Mischief, managed – digital disruptors in need of legacy structures

“Move fast and break things”. That is the motto of Facebook, and unofficially many of its contemporaries. While much of the most visible impact of new digital organisations has been on how they respond to, engage with and influence user behaviour, just as significant has been the extent to which these organisations have eschewed traditional business models, ways of working and other internal practices. This includes traditional measures of success (hence the above cartoon from The New Yorker), but also of transparency and leadership. Such issues will be the focus of this piece, to compare the old with the new, and where opportunities and challenges can be found.

What makes digital-first organisations different

It’s important to acknowledge the utterly transformative way that digital-first companies do business and create revenue, and how different this is from the way companies operated for the past century. Much of this change can be summed up in the phrase “disruptive innovation”, coined by the great Clayton Christensen way back in 1995. I got to hear from and speak to Clay at a Harvard Business Review event at the end of last year; a clear-thinking, inspiring man. There are few things today that organisations would still find use in from the mid-90s, and yet this theory, paradoxically, holds. The market would certainly seem to bear this concept out. Writing for the Financial Times in April, John Authers noted,

Tech stocks… are leading the market. All the Fang stocks — Facebook, Amazon, Netflix and Google — hit new records this week. Add Apple and Microsoft, and just six tech companies account for 29 per cent of the rise in the S&P 500 since Mr Trump was inaugurated.

The FANG cohort are entirely data-driven organisations that rely on user information (specifically user-volunteered information) to make their money. The more accurately they can design experiences, services and content around their users, the more likely they are to retain them. The greater the retention, the greater the power of network effects and lock-in. (Importantly, their revenue also make any new entrants easily acquirable prey, inhibiting competition). These are Marketing 101 ambitions, but they are being deployed at a level of sophistication the likes of which have never been seen before. Because of this, they are different businesses to those operating in legacy areas. These incumbents are encumbered by many things, including heavily codified regulation. Regulatory bodies have not yet woken up to the way these new companies do business; but it is only a matter of time. Until then though, the common consensus has been that, working in a different way, and without the threat of regulation, means traditional business structures can easily be discarded for the sake of efficiency; dismissed entirely as an analogue throwback.

The dangers of difference

One of the conceits of digital-first organisations is that they tend to be set up in order to democratise the sharing of services or data; disruption through liberalising of a product so that everyone can enjoy something previously limited via enforced scarcity (e.g. cheap travel, cheap accommodation). At the same time, they usually have a highly personality-driven structure, where the original founder is treated with almost Messianic reverence. This despite high-profile revelations of the Emperor having no clothes, such as with Twitter’s Jack Dorsey as well as Google, then Yahoo’s, now who-knows-where Marissa Mayer. She left Yahoo with a $23m severance package as reward for doing absolutely zero to save the organisation. Worse, she may have obstructed justice by waiting years to disclose details of cyberattacks. This was particularly galling for Yahoo’s suitor, Verizon as information came to light in the middle of its proposed purchase of the company (it resulted in a $350m cut to the acquisition price tag). The SEC is investigating. The silence on this matter is staggering, and points to a cultural lack of transparency that is not uncommon in the Valley. A recent Lex column effectively summarised this leader worship as a “most hallowed and dangerous absurdity”.

Uber’s embodiment of the founder-driven fallacy

Ben Horowitz, co-founder of the venture capital group Andreessen Horowitz, once argued that good founders have “a burning, irrepressible desire to build something great” and are more likely than career CEOs to combine moral authority with “total commitment to the long term”. It works in some cases, including at Google and Facebook, but has failed dismally at Uber.

– Financial Times, June 2017

This culture that focuses on the founder has led to a little whitewashing (few would be able to name all of Facebook’s founders, beyond the Zuck) and a lot of eggs in one basket. Snap’s recent IPO is a great example of the overriding faith and trust placed in founders, given that indicated – as the FT calls it – a “21st century governance vacuum“. Governance appears to have been lacking at Uber, as well. The company endured months of salacious rumours and accusations, including candid film of the founder, Travis Kalanick, berating an employee. This all rumbled on without any implications for quite some time. Travis was Travis, and lip service was paid while the search for some profit – Uber is worth more than 80% of the companies on the Fortune 500, yet in the first half of last year alone made more than $1bn in losses – continued.

Uber’s cultural problems eventually reached such levels (from myriad allegations of sexual harassment, to a lawsuit over self-driving technology versus Google, to revelations about ‘Greyball’, software it used to mislead regulators), that Kalanick was initially forced to take a leave of absence. But as mentioned earlier, these organisations are personality-driven; the rot was not confined to one person. This became apparent when David Bonderman had to resign from Uber’s board having made a ludicrously sexist comment directed at none other than his colleague Arianna Huffington, that illustrated the company’s startlingly old-school, recidivist outlook. This at a meeting where the company’s culture was being reviewed and the message to be delivered was of turning a corner.

