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Posts Tagged ‘Economist’

When does Microsoft stop being Microsoft?

An astounding twenty years ago, my father bought Bill Gates’ book, “The Road Ahead”. A business book barely interested me at that age, but it came with a CD-ROM (contents above) that showed an exciting future, much of which will sound familiar today. It seemed only natural that Gates’ company, Microsoft, would play an integral part in this future. Who would have guessed that Microsoft would fail to be the leader of so many of today’s dominant technologies? In smartphones, they are reduced to competing for the “middle ground” with Sony, as Apple and Google innovate. In television, again, Apple and Google, as well as the likes of Amazon, Netflix. In gaming, it has lost the console crown to Sony’s Playstation 4. And its famous OS, Windows, went through significant problems in its most recent iteration when myriad complaints about the absence of a Start button and a generally perplexing UX caused a volte-face that served as an embarrassing period for the company.

Since Satya Nadella took over as chief executive last year, there has been much talk of change in the way Microsoft does business, and indeed, in which businesses it will continue to operate in. But how much should Microsoft change before it loses touch with its roots? When does Microsoft stop being Microsoft?

In an article published in The Economist last month, the newspaper detailed how any business project that seemed to operate in an adjacent or transformative area for Microsoft – and thus by implication weakened the focus on Windows – was given short shrift during the days of Gates, who was known to utter in disbelief: “WHAT are you on? The ‘fuck Windows’ strategy?”. The Economist goes on to write that many of the companies best innovations were killed at the hands of this “strategy tax”. This phrase reportedly makes Mr Nadella shudder now, and he encourages innovations in areas that interest people. This has had noticeable effects; Microsoft wares are no longer confined to a walled garden. Office programs are available on smartphones, and the company is working more closely with Linux, an open-source platform that erstwhile chief exec Steve Ballmer once referred to as a “cancer”.

20150404_WBC737_0This previous reluctance to embrace open-source drove initial (and hugely profitable) success. But today, as computing moves to the cloud, The Economist writes, “this model is breaking down. Software is becoming a service delivered over the internet and mostly based on open standards”. Although it innovated in the right areas – specifically cloud computing and smartphones – its reluctance to allow people to run anything on these platforms but Windows OS not only narrowed their offering but allowed for competitors, the likes of Amazon and Apple, respectively, to move in. It is thus interesting to note that Nadella’s motto for Microsoft is “mobile first, cloud first”.

It is interesting to note that Mr Nadella rose to the top via Microsoft’s cloud business (Azur), rebuilding revenues by “letting customers use their own choice of software”. Office is available as a freemium model, and he has reached across the aisle in making it available on Android and iOS devices. The company allows Office 365 users to save their files “on the servers of Box, an enterprise-software firm. ‘They used to treat us like arch-enemies’, says Aaron Levie, Box’s boss.” Importantly, the ways of working have changed there; agile work practices are now in place, with products being tested and released iteratively under the umbrella “Garage”.

These changes are evidently not merely cosmetic. It does seem to be part of a renewed focus (that may even involve the spinning off of Xbox). It is key changes like this that IBM – a behemoth once surpassed by Microsoft, which is in its own throes of evolution as it looks to consulting and a partnership with Apple – is also engaging in. There are challenges though. On the subject of clawing back the hearts and minds of mobile developers, Microsoft co-founder Paul Allen told The New York Times recently, “It’s very challenging to carve back market share”. It speaks to a larger problem around talent. Marco Iansiti of Harvard Business School commented recently “Microsoft has lost a lot of great people”. Furthermore, its cloud and mobile focus could be dangerous; while its cloud services revenue is growing, it will not be enough to be make up for losses elsewhere. In mobile, the purchase of Nokia is increasingly seen as a misguided decision. Such challenges are compounded by the fact that, as Allen says, Microsoft has “more competitors than any major C.E.O. in the world” has to deal with. Faced with such fundamental change to the business on its own Road Ahead, it should be of small comfort that Boston Consulting Group published a report in April entitled “There’s no such thing as corporate DNA”, with the subheading “Why You Have to Be Prepared to Change Everything to Endure“.

Big Data needs a Big Strategy

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We’ve written several times over the years about the deployment of Big Data. One of the key challenges with such tools is the seductive risk of treating the data as a catch-all answer to a question not asked. Zeitgeist in the past worked with a large client in the public sector that understood this pitfall and studiously avoided it by knowing beforehand what Big Data meant to them, and how it could be used to improve its strategy and operations.

