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Media Trends 2016

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

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

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

Star Wars and the status quo

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

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

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

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

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

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

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

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

TV’s tribulations

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

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

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

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

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

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

Tech opportunities and pitfalls

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

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

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

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

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

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

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

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

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

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

Oh, and Merry Christmas.

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

A MATTER OF LIFE AND DEATH

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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.

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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.

Adjacencies & Disruptions – Amazon, Armani and identifying corollaries

Zeitgeist likes thinking about adjacencies. We’ve written about it before when looking at the art market, but it’s also prevalent in other industry sectors. Think of the UK übergrocer Tesco. The company has expanded into movie distribution – with Blinkbox – as well into banking and mobile, albeit as an MVNO. Why? To diversify its revenue streams; the grocery market is a cutthroat place of late; Morrisons recent conceding that it would be setting off another price war among its peers was hardly greeted with cheers by shareholders. How? By using the equity of trust they have built up with shoppers over the years, they are able to expand into other, similar territories, where their (claimed) competitive advantage of good value and good customer service can be similarly applied.

Amazon has been nothing if not a company constantly on the hunt for the efficient exploitation of adjacencies. A recent article in The New Yorker detailed how CEO Jeff Bezos got into books because he saw the market was ripe for disruption; he saw the Internet was the perfect platform to sell such a product:

It wasn’t a love of books that led him to start an online bookstore. ‘It was totally based on the property of books as a product’, Shel Kaphan, Bezos’s former deputy, says. Books are easy to ship and hard to break, and there was a major distribution warehouse in Oregon. Crucially, there are far too many books, in and out of print, to sell even a fraction of them at a physical store. The vast selection made possible by the Internet gave Amazon its initial advantage, and a wedge into selling everything else.

Zeitgeist remembers buying his first book from Amazon back in 1999. It wasn’t long before the company expanded into music, and from there into myriad other offerings. Like Tesco, Amazon found its original industry to be a highly competitive one – at least in terms of margins. It has become a fairly ruthless behemoth in the publishing industry, acting as monopoly in its rent-seeking tactics. The Kindle was an extension of its strategy to ‘own’ the territory of books, and as a publishing company itself it has so far had mixed success, according to The New Yorker. The Kindle Fire addresses its new media offerings, principally video. Just as a recent Business Insider article identified the Xbox 360 as Microsoft’s short-term ploy to encourage a customer to funnel all entertainment through their device before the launch of its successor Xbox One, so with Amazon and its Kindle Fire before this week’s release of Fire TV. The Financial Times featured good coverage of the device here, quoting an analyst at Forrester,

It is a slightly faster Roku box combined with voice recognition to make search easier and then they have created a full Android gaming device. This puts the product into a whole class of its own.”

It will be interesting to see how the device competes with the much cheaper Chromecast, from Google, itself an exploiter of adjacencies. Google relies less on an equity of customer trust to move into new industries and more an innate belief that tech can be used to solve pretty much any problem. The search engine provides an affordable smartphone OS platform, connected glasses, globe-trotting balloons and driverless cars.

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In the world of luxury, that essence of trust is treated with far greater reverence. This is principally why fashion brands have been such laggards when it has come to embracing digital communications and ecommerce solutions. tIronically, this approach, which by extension neglects a dedicated approach to holistic Customer Experience Management (or CEM) is arguably beginning to have a negative impact on how people perceive and interact with these companies. It is why adjacencies seem to happen less than temporary collaborations, an impressive recent example of which can be seen in BMW’s recent tie-up with Louis Vuitton.

It was gratifying to see Giorgio Armani, a company that has carefully crafted diffusion lines as well as adjacencies into hotels and homeware over the years, recently buck the trend, sending out communications over its newest line, Armani Fiori. While style can be eternal, fashion can be quite ephemeral – as with flowers. It’s not clear how much of a market there is for this. That being said, the sector is not exactly brimming with ultra-premium florists. And it might provide a certain level of reassurance for the man purchasing flowers, who can rely on the brand’s prestige to assuage any feelings of whether he is picking a good bunch. Where it might prove especially successful though is in the B2B sector; the lobbies of corporate headquarters and luxury hotels could soon be awash with the fragrance of a designer flower or two.

Adjacencies tend to work best then when they start by identifying qualities inherent in the brand as it currently exists. I.e. what is our current competitive advantage? Is that scaleable or transferable to a related field? Often, as with the cases above, such acquisitions and movements arise when traditional margins are being eroded or under threat of such. Prada, a leader in the luxury sector, has as that leader borne the brunt of strong headwinds recently as the sector as a whole experiences a slowdown. Its own adjacent acquisition? Last month it bought an 18th-century Milanese pastry shop.

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The state of retail

January 6, 2013 7 comments
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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.

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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.

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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.

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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…

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