In the course of history, many smart people have been scared by the rapid progression of technology and its impact on the way we live. Forget the printing press; Socrates was concerned that even the technology of recording via written documents (i.e. writing) would “create forgetfulness in the learners’ souls, because they will not use their memories”. One need only look at the graphic above, representing swings in market share for tech titans, to see significant change in just the past 35 years.
January has been a difficult month for the stock market, with share prices around the world taking a tumble. A lot of the liquidity in the market rests on the valuation of a growing number of technology firms, whose route to profitability varies wildly. The oft-written about “Unicorns” are seemingly due for some market correction – no bad thing for the tech sector – but what about the bastions of the industry, how are they looking?
Twitter – The firm would have breathed a sigh of relief at the end of last year, when original co-founder Jack Dorsey committed to returning to the company. There were promising sounds at first, but recently it has been mulling a move away from the 140-character limit that defines its modus operandi. It has the potential, according to Forrester, to repackage such long-form fare in the mode of Facebook’s Instant Articles. But attempting to emulate what has already been done cannot hold any hope for actually catching up with its rival. An article in The New Yorker this week derides the social network, calling out its lack of direction, and questioning its relevance in a growing pool of competitors. Twitter’s US penetration has been flat for the past three quarters, and Snapchat is nipping at its heels in terms of engagement. While overall Twitter is seeing steady growth, it’s rate of growth continues to decline
Facebook – By contrast, Facebook is doing well, particularly concerning its financial performance. Its increasing collaboration with telcos as it explores new revenue opportunities pave the way for sizeable rewards in the medium term. And it is slowly learning from the likes of WeChat and Kakao Talk in Asian markets on how to better integrate various functionality into its Messenger app; it’s first foray is working with Uber to allow users to hire a car without leaving Messenger. (This week Whatsapp also begun to get the message, no pun intended). We commented in our last article about how the social network is fast having to adapt to an ageing user base and lower engagement, but Facebook is attempting to combat such trends with numerous tactics. Sadly, its attempt to provide free internet services in developing markets has run into obstacles. In both Egypt and India, government regulators have interceded to stop the network from running its Free Basics service, under the guise of net neutrality (which in our opinion stretches the definition, and the spirit, of net neutrality).
Yahoo – The troubles for this company are more than we can summarise in this short review. Let it suffice to say that Marissa Mayer’s wunderkind sheen has been significantly tarnished since her arrival at the company in 2012. In an editorial in the Financial Times last month, the company was described as a “blur of services and assets of different values”. As her inescapably significant role in the organisation’s lacklustre performance becomes increasingly apparent – hedge fund Starboard Value has issued an ultimatum for her to either leave peacefully or be replaced by shareholder vote come March – reports are that Mayer will have to lay off around 10% of the company. The FT puts it well,
[R]ather like AOL, it is considered a service stuck in internet dark ages. It is what grandma uses to look up the weather. It is not for Snapchatting teenagers. And it is not what investors crave most of all: the prospect of growth.
Amazon – Until this week the company had been faring extremely well, and its most recent concern was not getting investors too excited about its recent profit announcement. And while it’s reporting this week of a 26% YoY rise in sales was welcome, its fourth-quarter profits of $482m were one-third lower than what Wall Street analysts were expecting; the stock plunged 13% as a result. The disparity between rising sales and profits that don’t align to such a rise are nothing new for the company, unfortunately.
Holistic sector frailty – Two excellent articles in The Economist this month reveal a sector that is experiencing growing pains as the current digital era reaches a period of relative maturity. As the hype dies down, what hath such new ways of thinking, making and working wrought? The first article examines the seemingly glamorous role of a techie working in a startup firm, and the pitfalls that come with it. The article reports that “Only 19% of tech employees said they were happy in their jobs and only 17% said they felt valued in their work”. In looking at the explosion of demand for the inadequately named Hoverboard, the second article identifies that globalisation has vastly sped up a product’s journey from conception to delivery at a consumer’s home, at the expense of a proper regulatory system; it is unclear with so many disintermediated players who should shoulder the burden of quality control. The Economist sees such risk as a parable for the tricky place the sector as a whole finds itself in.
It’s sequel season. While the Mission: Impossible franchise looked set to continue unabated – with, in Zeitgeist’s opinion, a superb Rogue Nation – others were not so fortunate. The revival of the Fantastic Four franchise by Fox saw far less solid returns and though it publicly remains committed to the franchise, it does have several directions it can now go, according to The Hollywood Reporter.