Without such forethought, applications of Big Data can be ineffectual, if not outright harmful, as the president of eBay Marketplaces said last year in an interview with McKinsey. Governments around the world – particularly in the West – have been using Big Data for some time now to help identify extremists. The jury is still out for some as to how harmful government digital surveillance can be. The deliberate weakening of virtual systems has its root in the fact that the US government originally classified once-arcane cryptography as a munition, which when licensed abroad was watered down. “The idea of deliberately weakening cryptography in the name of national security has not gone away”, writes The Economist. An article published in The New Yorker earlier this year investigated the NSA’s uses of Big Data – specifically mass surveillance of individuals in the US and beyond over cellphone metadata, social media, etc. – and found it wanting. This appears to be partly because there is no pre-determined strategy for what they want the data to do, other than to figuratively chuck it onto the pile with the rest of the data they have, which at some point might be used. The efficacy of such a practice, according to the article, has been minimal. In all of its surveillance, the article claims there was but a single case “where the NSA’s phone-records program was decisive”. It is perhaps telling that most of the perpetrators of terrorist attacks that have occurred on Western soil since 9/11 have been known to the intelligence community. In other words, the data needed was presented, but there was no strategic oversight for how it should be deployed. It is perhaps an inevitable consequence of too little direction and too much volume. The New Yorker elaborates, below:

“Patrick Skinner, a former C.I.A. case officer who works with the Soufan Group, a security company, told me… ‘We knew about these networks,’ he said, speaking of the Charlie Hebdo attacks. Mass surveillance, he continued, ‘gives a false sense of security. It sounds great when you say you’re monitoring every phone call in the United States. You can put that in a PowerPoint. But, actually, you have no idea what’s going on.’

By flooding the system with false positives, big-data approaches to counterterrorism might actually make it harder to identify real terrorists before they act. Two years before the Boston Marathon bombing, Tamerlan Tsarnaev, the older of the two brothers alleged to have committed the attack, was assessed by the city’s Joint Terrorism Task Force. They determined that he was not a threat. This was one of about a thousand assessments that the Boston J.T.T.F. conducted that year, a number that had nearly doubled in the previous two years, according to the Boston F.B.I. As of 2013, the Justice Department has trained nearly three hundred thousand law-enforcement officers in how to file ‘suspicious-activity reports.’ In 2010, a central database held about three thousand of these reports; by 2012 it had grown to almost twenty-eight thousand. ‘The bigger haystack makes it harder to find the needle,’ Sensenbrenner told me. Thomas Drake, a former N.S.A. executive and whistle-blower who has become one of the agency’s most vocal critics, told me, ‘If you target everything, there’s no target.’

This last quotation applies to strategy in general. Without anything specific to focus on as a strategic achievement or direction, one shouldn’t expect any improvement in that area.

Too much content, too many channels, too little time?

TransparentPremiere_Marquee We all seem to have less time to ourselves these days. But there seems to be more to watch – on more platforms – than ever before. What trends have led to this, and what’s the result? Much editorial ink has been spilled over the years about how our lives seem to be getting busier, with less free time to ourselves. This is somewhat of a painful irony given that many of our more intellectual ancestors thought our evolution as a species would quickly lead to a civilisation mostly consumed by thoughts of how to fill the days of leisure. In last week’s New Yorker, Harvard professor Thales Teixeira noted there are three major “fungible” resources we have as people – money, time and attention. The third, according to Teixeira, is the “least explored”. Interestingly, Teixeira calculated the inherent price of attention and how it fluctuates, by correlating it with rising ad rates for the Super Bowl. Last year, the price of attention jumped more than 20%. The article elaborates,

“The jump had obvious implications: attention—at least, the kind worth selling—is becoming increasingly scarce, as people spend their free time distracted by a growing array of devices. And, just as the increasing scarcity of oil has led to more exotic methods of recovery, the scarcity of attention, combined with a growing economy built around its exchange, has prompted R. & D. in the [retaining of attention].”

It’s such thinking that has persuaded executives to invest in increasingly multi-platform, creative advertising during the Super Bowl, and to media production companies taking their wares to the likes of YouTube and Netflix. But it’s all circular , as demonstrated last week when Amazon announced it would be producing films for cinema release. The plurality of such content over different channels carries important connotations for pricing strategies. At its most fundamental, what is a product worth when it is intangible and potentially only available in digital form? It chimes with an article written earlier this month in The Economist on the customer benefits of e-commerce. Though most knee-jerk reactions would assume price is the biggest benefit to customers, recent research illustrates this is not always the case. Researchers at MIT showed on average people paid an extra 50% for books online versus in-store. This isn’t because that latest David Baldacci is sold for more on Amazon, but rather because of the long tail. Which means more products are able to find the right owner, for a price, whereas in store comparatively they go unsold. More channels have meant more availability for content, which should benefit consumers in that more content destined to be a hit now finds a home, where once it might have been lost if turned down by the major TV or radio network stations. The Economist elaborates,

“Seasoned publishers have only a vague idea what book, film or song will be a hit. A major record label can sign only a fraction of the artists available, knowing full well it will unwittingly reject a future superstar. Thanks to cheap digital recording technology, file sharing, YouTube, streaming music and social media, however, barriers to entry have been dismantled. Artists can now record and distribute a song without signing to a major label. Independent labels have proliferated, and they are taking on the artists passed over by major labels. Hit songs are still a lottery, but the public gets three times as many lottery tickets.”

