Posts Tagged ‘Strategy’

Trends, threats and opportunities in the film industry


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

– Ed Epstein

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

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

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


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

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

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

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


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.

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


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

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

Star Wars – And the blockbuster dilemma

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


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

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

Tech wars – Hacking, piracy and monopolies

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

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

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

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

Talent wars – Cui bono?

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

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


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 Business of Fashion – Regulation, acquisition and the slowdown


When the global financial meltdown struck in 2008, many of those with a vested interest in the luxury market watched nervously; high net worth individuals had surely seen many investments wiped out as the recession struck and would thus be more inclined to austerity. While there was a brief moment of humility and caution over indulgence in life’s finer things, it was brief. The luxury market proved surprisingly resilient. Global spend has increased since the recession by around a third, helped in no small part by the explosion of growth in developing regions, China in particular. Orson Welles once said “If you want a happy ending, that depends of course on where you end your story”. Our story, sadly, does not end here.

It was not a good omen when fashion curator and director of the Musée Galliera in Paris Olivier Saillard said during New York Fashion Week last month, “We are in a moment that’s very bizarre in fashion: there are too many clothes”. Business of Fashion lamented both a lack of quality and vision in contemporary collections,

“Fashion seems stuck between the need to surprise using a new array of communications tools and the urge to deliver novelty at the fastest possible pace. Slowing down might be a solution, but that would be a hard route, which will hardly find followers.”

And it is followers that fashion, and the luxury market as a whole, are in need of. Earlier this month the Financial Times reported on the global slowdown of luxury spending. Behind this slowdown lie two factors. On the one hand, there is what are hopefully short-term influences; geopolitical turmoil is rife. Hong Kong continues to see protests that refuse to simmer down, causing disruption to myriad businesses. The city accounts for perhaps 20% of global luxury spending. The Middle East, whose consumer origin or nationality according to Bain & Co. has the biggest average per capita spend, is similarly in chaos, with Syria, Iraq, Afghanistan, Egypt, Libya all in various stages of unrest. Regions like Saudi Arabia and Qatar are caught between a rock and a hard place. In Russia, sanctions have hit oligarchs and their ilk hard. As a result, shares in luxury good companies have been hit hard. Prada has seen profits slide 20% in the first half of the year. Everyone’s darling of fashion innovation, Burberry, has warned of a “cautious outlook”. Mulberry has issued a string of profit warnings and recently ejected its CEO.


McKinsey illustrate the drift of luxury growth from developed to emerging markets

So we can reason that these companies are seeing fewer customers. But they are also attracting new ones, albeit with very different expectations of the service they expect from the companies they have relationships with. This is the longer-term challenge. Millennials may have been treated as a distinct niche group with quirky demands from brands, but next year they will outnumber Gen Xers, according to McKinsey. These utterly digitally savvy citizens have embraced and contributed to a digital fragmentation in the consumer decision journey, the production process and the fundamental nature of buyer / seller value exchange.

“[A] confluence of digital, the rising power of street fashion and changing consumer attitudes… are radically altering the industry. [It is a] consumer-led shift away from ostentatious and mainstream mega-brands towards understated originality”

One of the most obvious ramifications of this has been the trend of ‘logo fatigue’. It is likely to hit those like Gucci particularly hard, while benefiting those like The Row, and little-known retailers like L’Art du Basic. For larger brands there are some examples for inspiration though. Yoox, whom we have profiled in detail before, have gone from strength to strength in embracing effective digital strategy. The fashion ecommerce site reportedly sees 42% of its global traffic coming from mobile devices, and has recently made a significant push into experimenting with instant messaging app WeChat. As elaborated by Fashion and Mash, the account allows users to “shop via an interactive look book, and to instant message customer service teams and personal stylists. Content also invites users to exclusive events and provides early access to specific products”. In the physical world, Ralph Lauren’s hosting of a cafe in its Fifth Avenue store in New York may be less immediately strategic but seeks to leverage the same burgeoning trends. Brands will need to do more of this, more often, if they are to find what works best for them in terms of engaging and converting future prospects.