A report issued by the company on a turnaround recommended reducing Kalanick’s responsibilities and hiring a COO. The company has been without one since March. It is also without a CMO, CFO, head of engineering, general counsel and now, CEO. Many issues raise themselves as a start-up grows from being a small organisation to a large one. So it is with Uber – one engineer described it as “an organisation in complete, unrelenting chaos” – as it will be with other firms to come. There is only a belated recognition that structures had to be put in place, the same types of structures that the organisations they were disrupting have in place. The FT writes,

“Lack of oversight and poor governance was a key theme running through the findings of the report… Their 47 recommendations reveal gaping holes in Uber’s governance structures and human resources practices.”

These types of institutional practices are difficult to enforce in the Valley. That is precisely because their connotations are of the monolithic corporate mega-firms that employees and founders of these companies are often consciously fighting against. Much of their raison d’être springs from an idealistic desire to change the world, and methodologically to do so by running roughshod over traditional work practices. This has its significant benefits (if only in terms of revenue), but from an employee experience it is looking like an increasingly questionable approach. Hadi Partovi, an Uber investor and tech entrepreneur told the FT, “This is a company where there has been no line that you wouldn’t cross if it got in the way of success”. Much of this planned oversight would have been anathema to Kalanick, which ultimately is why the decision for him to leave was unavoidable. Uber now plans to refresh its values, install an independent board chairman, conduct senior management performance reviews and adopt a zero-tolerance policy toward harassment.

Legacy lessons from an incumbent conglomerate

Many of the recommendations in the report issued to Uber would be recognised by anyone working in a more traditional work setting (as a former management consultant, they certainly ring a bell to me). While the philosophical objection to such things has already been noted, the notion of a framework to police behaviour, it must also be recognised, is a concept that will be alien to most anyone working in the Valley. Vivek Wadhwa, a fellow at the Rock Center of Corporate Governance, clarified, “The spoiled brats of Silicon Valley don’t know the basics. It is a revelation for Silicon Valley: ‘duh, you have to have HR people, you can’t sleep with each other… you have to be respectful’.”

Meanwhile, another CEO stepped down recently in more forgiving circumstances, recently but which still prompted unfavourable comparisons; Jeff Immelt of General Electric. As detailed in a stimulating piece last month in The New York Times, Immelt has had a difficult time of it. Firstly, he succeeded in his role a man who was generally thought to be a visionary CEO; Jack Welch. Fortune magazine in 1999 described him as the best manager of the 20th century. So no pressure for Immelt there, then. Secondly, Immelt became Chairman and CEO four days before the 9/11 attacks, and also had the 2008 financial crisis in his tenure. Lastly, since taking over, the nature of companies, as this article has attempted to make clear, has changed radically. Powerful conglomerates no longer rule the waves.

Immelt has, perhaps belatedly, been committed to downsizing the sprawling offering of GE in order to make it more specialised. Moreover, the humility of Immelt is a million miles from the audacity, bragaddacio and egotism of Kalanick, acknowledging, “This is not a game of perfection, it’s a game of progress.”

So while the FANGs of the world are undoubtedly changing the landscape of business [not to mention human interaction and behaviours], they also need to recognise that not all legacy structures and processes are to be consigned to the dustbin of management history, simply because they work in a legacy industry sector. Indeed, more responsibility diverted from the founder, greater accountability and transparency, and a more structured employee experience might lead to greater returns, higher employee retention rates and perhaps even mitigate regulatory scrutiny down the line. The opportunity is there for those sensible enough to grasp it.

Tech frailty in 2016

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.

 

Media Trends 2016

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

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

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

Star Wars and the status quo

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

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

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

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

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

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

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

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

TV’s tribulations

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

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

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

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

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

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

Tech opportunities and pitfalls

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

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

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

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

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

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

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

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

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

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

Oh, and Merry Christmas.

Trials and tribulations for film franchises in 2015

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.

Who will own the right to show Bond?

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.

The next ‘Ishtar’: Is the film industry nearing “implosion”?

“A legendary disaster… a cascade of dysfunction”; can the film industry avoid future Ishtars?

This post serves as a companion piece and extended update to our previous article on rethinking film industry strategy, which can be found here.

“For me, the business of tentpoles is about generating franchises. The more tentpoles that are being made, the more risky the first installment of a potential franchise is going to be. That’s why I think everybody needs to be asking hard questions about what is a real tentpole and what is a faux tentpole.”

– Jean-Luc De Fanti, managing partner at Hemisphere Media Capital

Since our last post a few weeks ago on the need to rethink film industry strategy, when Steven Spielberg publicly predicted an “implosion” in the industry, the subject remains in the zeitgeist. As we referenced in our last post, Mr. Spielberg has some familiarity with the industry’s modus operandi, having created the blockbuster phenomenon way back in the 70s with Jaws. Like a mutant in a film of that genre though, the nature of blockbusters has changed since then. Jaws, were it made today, would look very different (i.e. terrible). Despite Mr. Spielberg’s warnings, studios presumably took some comfort in an animated sequel – Despicable Me 2 – becoming, in the words of NBCUniversal chief Steve Burke, “the single most profitable film in the 100 year history of Universal Studios”, more than E.T., Jurassic Park, etc. Not only did it paint a picture of an industry continuing to grow (though presumably the figure did not take inflation into consideration), it must have also quietened any further calls for originality, safe in the knowledge that it was a pretty lowbrow sequel that had triumphed.