So while we may have less time to consume it, more content over more channels will allow for greater chances for breakout hits, particularly with avid niche audiences. Amazon Prime video content was until recently confined to a niche audience, and the show Transparent dealt with niche subject matter. But the show has broken out into the zeitgeist and won two awards at the recent Golden Globes ceremony. (Full disclosure, we know a producer on the show and were lucky enough to visit the set on the Paramount lot in Los Angeles last summer). It is likely such a great show – recently made available free for 24 hours as a way to upsell customers to Prime – would not have found a home on traditional TV networks, and thus in people’s homes, were it not for this plurality.

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

A MATTER OF LIFE AND DEATH

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

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

Star Wars – And the blockbuster dilemma

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

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

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

Tech wars – Hacking, piracy and monopolies

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

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

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

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

Talent wars – Cui bono?

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

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

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

The failure of enterprise to prepare for cyberattacks

China-Cyber-Spying

Late last month, Zeitgeist went with friends to his local theatre to see “Teh [sic] Internet is a Serious Business”. The play, a story of the founding of the hacktivist group Anonymous, was the most well-publicised dawn of cyberattacks on businesses and governments. The organisation, at its best, set it sights on radical groups that promoted marginalisation of others, whether that was the Church of Scientology in the US or those trying to dampen the Arab Spring in Tunisia. This collective, run by people, some of whom were still in school, showed the world how vulnerable institutions were to being targeted online. We wrote about cybersecurity as recently as this summer, summarising the key points in a recent report from The Economist on what was needed to mitigate against future attacks and how to reduce the damage such attacks inflict. The issue is not going away (and in fact is likely to become worse before it gets better).

It was back in January that management consultancy McKinsey produced a report, ‘Risk and responsibility in a hyperconnected world: Implications for enterprises’, where they estimated the total aggregate impact of cyberattacks at $3 trillion. There is much to be done to avert such losses, but the current picture is far from rosy. Most tech executives gave their institutions “low scores in making the required changes”, the report states; nearly 80% of them said they cannot keep up with attackers’ – be they nation-states or individuals – increasing sophistication. Moreover, though more money is being directed at this area, “larger expenditures have not translated into an increased maturity” yet. And while the attacks themselves carry potentially devastating economic impact on a company, their prevention comes at a price too for the business, beyond the financial. McKinsey reports that security concerns are delaying mobile functionality in enterprises by an average of six months. If attacks continue, the consultancy posits this could result in “a world where a ‘cyberbacklash’ decelerates digitization [sic]”. Revelations about pervasive cyberspying by Western governments on their own citizens could well be a catalyst to this. Seven points are made in the report for enterprises to manage disruptions better:

  1. Prioritise the greatest business risks to defend and invest in.
  2. Provide a differentiated approach to defence of assets, based on their importance.
  3. Move from “simply bolting on security to training their entire staff to incorporate it from day one into technology projects”.
  4. Be proactive; develop capabilities “to aggregate relevant information” to attune defence systems
  5. Test. Test. Test again.
  6. Enlist CxOs to help them understand the value in protection.
  7. Integrate risk of attack with other corporate risk analysis

Given the amount of business and social issues that involve digital processes – “IP, regulatory compliance, privacy, customer experience, product development, business continuity, legal jurisdiction” – there is a huge amount of disagreement about how much state involvement there should be in the degree to which enterprises must take steps to protect themselves. This is an important point for discussion though, and we touched on it when we wrote about cyberattacks previously.

But that report was way back in January, things must have solved themselves since then, right? Last week, PwC reported that corporate cyber security budgets are being slashed, even while cyberattacks are becoming far more frequent. The FT reported that global security budgets fell 4% YoY in 2014, while the number of reported security incidents increased 48%. Bear in mind these are only reported incidents. This is potentially no bad thing, if we’re to go by McKinsey’s diagnosis of too much money being thrown at the problem in the first place. At the same time, it’s not exactly comforting.