Also this month, Zeitgeist found itself at an event at London’s Four Seasons hotel off Park Lane, hosted by law firm Baker & McKenzie. Threats, tech trends and M&A were the main subjects of discussion. Zeitgeist scribbled down some bons mots which were thought worth recounting here. Last month, McKinsey produced an insightful piece on the future of luxury growth, indicating growth would come for the most part from what they termed global megacities, a large proportion of which were located in emerging economies. But China is facing a slowdown; no doubt one of the reasons it was recommended in the conference that businesses start to think less of China as an independent market of growth and more of ASEAN as a region.

3D printing was a matter of much conjecture, but it was pleasing to see that the regulation of such materials was already being considered. One speaker offered the technology would be a greater problem for toy manufacturers than luxury, but cautioned that fast fashion and high customisation were a potent mix. Current UK regulation allows for printing any designs (of one’s own creation or not) at home for personal use for no gain. Such laws may have to be re-examined as 3D printing becomes more widespread. It is difficult to protect the IP of a fashion designer’s work, and difficult therefore to know where to draw the line between inspiration and infringement. The case of the red shoe, specifically between Yves Saint Laurent and Christian Louboutin, has illustrated such difficulty. In the case of 3D printing, one speaker suggested that printing could be limited via restriction similar to how publishers use paywalls, or a more sophisticated version of the DCMA. The importance of protecting the source code of 3D printing designs looks set to be important; Pirate Bay already has a section for such product. Social networking as a new source of IP was also discussed. David Yurman sought opinions on styles to be included on a Valentine’s campaign; users could drop hints to their partner. Bergdorf encouraged fans to design Fendi bags over social, too. But there have been slip ups; Cole Haan offered to pay fans $1,000 for taking pictures of their shoes, without making it clear it was part of contest where someone would win and that the company was sponsoring the activity. They got off with a warning from the regulator, but luxury brands must treat that as a cautionary tale as they continue to experiment. “The law is not keeping up with the technology”, as one speaker sagely confessed.


David Yurman’s Facebook campaign suggests new IP possibilities for businesses in the future

The M&A chat was equally of interest. Speakers ruminated on the rise of vertical integration as LVMH et al seek to own the whole process. It’s a brave step for companies that traditionally haven’t involved themselves with supply chains or distribution, according to those speaking. Acquisitions were taking two forms: one was spotting missing gaps in the portfolio. For LVMH, the hole in their portfolio was jewellery, which lay behind their purchase of Bulgari in 2011. More recently Giorgio Armani – or as one speaker referred to the man himself, “King George” – reclaimed control of Armani Exchange as it attempts to leverage fast fashion trends. The other form was that of acquisitions in support of brand development – innovation, technology, CRM in Mandarin, social media, etc. More of these sorts of acquisitions were expected on the horizon.

How do these deals play out today? Private equity buyers have a lot of capital and access to cheap debt, but traditionally many of the targets of a buyout have been family-owned businesses who were not ready to relinquish control to a PE firm. These firms are much quicker and more aggressive at deals; they can quickly globalise a brand, can improve the supply chain and stretch the brand up and down from the original price point. Of course, adding new assets, like social media, makes due diligence – and knowing how to allocate risk to a mercurial medium – much harder. Owning supply chains carries risks of more exposure (see Apple and Foxconn). One of the most thorny issues that speakers envisioned was for a luxury good empire known for provenance and quality to be acquired by a a company in a jursidiction that is not known for such things. What if Alibaba bought Balenciaga from Kering, for example?


Digital is expected to drive, on average, 40% of projected luxury sales growth from 2013 to 2020

Next year will see the return of John Galliano to the runway stage to the helm of a fashion house, this time at Martin Margiela. A recent article on the designer’s flameout while creating works of wonder for Christian Dior emphasised the way in which Galliano “had been cloistered off into a strange protective bubble. Sometimes, we isolate (and elevate) talented creatives so much in the fashion industry that they lose connection with reality”. It is arguably a similarly protective bubble that the fashion industry itself has often been accused of being in, and we would argue it is in now with regards to the need for greater digital sophistication and a more significant investment in digital strategy as it concerns customer insights and the law. It is plain to see that the luxury industry continues to face disruptive challenges, be they at the hands of digital, demographic or geopolitical trends. Some of these disruptions will hopefully, as mentioned earlier, be more temporary in nature. The more fundamental shifts in consumption, though challenging, also present myriad opportunities for businesses that are brave and agile enough to test what works best to capture and retain the customer of the future. Last month Exane BNP Paribas published a report illustrating just how important digital sophistication will be (see above chart), and naming those most likely to benefit from such changes. They could do worse than start by reading our previous post on the future of retail.