Two of this year’s – and of all time – uber-franchises are of course Star Wars and James Bond. Slated for release at the end of the year (December and November, respectively), trailers for the films are already out in the wild; the Star Wars second trailer set a Guinness World Record. Incidentally, both franchises have made a home out of Pinewood studios in the UK, where a mix of highly-skilled labour and tax incentives are a potent attraction. Both franchises, with roots going back decades, will look to exploit a popular desire for nostalgia that is also playing out in television with the arrival of reboots like Twin Peaks and The X-Files. Recently, however, both franchises have faced existential questions; one over how to promote a film that for many already has high awareness, while managing equally high expectations; the second over ownership.
How to market Star Wars?
Last month’s Comic-Con, a densely-packed meeting place for mega-nerd and studio exec alike, would have been, one would think, a superb place for some exclusive footage, interviews or other filmic crumbs from the Star Wars reboot to be shared to the salivating masses. However, as The New York Times reported, the presence of Star Wars: The Force Awakens was “strangely invisible”, while films as far away as 2017 adorned many a banner or trolley cart. It was not until the end of the week that J. J. Abrams emerged, refusing to divulge any plot details. Much as with knowing the ideal time to start the promotional blitz so that a film remains in an Academy voter’s mind come Oscar voting time, Disney does not want to risk creating excitement in the marketplace too soon, only to have such buzz die down by the time the film is released. Eagle-eyed fans will also be on the lookout for the equivalent of a Jar-Jar Binks in this franchise, something that will immediately turn them off. These fans don’t want to be left out in the cold either, as they very much felt they were when George Lucas tinkered with the original trilogy to add new digital elements (i.e. “Why was I not consulted?”).
Disney have played this long game before. Five years ago we wrote about the careful marketing activity behind the sequel to Tron – another franchise with a long history and a rabid fan base that formed part of a nerd’s cultural pantheon. All in all, the marketing activity spanned three and a half years. Adding to the difficulty of the long lead time is the industry’s second biggest market, China, where Star Wars was never theatrically released. Different tactics for raising awareness might be needed here, but in full knowledge that any materials will quickly make their way online and around the world.
Until now, prominent activity has been otherwise limited to a Vanity Fair cover article and a Secret Cinema screening of Empire Strikes Back that has had most of London’s 20-30somethings raving all summer. It will be difficult to gauge how much or little the marketing activity has to do with the latest iteration of such a powerful icon of culture and film; Disney must do its best to ensure its fans are kept happy but craving until December.
Skyfall, released in 2012, was Bond’s most successful offering to date. But this year’s outing, Spectre, will be the last before a deal ends between Sony Pictures and MGM / EON, the latter being the rights owners, who plan to shop distribution rights to a different studio. This would be a significant hit to the brand equity of a studio that has seen too few box office successes of late, arguably too many Spider-Man reboots, and the too-sorry tale of a cyberattack that exposed painfully frank emails, budgets, and salaries. Its stable of franchises is low compared to its peers; Universal finds itself with a newly-rejuvenated cash cow in the form of Jurassic World; Warner Brothers has its DC Comics franchise.
Outside of the brand though, the financial impact could be limited. While Sony had a 50% equity stake in Casino Royale and Quantum of Solace, according to the FT this was reduced to 20% for Skyfall and Spectre. “While it’s a good piece of business the financial upside or downside is not significant on either end”, a person close to the studio told the paper.
Likely suitors look to be 21st Century Fox – which has enjoyed a long relationship with MGM as its home entertainment distribution partner for a decade – or Warners, which distributed MGM’s Hobbit trilogy. Furthermore, the FT reports that “Kevin Tsujihara, the Warner Bros chairman, is a close friend of Gary Barber, his opposite number at MGM. The two have invested in several racehorses together, including Comma to the Top, which they bought for $22,000 and which had career earnings of more than $1.3m”. As with all things, timing will be everything as MGM ponders an IPO, which might see a higher valuation with a new studio deal in the offing.
“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.
*Our 2016 trends for the sector can be found here*
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.
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:
- Prioritise the greatest business risks to defend and invest in.
- Provide a differentiated approach to defence of assets, based on their importance.
- Move from “simply bolting on security to training their entire staff to incorporate it from day one into technology projects”.
- Be proactive; develop capabilities “to aggregate relevant information” to attune defence systems
- Test. Test. Test again.
- Enlist CxOs to help them understand the value in protection.
- 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.