Only a few days after PwC’s figures were published, JP Morgan revealed that personal data for 76 million households – about two-thirds of total US households – had been “compromised” by a cyberattack that had happened earlier in the year. Information stolen included names, phone numbers and email addresses of customers. It was also revealed that other financial institutions were probed too. Worryingly, the WSJ reports that investigators disagree on what exactly the hackers did. It was also unclear who was to blame; nation state or individual. Such disagreements over the ramifications of the attack, the identity of the attackers as well as the delayed revelation of the attack itself, illustrate just how necessary transparency is, if such attacks are to be better protected against and managed in the future.

For those in London at the end of the month, The Economist is hosting an event for those who apply, on October 21, examining “how businesses can and should respond to a data breach, whether it stem from a malicious insider, an external threat or simple carelessness”. Hope to see you there.

Netflix à la française – Musings on an empire

September 14, 2014 1 comment

Painting : Napoleon at Fontainbleau

A recent essay for Foreign Affairs, “The State of the State”, criticises Western governments for failing to innovate. The authors make an unfavourable comparison with China, which, though still autocratic in nature, has at least looked abroad for ways to make the state work better (if only in a necessarily limited scope). One doesn’t need to look much farther than France to see what happens when the state fails to innovate. President Hollande has done his very best to inculcate a backward ideology of indolence among its workers, but the negative effects of over-regulation have been present in France for some time. One major step that is in drastic need of undertaking is the simplification of France’s opaque labour laws, the code for which runs to 3,492 pages, according to a recent article in The Economist. A stark and laughable example of the limits of such a code is elaborated on below,

“[The code] impose[s] rules when a firm grows beyond a certain limit: at 50 employees, for example, it must create a works council and a separate health committee, with wide-ranging consultative rights. So France has over twice as many firms with 49 staff as with 50.”

France of course also has a strong sense of state oversight and sponsorship when it comes to the media industry. L’exception culturelle has long dominated discourse about what content is appropriate and designated to be high art. Such safeguarding of domestic product has been a thorn in the side of late of the EU / US trade partnership, threatening to derail negotiations. Some have argued that such promotion of homemade productions serves not to diminish foreign imports – a love of Americana has not subsided in France – but rather only to preserve a niche. Regardless, argues a recent editorial in one of France’s national newspapers, it has left the country’s media sector susceptible to disruption.

Today’s Le Monde newspaper features a front page editorial on the arrival Monday to the country of Netflix. The company announced its plans for European expansion at the beginning of the year. It won’t have everything its own way, though. Netflix will have to adapt to a very different market environment. The Subscription Video On Demand (SVOD) market is well-established, and it will see much competition from incumbents (last year annual revenues for companies based in France providing such services exceeded EUR10m). These incumbents charge little or nothing for their services, relative to the $70-80 a month Americans pay to a cable company to watch television, according to The Economist, which states “Netflix struggled in Brazil, for example, against competition from local broadcasters’ big-budget soaps”. Moreover, current government policy dictates a 36-month long window from cinema release to SVOD. We’ve argued against the arbitrariness of such windows before, for a variety of reasons, but here such policy surely negatively impacts Netflix’s projected revenues. Such projections will be curbed further by stringent taxes and a further dictat that SVOD services based in France with annual earnings of more than EUR10m are required to hand over 15% of their revenues to the European film industry and 12% to domestic filmmakers, according to France24. As well as traditional competition, Netflix also faces threats from OTT rivals, such as FilmoTV. One possible way around such competitor obstacles is the promotion of itself as a complementary service. The New York Times earlier this spring elaborated,

“Analysts say Netflix, which has primarily focused on older content more than on recent releases, could also survive in parallel to European rivals that have invested heavily in new movies and television shows. Netflix in some ways serves as a living archive, with TV shows like “Buffy the Vampire Slayer” from the 1990s or movies like “Back to the Future” from 1985. Such fare has enabled the company in Britain, for example, to partner with the cable television operator Virgin Media, which offers new customers a six-month free subscription to Netflix when they sign up for a cable package.”

Such archive content will come in handy, particularly given that, as Le Monde points out, Netflix had previously sold the rights to its flagship series ‘House of Cards’ to premium broadcaster Canal Plus’ SVOD service Canal Play (which itself is investing in new content). The article hesitates to guess how much of a success the service will be in France – something Citi has no problem in doing, see chart below – instead looking to the music industry for an analogy, where streaming has become a dominant form of engaging with the medium. As in other markets, streaming services have met with increasing success, particularly with younger generations. For Le Monde, the arrival of Netflix will undoubtedly ruffle a few feathers, but the paper also hopes it will blow away the cobwebs of an industry that has become comfortable in its ways; it hopes the company will provide a piqûre de rappel (shot in the arm) for the culture industry. Netflix’s ingredients – by no means impossible to emulate – of tech innovation, easy access and pricing and a rich catalogue, should be a lesson to its peers. The editorial only laments that it took an American company to arrive on French shores for businesses to get the message.

netflix-overseas-growth-potential

Citi foresees huge takeup of Netflix in tech-savvy UK, but relative to other territories France is expected to see strong growth too in the coming years

UPDATE (16/9/14): TelecomTV reported this morning that Netflix has partnered with French telco Bouygues. The company will offer service subscriptions “through its Bbox Sensation from November and via its future Android box service. Rival operators are refusing to host Netflix on their products”.

