.

Research from Accenture illustrates a declining demand for single-use devices

One thing which Netflix will want desperately to escape being accused of – and it has done so with much success thus far – is being a niche provider of content. Sadly, the days of the point-and-shoot camera, the dedicated games console, etc., are numbered, according to a recent report by Accenture. It is evidently with such a strategic outlook in mind that Disney have recently announced their Infinity gaming platform. Variety describes it as an “online treasure chest”, featuring a plethora of Disney characters from over the years that can be interacted with over multiple platforms, whether on mobile or on videogame consoles. Importantly, the concept is designed to be an iterative, one that will grow and add characters over time, presumably as new IP is created. It certainly pays heed to the second screen phenomenon by recognising the need for multiple device access. It also plays off the trend started by the game ‘Skylanders’, which involves both physical toys and digital interaction. The same principle will apply with new toys developed for Infinity, which can then be used to create unique stories and drive narratives. The idea of having disparate characters from different Disney franchises is potentially a frightening one for those in charge of the individual brand essences of said titles, but the potential for success can be found by looking no further than the Toy Story films, which feature an assortment of different genre toys that mix well in situ.

We’ve discussed the changing models of consumption for most of the article, but it is worth noting briefly how our cultural tastes are also changing, brought on by technology (again), but also globalisation. Pundits are often quick to point out nowadays that there is a substantial demand for the live experience. Yet if we look at music, one of the most profound things to experience live, recent figures showed attendance to concerts had dipped. At the end of last year, in an insightful roundtable, The New York Times interviewed several talking heads, asking them to round up their thoughts on 2012 in the music industry. One of the more interesting points repeatedly made was that of the abundant opportunity that the Internet now provides for musical talent. Moreover, the Internet at large has become just as viable – if not a more viable – starting place for an emerging artist than signing with a record label:

“Now this year something’s been proven: Pop performers can become truly famous by building their careers themselves online, maybe more efficiently and faster than a major company can help them to do.

… you look at the first-week sales numbers of someone like Kendrick Lamar, who had an independent album that was digital only and is now on [the major-label] Interscope, but basically has no major radio hits, even if he is well-liked by mainstream hip-hop. He comes out and sells about 240,000 in his first week. A couple weeks later Rihanna comes out — not her first album and at the height of her pop fame — and sells a few thousand less than Kendrick did.”

The other trend, globalisation, has meant that voices increasingly other than those that are Western, are more easily heard. The irrepressible Psy had the honour of being the performer in the first YouTube video to cross one billion views. Conversely, in his home country of South Korea, ‘Gangnam Style’ has accrued a pitiful “$50,000 from CD sales and $61,000 from 3.6m downloads”. The point remains, however, that the fallacy of the West as the cradle of pop culture is being exposed. Christopher Caldwell illustrates this masterfully, writing for the FT in December.

Zeitgeist has written before about the upheaval new trends and preferences for media consumption – impacted significantly by the arrival of the Internet – have wrought on financial growth in the media and entertainment sector. Digital, in the form of Napster and its myrmidons in particular, has a lot to answer for. There was some relief then that at the beginning of the year when UK digital sales topped GBP1 billion for the first time (though still failing to off-set the physical media decline). Moreover, Boston Consulting Group predicted last month – in an excellent report entitled Changing Engines in Midflight: The 2012 TMT Value Creators Report – that by 2015 the digital services ecosystem will reach $1 trillion by 2015 (see above).

It is interesting to see where the ownership of content starts and ends across layers, and how content owners are trying to monetise these platforms and grab as much market share as possible from their competitors. Amazon recently began offering digital downloads of any CD you have purchased from them since 1998. It would be a great surprise to see if they do the same for books anytime soon. Fortunately, reading still constitutes an avenue of entertainment, for those of all ages. A recent piece by The New York Times reported that digital reading was on the rise for children. The article notes the numbers give some room for discrepancy, but states “about one-fourth of the boys who had read an e-book said they were reading more books for fun”, which is a desperately important emotional connection to maintain. While e-reading is a commendable past-time, is there any merit in pushing further, and advocating for interacting with a medium that does not involve a digital display? Such a turn of events, perhaps aided by the trend for nostalgia mentioned earlier, is presenting itself in the luxury hotel market, with physical libraries returning to shelves. It has been termed ‘rematerialism’.