A recent essay for Foreign Affairs, “The State of the State”, criticises Western governments for failing to innovate. The authors make an unfavourable comparison with China, which, though still autocratic in nature, has at least looked abroad for ways to make the state work better (if only in a necessarily limited scope). One doesn’t need to look much farther than France to see what happens when the state fails to innovate. President Hollande has done his very best to inculcate a backward ideology of indolence among its workers, but the negative effects of over-regulation have been present in France for some time. One major step that is in drastic need of undertaking is the simplification of France’s opaque labour laws, the code for which runs to 3,492 pages, according to a recent article in The Economist. A stark and laughable example of the limits of such a code is elaborated on below,
“[The code] impose[s] rules when a firm grows beyond a certain limit: at 50 employees, for example, it must create a works council and a separate health committee, with wide-ranging consultative rights. So France has over twice as many firms with 49 staff as with 50.”
France of course also has a strong sense of state oversight and sponsorship when it comes to the media industry. L’exception culturelle has long dominated discourse about what content is appropriate and designated to be high art. Such safeguarding of domestic product has been a thorn in the side of late of the EU / US trade partnership, threatening to derail negotiations. Some have argued that such promotion of homemade productions serves not to diminish foreign imports – a love of Americana has not subsided in France – but rather only to preserve a niche. Regardless, argues a recent editorial in one of France’s national newspapers, it has left the country’s media sector susceptible to disruption.
Today’s Le Monde newspaper features a front page editorial on the arrival Monday to the country of Netflix. The company announced its plans for European expansion at the beginning of the year. It won’t have everything its own way, though. Netflix will have to adapt to a very different market environment. The Subscription Video On Demand (SVOD) market is well-established, and it will see much competition from incumbents (last year annual revenues for companies based in France providing such services exceeded EUR10m). These incumbents charge little or nothing for their services, relative to the $70-80 a month Americans pay to a cable company to watch television, according to The Economist, which states “Netflix struggled in Brazil, for example, against competition from local broadcasters’ big-budget soaps”. Moreover, current government policy dictates a 36-month long window from cinema release to SVOD. We’ve argued against the arbitrariness of such windows before, for a variety of reasons, but here such policy surely negatively impacts Netflix’s projected revenues. Such projections will be curbed further by stringent taxes and a further dictat that SVOD services based in France with annual earnings of more than EUR10m are required to hand over 15% of their revenues to the European film industry and 12% to domestic filmmakers, according to France24. As well as traditional competition, Netflix also faces threats from OTT rivals, such as FilmoTV. One possible way around such competitor obstacles is the promotion of itself as a complementary service. The New York Times earlier this spring elaborated,
“Analysts say Netflix, which has primarily focused on older content more than on recent releases, could also survive in parallel to European rivals that have invested heavily in new movies and television shows. Netflix in some ways serves as a living archive, with TV shows like “Buffy the Vampire Slayer” from the 1990s or movies like “Back to the Future” from 1985. Such fare has enabled the company in Britain, for example, to partner with the cable television operator Virgin Media, which offers new customers a six-month free subscription to Netflix when they sign up for a cable package.”
Such archive content will come in handy, particularly given that, as Le Monde points out, Netflix had previously sold the rights to its flagship series ‘House of Cards’ to premium broadcaster Canal Plus’ SVOD service Canal Play (which itself is investing in new content). The article hesitates to guess how much of a success the service will be in France – something Citi has no problem in doing, see chart below – instead looking to the music industry for an analogy, where streaming has become a dominant form of engaging with the medium. As in other markets, streaming services have met with increasing success, particularly with younger generations. For Le Monde, the arrival of Netflix will undoubtedly ruffle a few feathers, but the paper also hopes it will blow away the cobwebs of an industry that has become comfortable in its ways; it hopes the company will provide a piqûre de rappel (shot in the arm) for the culture industry. Netflix’s ingredients – by no means impossible to emulate – of tech innovation, easy access and pricing and a rich catalogue, should be a lesson to its peers. The editorial only laments that it took an American company to arrive on French shores for businesses to get the message.
UPDATE (16/9/14): TelecomTV reported this morning that Netflix has partnered with French telco Bouygues. The company will offer service subscriptions “through its Bbox Sensation from November and via its future Android box service. Rival operators are refusing to host Netflix on their products”.
It’s not quite as cool as Bond in his Tom Ford suit leaning on his wonderful Aston Martin while he plots his next move to unseat some despot. All the same, Germany’s recent apparent spate of typewriter purchases points to a renewed sense of fear of being overheard and compromised in an era of digitally pervasive content, vulnerable networks and indelible conversations. Spying and intelligence concerns coalesced with subject matter we’ve previously written about – including online privacy, governance, security and the internet of things – in a special report in last week’s The Economist, which produced eight articles on the subject of security in a digital landscape. Some highlights:
- Cybercrime is costly. The Centre for Strategic and International Studies estimates the annual global cost of digital crime and intellectual-property theft at $445 billion – a sum “roughly equivalent to the GDP of a smallish rich European country such as Austria”.