On past and future innovation – Disruption, inequality and robots

How to define innovation, how has it been studied in the recent past, and what does future innovation hold for the human race?

Sometimes the word innovation gets misused. Like when people use the word “technology” to mean recent gadgets and gizmos, instead of acknolwedging that the term encompasses the first wheel. “Innovation” is another tricky one. Our understanding of recent thoughts on innovation – as well as its contemporary partner, “disruption” – were thrown into question in June when Jill Lepore penned an article in The New Yorker that put our ideas about innovation and specifically on Clayton Christensen’s ideas about innovation in a new light. Christensen, heir apparent to fellow Harvard Business School bod Michael Porter (author of the simple, elegant and classic The Five Competitive Forces that Shape Strategy) wrote The Innovator’s Dilemma in 1997. His work on disruptive innovation, claiming that successful businesses focused too much on what they were doing well, missing what, in Lepore’s words, “an entirely untapped customer wanted”, created a cottage industry of conferences, companies and counsels committed to dealing with disruption, (not least this blog, which lists disruption as one its topics of interest). Lepore’s article describes how, as Western society’s retelling of the past became less dominated by religion and more by science and historicism, the future became less about the fall of Man and more about the idea of progress. This thought took hold particularly during The Enlightenment. In the wake of two World Wars though, our endless advance toward greater things seemed less obvious;

“Replacing ‘progress’ with ‘innovation’ skirts the question of whether a novelty is an improvement: the world may not be getting better and better but our devices our getting newer and newer”

The article goes on to look at Christensen’s handpicked case studies that he used in his book. When Christensen describes one of his areas of focus, the disk-drive industry, as being unlike any other in the history of business, Lepore rightly points out the sui generis nature of it “makes it a very odd choice for an investigation designed to create a model for understanding other industries”. She goes on for much of the article to utterly debunk several of the author’s case studies, showcasing inaccuracies and even criminal behaviour on the part of those businesses he heralded as disruptive innovators. She also deftly points out, much in the line of thinking in Taleb’s Black Swan, that failures are often forgotten about, and those that succeed are grouped and promoted as formulae for success. Such is the case with Christensen’s apparently cherry-picked case studies. Writing about one company, Pathfinder, that tried to branch out into online journalism, seemingly too soon, Lepore comments,

“Had [it] been successful, it would have been greeted, retrospectively, as evidence of disruptive innovation. Instead, as one of its producers put it, ‘it’s like it never existed’… Faith in disruption is the best illustration, and the worst case, of a larger historical transformation having to do with secularization, and what happens when the invisible hand replaces the hand of God as explanation and justification.”

Such were the ramifications of the piece, that when questioned on it recently in Harvard Business Review, Christensen confessed “the choice of the word ‘disruption’ was a mistake I made twenty years ago“. The warning to businesses is that just because something is seen as ‘disruptive’ does not guarantee success, or fundamentally that it belongs to any long-term strategy. Developing expertise in a disparate area takes time, and investment, in terms of people, infrastructure and cash. And for some, the very act of resisting disruption is what has made them thrive. Another recent piece in HBR makes the point that most successful strategies involve not just a single act of deus ex machina thinking-outside-the-boxness, but rather sustained disruption. Though Kodak, Sony and others may have rued the days, months and years they neglected to innovate beyond their core area, the graveyard of dead businesses is also surely littered with companies who innovated too soon, the wrong way or in too costly a process that left them open to things other than what Schumpeter termed creative destruction.

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Your new boss

Outside of cultural and philosophical analysis of the nature and definition of innovation, some may consider of more pressing concern the news that we are soon to be looked after by, and subsequently outmaneuvered in every way by, machines. The largest and most forward-thinking (and therefore not necessarily likely) of these concerns was recently put forward by Nick Bostrom in his new book Superintelligence: Paths, Dangers, Strategies. According to a review in The Economist, the book posits that once you assume that there is nothing inherently magic about the human brain, it is evidence that an intelligent machine can be built. Bostrom worries though that “Once intelligence is sufficiently well understood for a clever machine to be built, that machine may prove able to design a better version of itself” and so on, ad infinitum. “The thought processes of such a machine, he argues, would be as alien to humans as human thought processes are to cockroaches. It is far from obvious that such a machine would have humanity’s best interests at heart—or, indeed, that it would care about humans at all”.