The caveat is a large one though, that any proponents of summer blockbusters need to pay close attention to. Despicable Me 2 has made £437 million so far, with a production budget of just £50 million. While on the surface then Despicable Me 2 seems to prove how successful and profitable summer movies can be, it actually provides a lesson in what commercial success can look like with a small-budgeted film. Instead, the rule of thumb during the summer is more likely to involve investing some $200m+ in a film that fails spectacularly – think The Lone Ranger. Though this Disney production is the most visible disappointment of the season, it is by no means alone. The New York Times count “six big-budget duds since May 1“. It is interesting to note that Now You See Me, “the kind of midrange film that studios have largely abandoned as they focus more on pictures that play globally — has taken in $200.4 million worldwide and is still playing”, after costing $75m to make.

Those responsible try to spread the blame. Johnny Depp and producer Jerry Bruckheimer absolved themselves of wrongdoing for their involvement in The Lone Ranger by blaming the critics. Said Depp, “They had expectations that it must be a blockbuster. I didn’t have any expectations of that”. Yet it is easy to see how one might assume the film – created at such expense, with ripe intellectual property to be exploited, with talent involved in the phenomenally successful Pirates of the Caribbean franchise – had all the appropriate ingredients to make it a blockbuster. Studios meanwhile harp on about Twitter, which lets people instantly share their thoughts on a film and is now considered a worrisome bellwether for box office potential. But this is a reaction to poor filmmaking, not a reason why a bad film exists in the first place. They also cite a tight calendar. As The New York Times elaborates, “One or more cinematic behemoths — those loaded with similar-looking computer-generated effects, films that cost $130 million to $225 million to make — have arrived almost weekly since May, fragmenting and fatiguing the audience”. Again, this is no one’s fault but that of the industry. The idea of launching films in a specific time window, when consumers now enjoy time-shifting and device-shifting with their content, is antiquated. It is just as irrelevant in winter, when back-to-back “prestige” films clutter cinemas, desperate for Oscar attention. It is overwhelming for audiences, reduces choice, and in the case of the winter season implies that the voting member of the Academy have no long-term memory.

Just how many times can we see the White House being blown up?

The summer product is so derivative that evidently audiences are pushing back, showing indifference to the “clones” that feature so prominently at Comic-Con. Films are either direct sequels / reimaginings, or strongly resemble other recent projects. Again, The New York Times has an excellent article on this, elaborating,

“Studios showcased another Amazing Spider-Man, another Cloudy With a Chance of Meatballs, another Avengers, another Thor and another Captain America… In addition to Godzilla, remakes teased here in recent days included RoboCop… and Riddick,… Even many of the original movies introduced at Comic-Con this year had a been-there-done-that feeling to them, notably Legendary’s sword-and-sorcery picture Seventh Son, which co-stars Jeff Bridges, Julianne Moore and Ben Barnes. In thundering snippets of footage shown on Saturday, the movie at times resembled Clash of the Titans, Snow White and the Huntsman and The Chronicles of Narnia: Prince Caspian.”

Cheering news for Sony came last week when it announced a $35m profit in the last quarter, but turbulence lay beyond that. In our last post, we mentioned the imbroglio that Sony found itself in as investor Daniel Loeb – whose hedge fund owns roughly 7% of Sony – continued to urge Sony to spin off its entertainment assets. Last week, he wrote a third letter to Sony – the most aggressive yet, with the Financial Times calling it “blistering” – comparing the film division’s two recent duds After Earth and White House Down to Ishtar and Waterworld (two of the floppiest flops to ever flop). He wrote that the CEO, Kazuo Hirai was sitting by complacently while the film division remained “poorly managed, with a famously bloated corporate structure, generous perk packages, high salaries for underperforming executives and marketing budgets that do not seem to be in line with any sense of return on capital invested”. It was with some interest then that, this past Friday, Zeitgeist saw that none other than George Clooney had stepped into the fray, calling Loeb an “activist” who “knows nothing about our business”. He lambasted the hedge fund industry in general, saying “if you look at those guys, there is no conscience at work”.

Clooney added that the “climate of fear” Loeb was creating would lead to even more risk-averse productions. It is creative, rather than financial risk, that Hollywood is sorely in need of. Art doesn’t engage audiences when it is timid and derivative. It inspires people when it is innovative, daring and different. Usually such creative thoughts do not spring forth from the mind of a hedge fund manager. Such new thinking – involving a review of a market research firms say is suffering from “overcrowding” – will require a significant course correction, one that is not going to come anytime soon. The summer slate for 2015 currently includes a Terminator sequel, an Avengers sequel, a Smurfs sequel, Independence Day 2 and Pirates of the Caribbean 5.