The future of retail – What digital will do next for commerce

October 19, 2014 3 comments

Back in July of this year, while schoolchildren dreamt of holidays and commuters sweated their way to work, management consultancy McKinsey sat down with president of eBay Marketplaces Devin Wenig. The interview is above; we’re going to pick on some highlights below as Wenig pontificated on the future of bricks and mortar stores, the change needed in marketing, the fallacy of big data and what will make for good competitive advantage over other retailers in the months and years to come. Often with talking heads the output can be generic and anodyne. Wenig though offers some insightful thoughts.

The future of the store: “I think stores are going to become as much distribution and fulfillment centers as they are full-fledged shopping experiences… They’ll become technology enabled so that you can go to a store and see enough inventory, but you may shop “shoppable windows.” We’re building those right now for retailers around the world. You may end up hollowing out the real estate, where the showroom is a much smaller part of the footprint, and the inventory and the distribution center become more of that footprint.”

How marketing needs to change: “There are still many instances that I see where it is old-school marketing. It’s still about major TV campaigns, get people into the stores. That’s still important, and that’s not going to go away. But understanding how to engage in a world of exploding social networks, how to use search, how to use catalog, how to optimize, and how to engage—very different skills.”

Competitive advantage: “I think the answer is data… While from the merchant standpoint incredible selection may seem great, from the consumer standpoint it can be overwhelming. I actually don’t want to shop in a store with a billion items for sale, I’m just looking for this. Data is the way to connect a long-tail advantage with consumers that oftentimes want simplicity.”

Executing on strategy: “Great data is both art and science. There’s a lot of press about the science; there’s not as much about the art. But the truth is that judgment matters a lot… we bring quantitative analysis to that to say, “The right way to look at our customers is this, not this,” even though there are infinite ways we could.”

The fallacy of big data: “It’s not about big data, it’s about small data. Big data is useless… it’s about me connecting with you, my business connecting with you. You don’t want to be part of a big data set; you’re just looking to buy a shirt. And that’s about small data. That’s about understanding insights that I can glean about you that don’t feel intrusive, don’t feel creepy, and don’t feel artificial—but feel natural. That, to me, is the future. There are glimmers of success there. I wouldn’t say the industry has arrived. For all the rhetoric about data, it’s a work in progress, but a critically important work in progress.”

Merging experiences: “E-commerce [fulfills] a utilitarian function… Stores have an important element of serendipity… The future of digital commerce is trying to get the best of both… we’re trying to spur inspiration.”

The failure of enterprise to prepare for cyberattacks


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.

How Apple flaunts precedents

September 10, 2014 Leave a comment

Apple unveils new gadgets

If a market sector hasn’t seen a great deal of activity or customer engagement, after several attempts by respected companies, it might be deemed a bit of a risk for a business to enter the market. Why try where others – with the benefit of first-mover advantage – have failed?

For Apple, the opposite is the case. Sony was already trying to make laptops look beautiful with Vaio before the success of the iMac, Creative Labs and others had been selling MP3 players for years before the first iPod launched in 2001. Microsoft had tried its hand at smartphones with the Pocket PC before Apple wowed the world with the iPhone and Intel made a tablet in 2001 that saw little success. So it was curious to see the below quote yesterday from Ben Bajarin, analyst at Creative Strategies, on the eve of the release of Apple’s Watch device.

“There really isn’t a market for wearables yet… You struggle to find the value proposition and the reason for Apple to do it.”

The reason for doing it is precisely because so many of Apple’s peers and pretenders have failed to create a market for wearables, just as they failed to create a market for the tablet, the smartphone and the MP3 player.

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.


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).

On newspapers – Time (Inc.) for a shift in strategy


It’s no secret that the publishing industry is struggling mightily as customers shift from paying for physical newspapers and magazines to reading information online, often for free. The shift has caused ruptures among other places at that bastion of French journalism, Le Monde, with the recent exit of the editor as staff rued the switch to online. So-called ‘lad’s mags’, the FHMs and Loaded magazines of the world, have been hit particularly hard, as the family PC and dial-up internet gave way to personal, portable devices and broadband connections, which provided easier access to more salacious content than the likes of Nuts could ever hope to provide. FHM’s monthly circulation is down almost 90% from a 1998 peak, according to the Financial Times. Condé Nast have pushed bravely into the new digital era, launching a comprehensive list of digital editions of its wares when the iPad launched in 2010. More recently, the company launched a new venture, La Maison. In association with Publicis and Google, the idea is to provide luxury goods companies with customer insights as well as content and technology solutions. We’ve often written about the need for more rigorous customer insights in the world of luxury, so it’s refreshing to see Condé Nast innovating and continuing to look beyond newsstand sales. We’ve written about other ways publishers are monetising their content here and here.