Beyond the admittedly far-off prognostications of the removal of the human race at the hands of the very things it created, machines and digital technology in general pose great risks in the near-term, too. For a succinct and alarming introduction to this, watch the enlightening video at the beginning of this post. Since the McKinsey Global Instititute published a paper in May soberly titled Disruptive technologies: Advances that will transform life, business, and the global economy, much editorial ink and celluloid (were either medium to still be in much use) has been spilled and spooled detailing how machines will slowly replace humans in the workplace. This transformation – itself a prime example of creative destruction – is already underway in the blue-collar world, where machines have replaced workers in automotive factories. The Wall Street Journal reports Chinese electronics makers are facing pressure to automate as labor costs rise, but are challenged by the low margins, precise work and short product life of the phones and other gadgets that the country produces. Travel agents and bank clerks have also been rendered null, thanks to that omnipresent machine, the Internet. Writes The Economist, “[T]eachers, researchers and writers are next. The question is whether the creation will be worth the destruction”. The McKinsey report, according to The Economist, “worries that modern technologies will widen inequality, increase social exclusion and provoke a backlash. It also speculates that public-sector institutions will be too clumsy to prepare people for this brave new world”.

Such thinking gels with an essay in the July/August edition of Foreign Affairs, by Erik Brynjolfsson, Andrew McAfee and Michael Spence, titled New World Order. The authors rightly posit that in a free market the biggest premiums are reserved for the products with the most scarcity. When even niche, specialist employment though, such as in the arts (see video at start of article), can be replicated and performed to economies of scale by machines, then labourers and the owners of capital are at great risk. The essay makes good points on how while a simple economic model suggests that technology’s impact increases overall productivity for everyone, the truth is that the impact is more uneven. The authors astutely point out,

“Today, it is possible to take many important goods, services, and processes and codify them. Once codified, they can be digitized [sic], and once digitized, they can be replicated. Digital copies can be made at virtually zero cost and transmitted anywhere in the world almost instantaneously.”

Though this sounds utopian and democratic, what is actually does, the essay argues, is propel certain products to super-stardom. Network effects create this winner-take-all market. Similarly it creates disproportionately successful individuals. Although there are many factors at play here, the authors readily concede, they also maintain the importance of another, important and distressing theory;

“[A] portion of the growth is linked to the greater use of information technology… When income is distributed according to a power law, most people will be below the average… Globalization and technological change may increase the wealth and economic efficiency of nations and the world at large, but they will not work to everybody’s advantage, at least in the short to medium term. Ordinary workers, in particular, will continue to bear the brunt of the changes, benefiting as consumers but not necessarily as producers. This means that without further intervention, economic inequality is likely to continue to increase, posing a variety of problems. Unequal incomes can lead to unequal opportunities, depriving nations of access to talent and undermining the social contract. Political power, meanwhile, often follows economic power, in this case undermining democracy.”

There are those who say such fears of a rise in inequality and the whole destruction through automation of whole swathes of the job sector are unfounded, that many occupations require a certain intuition that cannot be replicated. Time will tell whether this intuition, like an audio recording, health assessment or the ability to drive a car, will be similarly codified and disrupted (yes, we’ll continue using the word disrupt, for now).

Cyberattacks and espionage – Risks and Prevention

Aston Martin - 2

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.

Smartphone consumer and business trends in 2014

 

AMphonebehaviours

In this post we’ll be looking at how mobile trends are effecting customers, network operators and handset manufacturers. Last week, Analysys Mason reported “[t]he average amount of time that consumers spend using smartphones per day almost doubled between 2011 and 2013, from 98 minutes to 195 minutes”. The time spent actually communicating with other human beings has increased during this period, but only with overall growth in use. As a relative share of what other things consumers do with their smartphones, communication has actually fallen (see above image), from a 49% to 25% share. Retailers will be very happy to see that the “utilities and commerce” share seems to have grown considerably.

72% of those that Analysys Mason surveyed across the UK, US, France and Germany were said to be using OTT messaging services on their phone. These over the top services are posing a real threat to traditional operators. One particular example that caught Zeitgeist’s attention was that of FreedomPop in the US, a virtual network operator that uses Sprint’s network to piggyback off. According to GigaOm, the company has launched an iOS app, that assigns you a unique telephone number and allows you to run all your communications through a “virtual phone”, circumventing the carrier. The answer for carriers may be in bundling services, and indeed BT and Vodafone seem to leaning toward this as a tactic. But a Lex column article in the Financial Times warns that although bundling services into a quad-play offer can increase retention, it usually means offering those same services at a discount.