The “Jaws” of death? – Rethinking film industry strategy

Steven Spielberg on-set for “Jaws”. The Leviathan gave birth to the summer blockbuster

This past week, Zeitgeist had the pleasure of enjoying a new adaptation of Shakespeare’s “Much Ado about Nothing”. This adaptation was not performed at the theatre but at the cinema. It was not directed by Kenneth Branagh or any other luminary of the legitimate stage, but rather by the quiet, modest, nerdy Joss Whedon, who until a few years ago was best known to millions as the brains behind the cult TV series phenomenon “Buffy the Vampire Slayer” (full disclosure: Zeitgeist worked on the show in his days of youth). Whedon was picked to direct a film released last year that can, without much difficulty, be seen as the apotheosis of the Hollywood film industry; “The Avengers”. A mise-en-abyme of a concept, involving disparate characters, some of whom already have their own fully-fledged franchises, coming together to form another vehicle for future iterations. “The Avengers” became the third-highest grossing film of all time, and it is a thoroughly enjoyable romp. Moreover, to go from directing on such a broad canvas to shooting a film mostly with friends in one’s own home – as with “Much Ado…” – displays an impressive range of creative ingenuity.

Sadly for shareholders and studio executives’ career aspirations, not every film is as sure-fire a hit as “The Avengers”, try though as they might (and do) to replicate the same mercurial ingredients that lead to success. Marvel, which originally conceived of the myriad characters surrounding The Avengers mythology, was bought in 2009 by Disney for $4bn. Disney for all intents and purposes have a steady strategic head on their shareholders. They parted ways with the quixotic Weinstein brothers while welcoming Pixar back into the fold. They were one of the first to concede the inevitability of closed platforms release windows – something Zeitgeist has written about in the past – they are debuting a game-changing platform, Infinity, which might revolutionise the way children interact with the plethora of memorable characters the studio have dreamt up over the years. However, such sound business strategy could not save them from the uber-flop that was 2012’s “John Carter”, which lost the studio $200m. This summer, the rationale for their biggest release has been built on what appears to be sound logic; taking the on- and off-screen talent behind their massively successful “Pirates of the Caribbean” franchise, and bringing them together again for another reboot in the form of “The Lone Ranger”. The New York Times said the film “descends into nerve-racking incoherence”; it has severely underperformed at the box office, after a budget of $250m. Sony’s “After Earth” similarly underperformed, suddenly throwing Will Smith’s bullet-proof reputation for producing hits into jeopardy.

These summer films – “tentpoles” to use the terminology bandied about in Los Angeles – are where the money is made (or not) for studios. As an industry over the past ten years, Zeitgeist has watched as these tentpoles have become more concentrated, more risk-averse and therefore less original, more expensive and more likely either to produce either stratospheric results or spectacular failures. Paramount is an interesting example of a studio that has made itself leaner recently, releasing far fewer films, and relying on franchises to keep the ship afloat. Edtorial Director of Variety Peter Bart seems to think there’s a point when avoiding risk leads to courting entropy. It’s an evolution that has escaped few, yet is was still notable when, last month, famed directors Steven Spielberg and George Lucas spoke out publicly against the way the industry seemed to be headed. Indeed, the atmosphere at studios in Hollywood seems to mimic that of a pre-2008 financial sector; leveraging ever more collateral against assets with significant – and unsustainable – levels of risk. The financial sector uses arcane algorithms and has a large number of Wharton grads whose aim should be to preserve stability and profit. Yet even with all this analysis, they failed to see the gigantic readjustment that was imminent. In the film industry, Relativity Media’s reputation for rigorous predictive models on what will make a film successful is rare enough to have earned it a feature in Vanity Fair. So what hope is there the film industry will change its tune before it is too late? Spielberg pontificates,

“There’s eventually going to be a big meltdown. There’s going to be an implosion where three or four or maybe even a half-dozen of these mega-budgeted movies go crashing into the ground and that’s going to change the paradigm again.”

Instead of correcting course as failures at the box office failed to abate, studios have dug in harder. Said Lucas,

“They’re going for gold, but that isn’t going to work forever. And as a result they’re getting narrower and narrower in their focus. People are going to get tired of it. They’re not going to know how to do anything else.”

Such artistic ennui in audiences is admittedly sclerotic in its visibility at the moment. “Man of Steel”, another attempt at rebooting a franchise – coming only seven years after the last attempt – is performing admirably, with a position still firmly in the top ten at the US box office after four weeks of release, with over $275m taken domestically. It’s interesting to note that audiences have been happy to embrace the new version so quickly after the last franchise launch failed; though actor James Franco finds it contentious, the same has been true with the “Spider-Man” franchise relaunch.

Is M&A finally out of vogue in the Media and Entertainment sector?