So what does this all mean for consumer entertainment? There are evidently lots of new technologies being released, from smart TVs to new gaming devices, that will attempt to capture eyeballs. These devices, far from having to think of their natural competitors, still have the common television – and, as we have seen, even VCRs – to compete with and overthrow first. TV commands such a huge slice of viewing time, but it is under threat from distracted viewers who are now very comfortable – and more importantly socially accepting – of using a tablet, laptop or phone during a show. There are also regulatory implications t consider, which will most likely be shaped, ex-post, along the way. Taking consumers on a journey across multiple platforms and media in a seamless way will be key. Disney’s Infinity platform, when it is released, will hopefully serve as an excellent example to others of how to combine physical and digital entertainment.

The state of retail

The love of the bargain is what drives them… Click for CNBC’s coverage

It’s a common fallacy to think of a time before a change in status quo as somehow being magically problem-free. A Panglossian world where all was well and nothing needed to change, and wasn’t it a shame that it had to. Similarly, we cannot blithely consign the retail industry of the past to some glorious era when everything was perfect; far from it. The industry has been under continual evolution, with no absence of controversy on the way. It was therefore a timely reminder, as well as being a fascinating article in its own right, when the New York Times provided readers recently with a potted history and a gaze into the future of Manhattan department store stalwart, Barneys. Not only is their past one in which the original proprietor sought to undercut his own suit suppliers, creating a bootlegging economy by literally ripping out their labels and replacing them with his own, but it was also one where department stores served a very different purpose to what they do today. They had less direct competition, not least unforeseen competition in the form of shops without a physical presence. Moreover, today they are run in an extremely different way, with an arguably much healthier emphasis on revenue (though some might say this comes at the expense of a feeling of luxury, in a lobby now brimming with handbags and little breathing room). The problems and opportunities for Barneys could serve as an analogy for the industry of which it is a part.

Despite brief reprieves such as Black Friday (click on headline image for CNBC’s coverage), as well as the expected post-Christmas shopping frenzy, can one of the main problems affecting retail at the moment simply be that it is undergoing an industry-wide bout of creative destruction? Zeitgeist has written about the nature of creative destruction before, and whether or not that is to blame for retail’s woes, the sector is certainly in the doldrums. In the UK, retailers are expecting a “challenging” year ahead. Recent research from Deloitte shows 194 retailers fell into administration in 2012, compared with 183 in 2011 and 165 in 2010. So, unlike the general economy, which broadly can be said to be enjoying a sclerotic recovery of sorts, the state of retail is one of continuing decline. How did this happen, and what steps can be taken to address this?

Zeitgeist would argue that bricks and mortar stores are suffering in essence due to a greater amount of competition. By which, we do not just mean more retailers, on different platforms. Whether it be from other activities (e.g. gaming, whether MMOs like World of Warcraft or simpler social gaming like Angry Birds), or other avenues of shopping (i.e. e-commerce, which Morgan Stanley recently predicted would be a $1 trillion dollar market by 2016), there is less time to shop and more ways to do it. The idea of going to shop in a mall now – once a staple of American past-time – is a much rarer thing today. It would be naive to ignore global pressures from other suppliers and brands around the world as putting a competitive strain on domestic retailers too. Critically, and mostly due to social media, there are now so many more ways and places to reach a consumer that it is difficult for the actual sell to reach the consumer’s ears. This is in part because companies have had to extend their brand activity to such peripheries that the lifestyle angle (e.g. Nike Plus) supercedes the call-to-action, i.e. the ‘BUY ME’. The above video from McKinsey nicely illustrates all the ways that CMOs have to think about winning consumers over, which now extend far beyond the store.