Cheap smartphones are nothing new in of themselves; competitors to Samsung and Apple have been scrounging away at the bottom of the market for some years now, and it was way back in 2012 at the Mobile World Congress that Mozilla announced it would make a cheap handset for developing economies. What has changed recently is the explosive growth at this end of the market. By 2018, more handsets will have been shipped that sell for under $200 than those that sell above that amount (see chart below), according to IDC and The Economist, who wrote about it recently. As the paper pointed out,

People buying their first smartphones today, perhaps to replace a basic handset, care less about the brand and more about price than the richer, keener types of a few years ago. They are likely to pay less for a nice new smartphone than they did for their shabby old device, because the cost of making smartphones has tumbled.

Part of the problem for incumbents is that they have had to do all the R&D, which new entrants can learn from and improve on without worrying about such fixed costs. For consumers though, with fragmentation at both ends of the market, the choice and price of smartphones has never been better.

Regulating in the face of digital disruption

April 30, 2014 1 comment

peter-c-vey--these-new-regulations-will-fundamentally-change-the-way-we-get-around-the…-new-yorker-cartoon_i-G-65-6596-IDO2100ZHaving studied policy and regulation at university, Zeitgeist is often compelled to look at many issues facing companies today through a regulatory lens. But even the most dispassionate fan of rules and laws would have to concede that as digital innovation disrupts multiple sectors around the world, the way these new innovations and businesses are governed is an important consideration. In this piece we’ll be looking at regulatory concerns for disruptors like Uber and Netflix, as well as how regulation effects legacy companies like Microsoft and Comcast. As with many of our articles on this blog, we’ll be taking a particular look at the TMT sector. (Bitcoin will have to wait for another article).

Regulators often find themselves caught between a rock and a hard place. Should the emphasis be placed ex-ante, to ensure compliance, or ex-post to apply punitive measures and fix problems once they have become apparent? The former seems wise as it sets initial goals for companies. But it also risks opening loopholes, as well as being overly prescriptive and thus failing to adapt. It can also lead to the development of overly-familiar relations between regulator and industry, leading to what is known as ‘capture’. Currently, the US favours an ex-ante approach, but as Edward Luce detailed recently in the Financial Times, this has led to a “creeping impulse to micro-regulate“. The FDA’s recent announcement that they would regulate e-cigarettes, despite no proof it encourages the take-up of smoking tobacco, is such an example. Ex-post – regulating after an event – seems just as bad, mostly because the damage has already been done at that point. While it means that all problems addressed are real-world and practical, they can also be applied with too much emphasis. Above all, regulation ultimately risks stifling innovation; Edison moved to the West coast because he was fed up of the stringent regulations in the East. A recent lead article in The Economist asserted that, far from too little regulation, the global recession was caused by too much state involvement in the wrong places. Too little oversight though, and companies can be allowed to run wild.

Earlier this month, The New York Times featured an op-ed on regulating the online world. It is written by New York State attorney general Eric Schneiderman. As might be expected, he quickly attacks online start-ups saying it is “amazing” that they think just because their business is online, that “somehow makes them immune from regulation”. This is all well and good, but it masks the fact that clear regulations have not been established. Schneiderman is right to point out that just because a business now has an app instead of a high street store doesn’t mean its responsibilities to the law have changed. It is an apt analogy. But in practice the story is different. As with most innovations, from film to Napster and Airbnb, regulators must constantly be playing catch-up. The complaints of new businesses are not that they should be subject to regulation, rather that those rules are onerous or outdated, applying to a different time. The sharing economy works because it has found cheaper, more efficient ways of offering services that hitherto were more restricted; regulations need to be appropriately dispensed. Sadly, many cities in the US have simply blocked allowing such services to operate. Uber – a car pickup service – is probably not wholly repulsed by the thought of regulation, but they are resistant to rules put in place by entrenched interests and unions. Airbnb might violate the letter of the law, but not the spirit surely. People have always let out their living space to others. The only thing that has changed is scale. Why does scale suddenly make something legally problematic? Schneiderman points out that some lettings are so large, with multiple rooms let at once, that they are essentially hotels. True enough, perhaps, but Zeitgeist has certainly never come across such a property, and they are certainly small in number, and no more represent Airbnb’s ethos than any hotel violating its own (regulated) terms. A recent article in The Economist argued for “adaptation, not prohibition“. Schneiderman’s sentiment is that these start-ups need to work more closely and proactively with regulators, but this fails to recognise that regulators need to also fundamentally change their approach.

