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.

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.

Sports journalist scores own goal with Twitter let down

Too much hype can be a bad thing if you fail to deliver.

You will no doubt already be familiar with the fable of the Boy Who Cried Wolf.

In it, the title protagonist is a third century BC Greek shepherd boy with a 21st century attention span.

Sadly, born in a time long before iPods, Playstations and Kindles the only way he was able to amuse himself on cold nights was to shout that an imaginary wolf was attacking his flock and so summon all the villagers from their warm beds to chase it off.

So amused was the shepherd boy by this early attempt at trolling that he repeated it, each time winding up the locals more with his false alarms.

How Aesop may have communicated his fable in 2011

Inevitably, as we all know a hungry wolf did turn up shortly afterwards and the villagers ignored the boys pleas for help, refusing to fall for what they assumed was another trick.

The tale has been told many times to warn children of the dangers of telling fibs and seeking undue attention.

It would appear from a modern interpretation of the story that the Guardian Sports Desk could urgently do with a copy of Aesop’s Fables (available for as little as £3.99 on Amazon).

At around 15:30 yesterday afternoon, respected Sports Editor of the Guardian Newsdesk Ian Prior tweeted that there would be a

Two hours was more than enough time for football messageboards to go into overdrive as fans hypothesised as to what the scoop could be.

Perhaps an announcement on the Olympic Stadium? Was Ferguson going to retire and Mourinho replace him? Could another Arab billionaire buying out a major club? Would Barcelona finally get round to offering a record breaking fee for Lloyd Doyley?

Or maybe as the other half of Zeitgeist prayed, Roger Federer’s defeat in the Australian Open had been misreported and he’d actually beaten Novak Djokovic – into a pulp.

As the deadline drew closer, F5 buttons were being smashed around the world and the Guardian homepage finally refreshed with the scoop.

It turns out that Inter Milan might make a bid for Tottenham’s Gareth Bale. For £40m. In the summer. No sources at either club quoted.

There didn’t need to be. Within minutes both clubs had denied the story.

A scoop. But not anywhere near as major as people were hoping.

The let down and collective fury at such a mundane story getting such a build up lead to a mass venting against Prior and many rivals taking the opportunity to put the boot in.

The Daily Mirror back page references Prior’s imfamous tweet

Theories began circulating that Prior may have sacrificed himself in order to then compose an article on the power of social media or that the whole exercise was a critique of the hyperbole that surrounds football, particularly during the transfer windows,  but it seems unlikely that a Sports Editor would embarass himself for such reasons.

To his credit, Prior has taken the stick with good grace admitting that he was

retweeting a campaign to get people to stop following him

before accepting defeat

and announcing the end to a long day with

Indeed his positive attitude and willingness to take it on the chin has helped deflate much of the ire and avoided prolonging the situation. Prior isn’t the first person to mess up on Twitter, he can add his name to an ever-growing list that contains the likes of Habitat, Stephanie Rice and Courtney Love.

Though his faux pas was not as bad as the others mentioned, the lesson however is clear. Social media is a powerful medium to reach people with an interest in what you have to say.

But let them down and they’ll leave you to the wolves just like a bunch of tired Greek villagers.

White sky in the morning, profits warning!

How will the snow affect the UK retail landscape?

While the news at the time focused on stranded air passengers, a crippled transport network and the need for some inventive parenting to explain why Father Christmas was unable to deliver presents on time, the after-effects of December’s heavy snowfall are now being felt strongly on the UK high streets and shopping centres.

With the tinsel and fairy lights still in full view, it has been a far from Happy New Year for the number of retailers forced to announce that their sales were lower than expected with the consquences ranging from store closures and job losses to profits warnings. Many cited the unwelcome cold snap as compounding difficulties brought about by the economic crisis, changing consumer habits and threats appearing from non-traditional competitors.

First to register concern were HMV, who admitted in an unscheduled trading statement, that like-for-like sales across its UK and Ireland outlets had plunged by 13.6% in December. Having seen other music and entertainment retailers, including Zavvi, Our Price, Tower Records and even Woolworths bite the dust in recent years it isn’t surprising that the entertainment specialist is feeling the heat while the rest of us freeze.

Zeitgeist has already touched on how ‘In some industries, the concept of owning something tangibly has become redundant;‘, with music and film sitting high on that list. More worryingly for HMV as the owner of Waterstones bookshops is Amazon‘s online dominance of the category and the rise of devices like the Kindle and regular smartphones that are likely to eat into book sales in the coming years.