If we look at the in-store experience for a moment without considering externalities, there is certainly opportunity that exists for the innovative retailer. Near the end of last year, the Financial Times published a very interesting case study on polo supplier La Martina. The company’s origins are in making quality polo equipment, from mallets to helmets and everything in between, for professional players. As they expanded – a couple of years ago becoming the principle sponsor of that melange of chic and chav, the Cartier tournament at Guards Polo Club – there came a point where the company had to decide whether it was going to be a mass-fashion brand, or remain something more select and exclusive. As the article in the FT quite rightly points out, “Moving further towards the fashion mainstream risked diluting the brand and exposing it to volatile consumer tastes.” The decision was made to seek what was known as ‘quality volume’. The company has ensured the number of distributors remains low. Zeitgeist would venture to say this doesn’t stop the clothing design itself straying from its somewhat more refined roots, with large logos and status-seeking colours and insignia. Financially though, sales are “growing more than 20% a year in Europe and Latin America”, which is perhaps what counts most currently.

Louis Vuitton’s ‘L’ecriture est un voyage‘ is a good example of experimental thinking and missed opportunities

In the higher world of luxury retail, Louis Vuitton is often at the forefront (not least because of its sustained and engaging digital work). While we’re focusing purely on retail environments though, it was interesting to note that the company recently set up shop (literally) on the left bank of Paris; a pop-up literary salon, to be precise. Such strokes of inspiration and innovation are not uncommon at Vuitton. They help show the brand in a new light, and, crucially, help leverage its provenance and differentiate it from its competition. Sadly, when Zeitgeist went to visit, there was a distinct feeling of disappointment that much more could have been done with the space, which, while nicely curated (see above), did little to sell the brand, particularly as literally nothing was for sale. The stand-out piece, an illustrated edition of Kerouac’s On the Road, by Ed Ruscha, Zeitgeist had seen around two years ago when it was on show at the Gagosian in London. Not every new idea works, but it is important that Louis Vuitton is always there at the forefront, trying and mostly succeeding.

So what ways are there that retailers should be innovating, perhaps beyond the store? One of the more infuriating things Zeitgeist hears constructed as a polemic is that of retail versus the smartphone. This is a very literal allusion, which NBC news were guilty of toward the end of last year. “Retail execs say they’re winning the battle versus smartphones”, the headline blared. What a more nuanced analysis of the situation would realise is that it is less a case of one versus the other, than one helping the other. The store and the phone are both trying to achieve the same things, namely, help the consumer and drive revenue for the company. Any retail strategy should avoid at all costs seeing these two as warring platforms, if only because it is mobile inevitably that will win. With much more sound thinking, eConsultancy recently published an article on the merits of providing in-store WiFi. At first this seems a risky proposition, especially if we are to follow NBC’s knee-jerk way of thinking, i.e. that mobile poses a distinct threat to a retailer’s revenue. The act of browsing in-store, then purchasing a product on a phone is known as showrooming, and, no doubt aided by the catchy name, its supposed threat has quickly made many a store manager nervous. However, as the eConsultancy article readily concedes, this trend is unavoidable, and it can either be ignored or embraced. Deloitte estimated in November that smartphones and tablets will yield almost $1bn in M-commerce revenues over the Christmas period in the UK, and influence in-store sales with a considerably larger value. That same month in the US, Bain & Co. estimated that “digital will influence more than 50% of all holiday retail sales, or about $400 billion”. Those retailers who are going to succeed are the ones who will embrace mobile, digital and their opportunities. eConsultancy offer,

“For example, they could prompt customers to visit web pages with reviews of the products they are considering in store. This could be a powerful driver of sales… WiFi in store also provides a way to capture customer details and target them with offers. In fact, many customers would be willing to receive some offers in return for the convenience of accessing a decent wi-fi network. Tesco recently introduced this in its larger stores… 74% of respondents would be happy for a retailer to send a text or email with promotions while they’re using in-store WiFi.”