Part of the problem in the industry, some say, is to do with those at the top running the various film studios. In “Curse of the Mogul”, written by lecturers at Columbia University, the authors contend that since 2005 the industry as a whole has underperformed versus the S&P stock index, yet such stocks are still eminently attractive to investors. The reason, the authors say, is that those running the businesses frame the notion of success differently. They argue that it takes a very special type of person (i.e. them) to be able to manage not only different media and the different audiences they reach and the different trends that come out of that, but more importantly (in their eyes) to be able to manage the talent. They asked to be judged on Academy Awards rather than bottom lines. The most striking thing in the book – which Zeitgeist is still reading – is the continual pursuit by said mogul of strategic synergies. This M&A activity excites shareholders but has historically led to minimal returns (think Vivendi or AOL Time Warner), often because what was presented as operational or content-based synergy is actually nothing of the sort. It’s a point Richard Rumelt makes in his excellent book, “Good Strategy / Bad Strategy”. Some companies are beginning to get the idea. Viacom seemed an outlier in 2006 when it divested CBS. Lately, News Corporation has followed a similar tack, albeit under duress after suffering from scandalous revelations about hacking in its news division. A recent article in The Economist states,

“Most shareholders now see that television networks, newspapers, film studios, music labels and other sundry assets add little value by sharing a parent. Their proximity can even hinder performance by distracting management… they have become more assertive and less likely to believe the moguls’ flannel about ‘synergies’.”

So in some ways it was of little surprise that Sony came under the microscope recently as well, part of this larger trend of scrutiny. The company has experienced dark times of late, with shares having plunged 85% over the past 13 years. The departure of Howard Stringer in 2012 coincided with an annual loss of some $6.4bn. Now headed up by Kazuo Hirai, the company has undoubtedly become more focused, with much more being made of their mobile division. Losses have been stemmed, but the company is still floundering, with an annual loss reported in May of $4.6bn. It was only a couple of weeks later that hedge-fun billionaire Dan Loeb – instrumental in getting Marissa Meyer to lead Yahoo – upped his ownership stake in Sony, calling on it to divest its entertainment division in a letter to CEO Hirai. Part of the issue with Sony is a cultural one, where Japan’s ways of working differ strongly from the West’s. This is covered in some detail in a profile with Stringer featured in The New Yorker. In a speech he gave last year, Stringer said, “Japan is a harmonious society which cherishes its social values, including full employment. That leads to conflicts in a world where shareholder value calls for ever greater efficiency”. But Sony’s film division – which includes the James Bond franchise – is performing well; in the year to March 2013 Sony’s film and music businesses produced $905m of operating income, compared with combined losses of $1.9 billion in mobile phones, according to The Economist. It ended 2012 first place among the other film studios in market share. Sony is the last studio to consistently deliver hits across genres, reports The New York Times in an excellent article. The article quotes an anonymous Sony exeuctive, “We may not look like the rest of Hollywood, but that doesn’t mean this isn’t a painstakingly thought-through strategy and a profitable one”. Sadly the strategy behind films like ‘After Earth’ begin to look flimsy when one glances at the box office results. While Hirai and the Sony board concede that have met to discuss the possibility of honouring Mr. Loeb’s suggestion – offering 15-20% of it as an IPO rather than selling it off in full – Mr. Hirai also commented in an interview with CNBC, “We definitely want to make sure we can continue a successful business in the entertainment space. That is for me, first and foremost, the top priority”. In mid-June Loeb sent a second letter, advocating the IPO proposal and saying “Our research has confirmed media reports depicting Entertainment as lacking the discipline an accountability that exist at many of its competitors”. The question is whether selling off its entertainment assets would remove any synergies with other divisions, thus making the divisions left over less profitable, or whether such synergies even existed in the first place. For Loeb, the “most valuable untapped synergies” are still in the studio and music divisions yet after decades as one company they still remain untapped. That point won’t make for pleasant reading at Sony HQ.

Another problem is the changing nature of media consumption habits. Not only are we watching films in different ways over different platforms, we are also doing much else besides, from playing video games, which have successfully transitioned beyond the nerdy clique of yesteryear, to general mobile use and second screening. This transition – and with it a realisation that competition is not likely to come from across regional boarders but from startup platforms – is largely being ignored by the French as they insist on trade talks with the US that centre on the preservation of l’exception culturelle. Such trends are evident in business dealings. The Financial Times this weekend detailed Google’s significant foray into developing content, setting up YouTube Space LA. The project gives free soundstage space to artists who are likely to guarantee eyeballs on YouTube, and lead to advertising revenue for the platform. From the stellar success of the first season of “House of Cards”, to DreamWorks Animation’s original content partnership announced last month, Netflix has become the bête noire for traditional content producers as it shakes up traditional models. We have written before about the IHS Screen Digest data from earlier this year, showing worrying trends for the industry; as predicted, audiences are beginning to favour access over ownership, preferring to rent rather than own, which means less profit for the studio. As much due to a decline in revenue from other platforms as growth in of itself, cinemas are expected to be the major area of profit going forward to 2016 (see above chart). We’ve written before about the power cinema still has. Spielberg and Lucas pick up on this;

“You’re going to end up with fewer theaters, bigger theaters with a lot of nice things. Going to the movies will cost 50 bucks or 100 or 150 bucks, like what Broadway costs today, or a football game. It’ll be an expensive thing… [Films] will sit in the theaters for a year, like a Broadway show does. That will be called the ‘movie’ business.”