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East and West shook up a regulatory framework with the recent release of “300: Rise of an Empire” via China’s Tencent website

Regulation in China has been a hot topic for a while now. This is principally because the region has a low tolerance of free speech. But it extends to cultural concerns as well; the Google Play store, Twitter, and most of Hollywood’s annual product do not make it onto Chinese shores (legally, anyway). What this creates is a secondary tier of companies who take Western business models and run with it. That’s why there are multiple Chinese Android app stores, why Sina Weibo is a fantastically successful service, and why many poor remakes of US films flood the Chinese market. It has been pleasing then to see two recent developments in the way China regulates the TMT sector that should be good news for consumers and Western companies. Today saw the announcement that Microsoft’s Xbox One is to be sold in China. It will be the first foreign games console to go on sale in the country, lifting a fourteen year ban. This would open up the company to the half billion active gamers in China. Additionally, as Michael Pachter, analyst at Wedbush Securities pointed out,

“The middle class in China is pretty large, and positioning the box as an over-the-top TV receiver gives it a lot of appeal to wealthier Chinese.”

Earlier this week, Warner Bros was the latest film studio to partner with Chinese site Tencent. The film 300: Rise of an Empire, is available to rent through the site, while it is still in cinemas in territories like the US. The points of the deal were very interesting. Zeitgeist has for a number of years now advocated an increased flexibility to film platform release windows. Such a rigid structure as the industry has in the US is not as apparent in China. This could help alleviate piracy in the country and separately could pave the way for a relaxing of the quota of US films that are let into the Chinese market every year. Hopefully this will be a precursor to more such moves in Western markets. As someone commented on the news when it was published on the Financial Times website,

“Maybe they can do the same in the rest of the world as well?
Or I could wait 2 months for something to come out on Bluray in the UK compared to the US. Or just pirate it when the US version is available since they won’t let me buy it in my country, but will let other people buy it in other countries.”

While China is taking steps forward, the US seems to be faltering in its regulatory approach. We mentioned the impending restrictions on e-cigarettes earlier, and let’s not even go into then-mayor Michael Bloomberg’s crusade against sugar. We’ve written about net neutrality before. The issue has been of interest to Zeitgeist since university days. It was thrust into the spotlight this year when a US court ruled that the FCC had “overstepped its authority” after a legal challenge from Verizon. Last week, new rules were proposed that will undermine the original purpose of the policy of treating all traffic the same, allowing ISPs to charge companies like Netflix more in order to reach consumer with greater quantity or quality, but only on “commercially reasonable” terms. These terms have yet to be defined. These moves touch on a related matter that has also been greeted with consternation by those who favour fairness. This is Comcast‘s proposed merger with Time Warner Cable. Netflix recently publicly came out against the move. It is easy to see why. As The Economist recently elaborated, such a deal would limit competition and reduce any incentive to innovate. It is also one more example of the assumption companies have that their problems can be solved with size. Comcast have admitted they will raise prices for the end user, while as much as conceding there will no be no discernible benefit to them. One might argue there is little more for such companies to do, but average internet speeds in Tokyo and Singapore are ten times as fast on average as in the US. Even the Financial Times, which can often be counted on to be a bastion of support for capitalists, compared Comcast to the Railway Barons of the past.

The sharing economy is creating difficulty for many sectors, and regulatory agencies have not escaped this. Such forces have been to slow to adapt to fundamental changes in the TMT sector, particularly in print, music and film industries. There certainly seems to be a tendency for over-regulation today, particularly in the US. Returning to an article we mentioned at the beginning of our piece, Edward Luce laments that America “no longer feels unusually free”. Perhaps this is part of a cyclical trend. Like the causes of the recession, perhaps the problem is a stifling caused by over-regulation in the wrong places, coupled with a lack of innovation in areas where sensible rules that do not cater to the established are in dire need. It is good to see rules and regulations around consoles and release windows are being relaxed in China, but the furore around regulating the sharing economy needs a similar dose of innovative thinking.

UPDATE (17/9/14): We’ve included some nice examples in this post of innovative thinking paired with light touch regulation going on in China’s entertainment sector. Sadly the pendulum swings both ways; though shows like BBC’s ‘Sherlock’ were made available with authorised translations mere hours after their original broadcast in Blighty, the state is cracking down hard in other ways. The Economist reports that last week, China’s TV regulator said that, from April, any foreign series or film would need approval before being shown online. It is looking for “health, well-made works” that “showcase good values”. This sounds like a vague excuse to arbitrarily censor content it doesn’t like. Explicitly, banned subject matter includes, according to The Economist, “superstition, espionage and—bizarrely—time travel”.

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