Deeper Problems

While the sub-zero temperatures may have kept shoppers out of their stores the weather can’t take all of the blame. This weekend, this half of Zeitgeist bought a CD as a friends birthday present. A quick look online showed the item retailing on HMV.com at £8.99, however in-store I was obliged to pay £17.99. The Sales Assistant helpfully told me that the difference was because online sales are shipped from Guernsey. I rather suspect that the lower price has more to do with the fact that other online stores such as Amazon.co.uk and Play.com are also selling the item for £8.99 than where the item is shipped from.

It’s not hard to see why the bricks-and-mortar stores are in so much trouble when they have to sell items for nearly double the online price to cover their overheads. In this instance the extra cost doubles as a ‘Failure to Plan‘ tax for me, but increasingly shoppers will go online for their entertainment needs rather than paying a premium for the convenience of getting it immediately on the high street. Alternatively they’ll simply download or stream it and do away with the need for any physical material purchase.

This final option shows how behaviour change can be brought about with the right motivations. For years now, we have been encouraged to reduce unnecessary waste and raw materials to help the environment. However, it is the convenience of having music, film, games and books stored digitally, rather on discs in plastic boxes or paper, that has proved more of a driver than any desire to save the planet.

Others Affected

Another retailer to be affected by how we now spend our leisure time is Games Workshop who issued a profits warning of their own soon after.

Two other retailers who also issued a now on-trend profits warning are greeting cards merchants Clinton Cards and maternity and babyware retailer Mothercare.

For Clintons this is the second such warning in six months and time will tell whether ‘strategic intiatives‘ taken by the board will have the desired effect or whether as a nation, a new generation is growing up to wish ‘Happy Birthdays’ and ‘Merry Chistmases’ via text message or social media sites.

Encroachment on their traditional market by the major multiples hasn’t helped Mothercare and brokers Seymour Pierce have questioned quite how much of their problems are down to the snow.

With the Christmas period so crucial for many retailers there may be more similar statements being prepared in boardrooms up and down the land. The slightly milder weather in early January may help ‘The Sales’ boost some bottom lines, but with a number of retailers choosing to delay exposing shoppers to the increase in VAT the bargain hunters may not spend enough to make up the shortfall, particularly if they are saving for a more expensive 2011. If a handful of retailers do go under it begs the question, ‘Who will take over their retail space and what will the retail landscape look like in a couple of years from now?’.

Such gloomy announcements from household names will do little to help the economy and improve consumer confidence, particularly once the seemingly permanent VAT rise comes into effect everywhere.

In the meantime we’ll have to wait and see what legacy the snow is going to leave in other sectors such as insurance, utilities and travel. Either way, it might be an idea to start saving now for those premiums and gas bills.

A sense of ownership

In an increasingly homogenous and globalised world, how important is craft?

In some industries, the concept of owning something tangibly has become redundant; an antiquated thought that occupies old minds and outdated marketing and sales strategies. Netflix, the online video rental service, is a prime example of this. Recently the service reported record quarterly profits, with revenue up 31%, adding just under 2m subscribers in the last three months. The service, which started as a way to rent DVDs online, eventually introduced a streaming service, which, as of this month, is now more popular than the DVD part of its offering. This has not been a sudden shift, but rather one that has been happening gradually, helped independently by DVD’s gradual decline since its heyday. Blu-ray is a temporary panacea and will not combat the inexorable shift toward a medium that someday may not exist in hardcopy form. The challenge will be in how to maintain a sense of ownership for the consumer when all their films (as well, of course, as all their books and music), are only visible through an electronic device, rather than being stacked on shelves. Having physical media on your shelves is a statement of sorts, and not merely a tool to show off your intellect. Though by turns irritating and immature, Taleb’s book Black Swan does make a great point about the purpose of a library of books, a metaphor which can be extended to music and film as well. Anecdotally, Zeitgeist doesn’t know a single person who favours the practicality of an electronic book over the unique feeling of owning something tangible. Creating desire for such software [i.e. books, film, music] will be another challenge, one that at the moment is being countered by creating desire for the hardware [i.e. the platform: iPad, Kindle, etc.].