In a conversation over Twitter, (excerpts of which are featured above), Cameron Saunders, MD of 20th Century Fox UK told Zeitgeist that “major changes were afoot”. Such potential disruption is by no means unique to the film industry, and should come as a surprise to one. Zeitgeist recently went to see Columbia faculty member Rita McGrath speak at a Harvard Business Review event. In her latest book, “The End of Competitive Advantage”, McGrath discounts the old management consultant attempts at providing sustainable competitive advantages to business. Her assertion is that any advantage is transient, that incumbency and success often lead to entropy, unless there is constant innovation to build on that success. Such a verdict of entropy could well be applied to the film industry. The model has worked well for decades, despite predictions of doom at the advent of television, the VCR, the DVD, et cetera ad nauseum. But fundamental behavioural shifts are now at play, and the way we devise strategies for what content people want to see and how they wish to see it need to be readdressed, quickly. Otherwise all this deliberation will eventually become much ado about nothing.

UPDATE (15/4/13): Of course, context is everything. The New York Times published an interesting article today saying investing in Hollywood is less risky than investing in Silicon Valley, though the returns in the latter are likely to be greater. Neither are seen as reliable.

This issue isn’t going away. We write again about it, here.

The New News – Monetising journalism today

“What the Internet has done is made a million sources of information available. It’s only a click away… The Internet has disrupted many industries. The newspaper business has been destroyed. It’s beginning to happen, arguably, to television. Consumer behaviour is changing!”

– Henry Blodget, editor-in-chief, Business Insider

Great minds may think alike, but they’re now consuming media on a plethora of different devices. Legacy media companies have been struggling in recent years to protect old revenue streams as the onslaught of digital disruption has rendered previous business models less than adequate. Recently, though, there have been signs of hope.

In television, Hulu and Netflix are increasingly showing themselves to be lifesavers of the long-format viewing, in an era where we are being increasingly distracted with short-term fixes, evinced by the success of social gaming product from companies like King. Hulu added 1 million paying subscribers in Q1 of this year and streamed over a billion videos. Netflix, after bravely investing in producing its own content with House of Cards, recently reported it has already recouped the sizeable $100m investment it made in the first season. It’s interesting, reassuring and quite logical to note the news that when Netflix enters a new market, piracy in the region drops. Let’s hope that legacy media companies are finally recognising the oblique connection here (and ponder less the millions of dollars lost over the years to pirated content at the expense of no legitimate alternatives). Though Borders has disappeared and Barnes & Noble may be in trouble, the book business is doing well, with 2012 being a “record year” for the industry. Digital downloads were up 66%, with physical purchases down only 1%. In music, the industry is slowly embracing a future (now very much a present) that has been staring them in the face since the start of the century with Napster and its myrmidons; digital sales rose 9% last year, helping overall sales to rise for the first time in a decade (see The Economist’s chart below). In South Korea, a region traditionally awash with pirated content, startup KKBox has come up with innovative ways to get people to pay for music again. They emphasise a sense of community – much like the one users felt they belonged to on Napster – bringing subscribers “closer to the regional music scene… Users can listen in real time as music celebrities make playlists of their favourite songs. There is also a KKBox print magazine and an annual awards show and concert, and it sponsors regional music festivals”. In other words, the offering goes beyond simply providing product to be streamed; it creates a cohesive world around the product.

In 2012, music industry sales held steady for the first time in years. Digital sales continued to grow.

This cohesive world is in vogue at the moment; it represents most business justifications for investment in social media, and on a granular level again for investing in multiple networks, be they Facebook, Twitter, Pinterest, etc. This cohesiveness also allows for the exploitation of new revenue streams, something we’ve written about before. It’s a point that’s recognised by those in the newspaper industry. David Carey, head of the Hearst Magazines empire, has stated unequivocally that today “you need five or six revenue streams to make the business really successful”. It’s why companies like Monocle, which produces a high-end cultural magazine, has started a radio service that has been “profitable from the start, since normal commercial radio stations never deliver the kinds of listeners its high-end advertisers want”. And as advertising revenue dips below subscriber revenue, as it did recently at The New York Times and will do if it has not done so already at the Financial Times (FT), these new business models need to be set up and utilised, fast.