These kind of features all speak more broadly to improving and simplifying the in-store experience. They also illustrate a trend in the blending between the virtual and physical retail spaces. Major retailers, not just in luxury, are leading the way in this. Walmart hopes to generate $9bn in digital sales by the end of its next fiscal year. CEO Mike Duke told Fast Company, “The way our customers shop in an increasingly interconnected world is changing”. This interconnectedness is not new, but it is accelerating, and the mainstream arrival of 4G will only help spur it on further. The company is soon to launch a food subscription service, pairing registrants with gourmet, organic, ethnic foods, spear-headed by @WalmartLabs, which is also launching a Facebook gifting service. At the same time, it must be said the company is hedging its bets, continuing with the questionable strategy of building more ‘Supercenters’, the first of which, at the time a revolutionary concept, they opened in 1988.

One interesting development has been the arrival of stores previously restricted to being online into the high street, something which Zeitgeist noted last year. This trend has continued, with eBay recently opening a pop-up store in London’s Covent Garden. These examples are little more than gimmicks though, serving only to remind consumers of the brands’ online presence. Amazon are considering a much bolder move, that of creating permanent physical retail locations, if, as CEO Jeff Bezos says, they can come up with a “truly differentiated idea”. That idea and plan would be anathema to those at Walmart, Target et al., who see Amazon as enough of a competitor as it is, especially with their recent purchase of diapers.com and zappos.com. It serves to illustrate why Walmart’s digital strategies are being taken so seriously internally and invested in so heavily. Amazon though has its own reasons for concern. Earlier in the article we referenced the influence of global pressures on retailers. Amazon is by no means immune to this. Chinese online retailer Tmall will overtake Amazon in sales to become the world’s largest internet retailer by 2016, when Tmall’s sales are projected to hit $100 billion that year, compared to $94 billion for Amazon. The linked article illustrates a divide in the purpose of retail platforms. While Amazon is easy-to-use, engaging and aesthetically pleasing, a Chinese alternative like Taobao is much more bare-bones. As the person interviewed for the article says, “It’s more about pricing – it’s much cheaper. It’s not about how great the experience is. Amazon has a much better experience I guess – but the prices are better on Taobao.”

So how can we make for a more flexible shopping experience? One which perhaps recognises the need in some users to be demanding a sumptuous retail experience, and in others the need for a quick, frugal bargain? Some permutations are beginning to be analysed, and offered. Some of these permutations are being met with caution by media and shoppers. This month, the Wall Street Journal reported that retailer Staples has developed a complex pricing strategy online. Specifically, the WSJ found, it raises prices more than 86% of the time when it finds the online shopper has a physical Staples store nearby. Similar such permutations in other areas are now eminently possible, thanks in no small part to the rise of so-called Big Data. Though the Staples price fluctuations were treated with controversy at the WSJ, they do point to a more realistic supply-and-demand infrastructure, which could really fall under the umbrella of consumer ‘fairness’, that mythical goal for which retailers strive. Furthemore, being able to access CRM data and attune communications programmes to people in specific geographical areas might enable better and more efficient targeting. Digital also allows for a far more immersive experience on the consumer side. ASOS illustrate this particularly well with their click-to-buy videos.

As the Boston Consulting Group point out in a recent report, with the understated title ‘Digital’s Disruption of Consumer Goods and Retail’,  “the first few waves of the digital revolution have upended the retail industry. The coming changes promise even more turmoil”. This turmoil also presents problems and opportunities for the marketing of retail services, which must be subject to just as much change. If we look at the print industry,  also comparatively shaken by digital disruption, it is interesting to note the way in which the very nature of it has had to change, as well as the way its benefits are communicated. It is essential that retailers not see the havoc being waged on their businesses as an opportunity to ‘stick to what they do best’ and bury their head in the sand. This is the time for them to drive innovation, yes at the risk of an unambitious quarterly statement, and embrace digital and specifically M-commerce. What makes this easy for those companies that have so far resisted the call is that there is ample evidence of retailers big and small, value-oriented to luxury-minded, who have already embraced these new ideas and platforms. Their successes and failures serve as great templates for future executions. And who knows, the state of retail might not be such a bad one to live in after all. Until the next revolution…