At the same time, other industries, where individuality and provenance are of greater advantage than practicality or cutting-edge convenience, are experiencing a different problem. The Economist this week reports on the problems facing the industrious knitters on Fair Isle, part of the Shetland islands. The distinctive prints they create for their knitwear, which the magazine describes as “in vogue”, has also tapped in to an increasing post-recession desire for “garments that look chunkily lasting and homemade”. In this case, provenance is a hugely significant part of why people would choose to buy this particular product. Ownership of the product is not for the mere intellectual consumption of the product, it is also about wearing something that means something, in the sense of Roland Barthes’ Mythologies. This importance, The Economist maintains, is being diluted as neighbouring knitwear manufacturers unfairly play off the Fair Isle’s name. Following in the footsteps of Harris Tweed and champagne, the cottage industry, like Cornish pasties and Yorkshire pudding, is seeking special protection for exclusive use of it’s name.

So there’s clearly a push and pull going on as to the importance – the essence – of ownership. Perhaps what is needed is a total reappraisal of what ownership means when the content you are talking about is not something tangible that you carry around with you and are free to do with as you wish, but rather something floating in the Cloud, that you merely have access to.

Turning the Screw

Increasingly, there seems to be an Orwellian slant to the machinations of the Internet. Last summer, early adopters of the Kindle and fans of George Orwell would probably have been rather frustratingly struck by the irony of waking up to find their library somewhat diminished. As one blog writes,

“In George Orwell’s “1984,” government censors erase all traces of news articles embarrassing to Big Brother by sending them down an incineration chute called the “memory hole.” On Friday, it was “1984” and another Orwell book, “Animal Farm”, that were dropped down the memory hole – by Amazon.com.”

Another blog notes that the Kindle is “basically a device that Amazon controls that you just happen to have in your hands.” The novels were removed after being added by a company that did not have the sufficient rights to them. This may be sufficient reason to remove the product from the store; it does not, however, excuse the way in which Amazon went about systematically removing copies that were on owner’s devices, who had already paid them. The incident was noted in a more recent editorial in the FT, evincing a mounting ownership creep on behalf of major corporations. Now, more than ever, when products are not only files on your desktop but stored remotely in a cloud, a consumer’s rights to ownership have never felt less tangible.

Apple, specifically its App Store, has recently come under fire again, this time for the removal of adult apps. Some adult-themed apps, such as the Playboy app, will remain available. It is the thought of Apple acting not only as moral arbiter, but also in an ad hoc manner with that responsibility, which should give consumers cause for concern. If someone creates an app or wants to distribute a book online in the future, will they hesitate to share their innovation and creativity for fear it could be summarily deleted at will by a fickle corporation? TechCrunch has a fascinating and well-written article here on the removal by Google of many music blogs that were deemed under the DCMA to be infringing on intellectual property. Again, as in the Kindle case, it is less the justification of the action (although this can also be disputed), and more the way it was done that is inexcusable.

In the Communist nirvana that is China, things are worse. Le Monde reports that though the country is on the brink of launching IPv6, allowing people to create and type in URLs using Chinese characters, the government is also imposing draconian measures for those wishing to set up websites. The government already restricts access to sites such as BBC News, Facebook and Twitter. In the past two weeks, they have also asked that anyone wishing to open a web site must present themselves before the authorities with their identity card and photographs of themselves, ostensibly to combat pornography. Not only is this measure entirely unnecessary and completely antithetical to the libertarian principles of the Internet, but from a practical standpoint it is wildly inefficient and will certainly stifle innovation. The UK government’s initial plans for censuring those who share files illegally have been, for the moment, stayed.

Conversely, these same bodies are not operating with impunity, even in situations where arguably they are not to blame. Three Google executives were convicted in Italy at the end of last month. The charge, Reuters reported, was “violating the privacy of an Italian boy with autism by letting video of him be posted on the site in 2006.” Quite how it was decided that those hosting the video – on a site that apparently serves a billion videos every day – could possibly have responsibility for it is beyond Zeitgeist. The New York Times writes “It suggests that Google is not simply a tool for its users, as it contends, but is effectively no different from any other media company, like newspapers or television, that provides content and could be regulated”. One of the accused, global privacy counsel Peter Fleischer, commented that if employees were “criminally liable for any video on a hosting platform, when they had absolutely nothing to do with the video in question, then our liability is unlimited.” Despite corporate overreach in some areas, sometimes the judicial system can be just as harsh on those same corporations. The insight is that what goes around, comes around.