- Focus on prevention rather than reaction. As with many things, the best way to make sure cyberattacks aren’t too damaging to your business is to make sure they never happen in the first place. It’s more difficult (and costly) with digital security because the process can easily feel like a Sisyphean struggle; businesses invest in new technology only to see it circumvented by more hacking, perhaps exposing a different loophole or vulnerability. But an iterative approach is better than leaving the door open and spending more money after the fact.
- Honesty is the best policy. After being hacked, a company can find it hard to admit it. This is understandable. Not only is it somewhat embarassing, it admits to customers and shareholders that the company is vulnerable, but it also suggests that their data is not safe with said company; perhaps they should shop elsewhere. However, transparency in such a situation is paramount if others are to learn how to combat such attacks. One suggestion is that the US government “create a cyber-equivalent of the National Transportation Safety Board, which investigates serious accidents and shares information about them”.
- Who to complain to? The perpetrators of cybercrimes are no longer limited to the teenaged hackers of yesteryear. Though ideological groups like Anonymous serve as a disruptive influence, often the biggest problems are caused by the governments charged with protecting things like individual privacy, security and freedom of speech. From the US to China, authorities “do not hesitate to use the web for their own purposes, be it by exploiting vulnerabilities in software or launching cyber-weapons such as Stuxnet, without worrying too much about the collateral damage done to companies and individuals”.
- External trends point to a worsening of the problem. The Internet of Things as a trend will have billions of devices connected to each other via the Internet over the next few years. With one of the fundamental ideas being that the user isn’t really aware of the connection, the likelihood of spotting a hacked device becomes all the smaller. This isn’t a huge problem in cases like a connected fridge receiving spam email, but it becomes more of a problem when hackers can gain remote control of your car. One of the barriers to improved security for everyday devices is that the margins are razor-thin, as are the chips to connected to the devices, in order to keep the product small. Any added security software or hardware and the cost and size of the product increases.
Zeitgeist believe the risk to IoT devices will be one of the key areas that businesses and regulators will need to focus their efforts in the future. Because it is still a relatively fledgling sector, the issue is not being discussed yet in many places. Deloitte, in association with the Wall Street Journal, recently reported on the nature of cyberrisks and how companies can help mitigate them. Well worth a read.
In this post we’ll be looking at how mobile trends are effecting customers, network operators and handset manufacturers. Last week, Analysys Mason reported “[t]he average amount of time that consumers spend using smartphones per day almost doubled between 2011 and 2013, from 98 minutes to 195 minutes”. The time spent actually communicating with other human beings has increased during this period, but only with overall growth in use. As a relative share of what other things consumers do with their smartphones, communication has actually fallen (see above image), from a 49% to 25% share. Retailers will be very happy to see that the “utilities and commerce” share seems to have grown considerably.
72% of those that Analysys Mason surveyed across the UK, US, France and Germany were said to be using OTT messaging services on their phone. These over the top services are posing a real threat to traditional operators. One particular example that caught Zeitgeist’s attention was that of FreedomPop in the US, a virtual network operator that uses Sprint’s network to piggyback off. According to GigaOm, the company has launched an iOS app, that assigns you a unique telephone number and allows you to run all your communications through a “virtual phone”, circumventing the carrier. The answer for carriers may be in bundling services, and indeed BT and Vodafone seem to leaning toward this as a tactic. But a Lex column article in the Financial Times warns that although bundling services into a quad-play offer can increase retention, it usually means offering those same services at a discount.
Cheap smartphones are nothing new in of themselves; competitors to Samsung and Apple have been scrounging away at the bottom of the market for some years now, and it was way back in 2012 at the Mobile World Congress that Mozilla announced it would make a cheap handset for developing economies. What has changed recently is the explosive growth at this end of the market. By 2018, more handsets will have been shipped that sell for under $200 than those that sell above that amount (see chart below), according to IDC and The Economist, who wrote about it recently. As the paper pointed out,
People buying their first smartphones today, perhaps to replace a basic handset, care less about the brand and more about price than the richer, keener types of a few years ago. They are likely to pay less for a nice new smartphone than they did for their shabby old device, because the cost of making smartphones has tumbled.
Part of the problem for incumbents is that they have had to do all the R&D, which new entrants can learn from and improve on without worrying about such fixed costs. For consumers though, with fragmentation at both ends of the market, the choice and price of smartphones has never been better.