These discussions and others were up for debate at an event two weeks ago, hosted by the Media Society at the offices of the FT, examining the effects and implications of digital disruption. On a macro level, the problem has been with trying to get people to value content that is no longer physical. From the looks of it – not least from the evidence above -this is broadly starting to be achieved in the music, book and television industries. The problem, according to Laurie Benson, formerly of Bloomberg, was that the newspaper and magazine publishers took the genie out of the bottle, and “panicked”. For, unlike television content producers that seemingly buried their hand in the sand, those in the newspaper business immediately shoved all their content online, for free, in an effort / vain hope that advertising would continue to provide. Nic Newman, who spearheaded the BBC iPlayer initiative, said companies were still fundamentally struggling with mobile, which is especially important now it is considered “the first screen”. Moreover, social media, as well as providing an opportunity to construct a cohesive environment for the product being sold, has also, said Nic, hugely changed the way we find and discover news. The irony of his statement, given at the headquarters of the Financial Times, a paper with arguably the most opaque paywall in the industry – and with a zero-sum Facebook strategy – was not lost on Zeitgeist. On that note, Rob Grimshaw, managing director of FT.com, spoke up, saying he was “very comfortable” with the paywall as it currently was. He admitted he was “worried” about what Twitter would do to their model (the tense should perhaps be what it is doing). Rob mentioned Forbes, which is now allowing direct outside contribution. This obviously makes the platform somewhat more exciting, and certainly more accessible. But what does Forbes mean now as a publication; what is their editorial position, asked Rob. Though many interesting questions were posed, answers were few and far between at the conference, and few initiatives were proposed.

On a more granular level, what are businesses doing now to try and maximise revenue in print? We’ve discussed recommendations for print media before. Unsurprisingly, some of the more innovative – and perhaps controversial – models are coming from those publications outside the mainstream. Business Insider, and Vice, are two such examples. Insights into both publications (although defining these companies as only publications perhaps limits the perception of their offering) were covered in the same issue of The New Yorker last month.

Ken Auletta’s article about Business Insider, and its “disgraced Wall Street analyst”-turned editor, Henry Blodget, states that the blog “draws twenty-four million unique monthly users, more than CNBC”. Overhead is one clearly one of the main areas that such companies have over their legacy rivals, whose roots are in ink and paper; Business Insider could never hope to, nor would they wish to have 1,700 full-time staff, as the WSJ does. One of the innovative, intriguing and controversial things about the editorial of BI is it’s blending of hard news – “7 signs household finances are getting stronger” – with more off-the-wall, attention-grabbing, low-brow content – “3 teeth-whitening products that actually work”, “Here’s what NBA players looked like before they had stylists” and “The porn industry has already dreamed up some awesome ideas for Google Glass“. Blodget, who continues to write many stories himself, is seemingly as comfortable writing about budget-cliff negotiations with an accompanying eighteen charts, as he is writing about the experience of flying home economy class from Davos. Andrew Leonard, on Salon, called the latter “the stupidest article to be posted to the Internet in the year 2013 – and possibly the entire century”. The content may have indeed been questionable, but it’s part of an interesting strategy to cater to multiple mindsets of the same audience; Blodget says he wants to “put the fun back into business“. The New Yorker article describes how BI produces original content through research, including how Goldman Sachs lost the chance to be the lead under-writer in Facebook’s IPO, and questioning whether previously undisclosed emails showed that Zuckerberg really had stolen the idea for Facebook from the Winklevoss twins. A lot of the time though, BI links to reported news “and then adds its own commentary, as well as reactions from others”, what Blodget calls “halfways between broadcast and print… it’s conversational”. It’s also unquestionably lazy, but provocative, which is what – along with many slideshows, with each slide on a different page – earn the blog so many clicks. 85% of BI revenue comes from advertising, a dangerous ploy in a time when rates and interest in online platforms are either slipping or more generally failing to account for costs. Most of the rest of the pie comes from paid conferences, something that other publications – incumbent or otherwise – should take note of. People pay with their time, and sometimes money, for your expertise and opinion, so expanding this engagement into other adjacent opportunities is a wise move. To this point, the company has also hired analysts to create research reports on telco trends. The New Yorker comments, “The result is something like a private magazine that several thousand individuals and businesses receive, for $299 a year”. Other companies are experimenting with various monetisation methods. Andrew Sullivan’s publication The Dish is soon to be made subscriber-only, with no ads, as $20 a year. The good news is that people are starting to willingly pay for other digital content, such as books, music and film. But aside from BI’s small subscriber-based research section of the site – an exception on blogs – the greater worry is what the type of engagement we have with content online means for the type of content that is produced in order to cater for those tastes. Are we reaching the end of an era of nuance? The New Yorker again,

“Lengthy investigative pieces are rare on all-digital platforms. They are expensive to produce and, given a readership that has an average of four minutes to spare, not likely to attract a large audience. As economically beleaguered newspapers invest less in long-form reporting, digital publications are unlikely to invest more.”