Time Warner is not alone then in its struggles for new ways of making money from previously flourishing revenue streams. According to The New York Times, Time Warner will be spinning off its publishing arm, Time Inc., with 90 magazines, 45 websites and $1.3bn in debt. In 2006, the article reports, Time Inc. produced $1bn in earnings, which has now receded to $370m. Revenue has declined in 22 of the last 24 quarters. This kind of move is not new. Rupert Murdoch acted in similar fashion recently when he split up News Corporation, creating 21st Century Fox. But with the publishing side of the business there were some diamonds in the rough for investors to take interest in; a couple of TV companies, as well as of course Dow Jones’ Wall Street Journal, which has been invested in heavily. Conversely, the feeling of the Time Inc spin-off was more one of being put out to pasture, particularly as the company will not have enough money to make any significant acquisitions. Like the turmoil at Le Monde, there have been managerial controversies, as those seeking to shake things up have tried to overcome historical divisions between the sales and editorial teams – something other large business journalism companies are reportedly struggling with – only to be met with frustration.


Setting that aside, Time Warner moved swiftly. A day later, the FT reported that the company was “finalising an investment” in Vice Media. We have written extensively about Vice previously, here. The company certainly seems to know how to reach fickle millennials, through a combination of interesting, off-beat journalism, content designed to create its own news, as well as compelling video documentaries that take an unusual look at topical subjects. Such an outlook however does not preclude it from partnering with corporations. As a millennial myself, it seems what people look for from those like Vice is authenticity, rather than the vanilla mediocrity arguably offered by others. We don’t mind commercialism as long as it’s transparent. It does not jar then when Intel is a major investor in its ‘content verticals’, or when last year 21st Century Fox invested $70m in the company. This bore fruit for the movie studio most recently in a tie-up promoting the upcoming Dawn of the Planet of the Apes. The sequel takes place 10 years after the 2011 film, and Fox briefed Vice to create three short films that would fill in the gaps. A great ploy, and the result is some compelling content to keep fans engaged in the run-up to the film’s release, particularly in territories where the film opens after the US market. Such activity is far beyond the purview of the traditional newspaper. But this is not necessarily a bad thing. Publishers must face up to the reality that newspapers alone will not deliver enough revenue to be sustainable. Seeking other content revenue streams while engaging in strategic partnerships with other companies looks, for now, to be a winning formula.

UPDATE 08/07/14: When it comes to engaging with millennials, mobile is most definitely the medium of choice. The FT reported today on Cosmopolitan magazine’s 200% surge in web visitors, year on year in May. Fully 69% of page views were from mobile devices (compared to a 25% average for the rest of the web). The publication has also wised up to the type of content this group likes to consume, as well as create. Troy Young, Hearst’s president of digital media, said the new site is “designed for fast creation of content of all types… Posts aren’t just text and pictures. They’re gifs, Tweets, Instagrams.” Mobile will only get the company so far though. PwC thinks US mobile advertising spending will account for only 4.6% of total media and entertainment advertising outlays this year. Cosmo is looking beyond mobile though to “exclusive events or experiences”, perhaps along the same lines as those other businesses are practicing who are looking for additional revenue streams. The article suggests users might “pay to see the first pictures of an occasion like Kanye West’s and Kim Kardashian’s recent wedding”. Beggars can’t be choosers.

UPDATE 10/07/14: Have all these corporate manoeuvres on the part of Time Warner been in the service of making itself appear an attractive acquisition? As the famous and clandestine Sun Valley conference takes place this week, rumours abounded that Google or 21st Century Fox were both interested in buying TW. This according to entertainment industry trade mag Variety, which commented, “Time Warner could be an attractive target. Moreover, unlike Fox or Liberty Media, it is not controlled by a founder or a founder’s family and with a market cap of $63.9 billion it is a relative bargain compared to the Walt Disney Co. and its $151 billion market cap”.


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