Journalism for Vice means creating content to be reported on, rather than simply reacting to developing news

Lizzie Widdicombe’s article on Vice magazine shows there is far more innovation to be developed in the publishing industry, as long as one is willing to stop thinking of oneself as publisher. Vice is by no-means an upstart, at least in the magazine world, but recently found itself on the global stage after having the sheer tenacity to organise Dennis Rodman to go to North Korea for an exhibition basketball game, sitting alongside the Dear Leader himself Kim Jong Un. The story ran with the headline, “North Korea has a friend in Dennis Rodman and Vice”. Immediately we see the lines between reportage and editorial, between analysing events and creating them, begin to blur considerably. The headline looked particularly careless when shortly after the ‘basketball diplomacy’, North Korea “scrapped its 1953 armistice with South Korea and threatened preemptive nuclear attack on the United States”. The Vice article detailed the “epic feast” they were treated to, which again seemed callous given the generational malnutrition that has led to stunted growth in the North Korean population. Journalism stalwart Dan Rather called the whole episode “more Jackass than journalism”. This is a very different type of journalism indeed. The company has 35 offices in 18 countries, with websites, book and film divisions as well as an in-house ad agency. Since 2002 it has operated a record label with albums from the likes of Bloc Party. The New Yorker article says “these ventures are united by Vice’s ambitions to becomes a kind of global MTV on steroids, [but] unlike MTV – which broadcasts a monolithic American vision of youth culture – [the international aim is] to ‘localise’ their sensibility”. According to Shane Smith, Vice’s CEO, ‘The overall aim, the overall goal is to be the largest network for young people in the world… to make content that young people actually give a shit about'”. Vice employees sometimes refer to the brand as “the Time Warner of the streets”.

It has made significant forays into video, with a channel on YouTube that attracts more than a million subscribers. Like Business Insider, Vice also blends the highbrow with the lowbrow in terms of content. On YouTube, the New Yorker reports, videos range from ‘In Saddam’s Shadow: 10 Years After the Invasion’, to ‘Donkey Sex: The Most Bizarre Tradition’. The company’s revenues are estimated at $175m for 2012. In 2011, Vice was valued at $200m, “and last year Forbes speculated that the company might someday be worth as much as a billion dollars“. Its newest venture is a show on HBO (owned by Time Warner), with the tagline ‘News from the edge’. The show “takes on subjects from political assassinations in the Philippines to India’s nuclear standoff with Pakistan”. It engages in what it calls ‘immersionism’, where Vice employees are sent out to these locations and more or less told to engage in practices of varying degrees of danger. The New Yorker says this type of reporting harkens back to that of Hunter S. Thompson, who pioneered “participatory journalism… Vice claims to have a similar objective. Introductions to the HBO series announce that it’s out to examine ‘the absurdity of the human condition'”. One of the reasons companies like Time Warner, News Corp (see image below) and Conde Nast have all made the pilgrimage to Vice’s offices in Brooklyn is that they are all terribly envious of the way the company has managed to engage and monetise their audience. As well as the HBO show, Vice also create supplementary material fro HBO.com that shows how the show was made. Its Internet presence is diverse, and this is where the multiple revenue streams and advertising opportunities come in, as The New Yorker elaborates,

“Web sites, including Vice.com; an ad network; and its YouTube channel… Vice makes more than 85% of its revenue online, much of it through sponsored content… Besides selling banner displays and short ads that play before its videos, Vice offers it advertisers the option of funding an entire project in exchange for being listed as co-creator and having editorial input. Advertisers can pay for a single video, or, for a higher price – $1-5m for twelve episodes… – they can pay for an entire series, on a topic that dovetails with the company’s image… At the highest end of the sponsorship spectrum are [content] verticals, in which companies can sponsor entire websites.”

North Face, for example, partnered with Vice to sponsor ‘Far Out’, where Vice employees visited “the most remote places on Earth”. CNN is attempting similar feats, in an effort to legitimise the partnership – for example with Jaeger Le Coultre – by producing content that has a connection with company’s brand values. Some of Vice’s content verticals are softer than others, so that they can be more advertiser-friendly. It is seen by some at Vice of returning to the original soap opera days, when P&G would sponsor a serial show. This has led to some longtime fans declaring the publication has become too safe – gone are the early magazine covers featuring lines of cocaine, for example. The New Yorker comments the result “can feel like a strange beast, neither advertising nor regular content but something in between”. Vice also have a Creators Project, “devoted to the intersection of art and technology”. They partnered with Intel, and content has included an article on a cinema hackathon, as well as an event where a non-profit and VFX company partnered with techies to develop new forms of “interactive storytelling”. Intel sponsored the event, the video of the event, the blog post and the entire Creators Project website. Over three years, the company has paid Vice “tens of millions of dollars annually… to fund and publicise similar projects”. It is part of Intel’s attempt to have itself perceived as more of an experience brand, a la Disney and Apple. Said the CMO, “We want to see Intel coverage in Vanity Fair and Rolling Stone“. The video of the event is also put in YouTube, a company that is “crucial to Vice’s ability to expand” and which two years ago began paying Vice to make shows as part of a broader strategy to upend traditional TV – seen elsewhere in their recent Comedy Week. Such efforts from Vice form a feedback loop of good news that encourages investment from other individuals (such as former media mogul Tom Freston) and companies (such as Raine Group and advertising conglomerate WPP, a former employer of Zeitgeist). Vice is also planning a global, 24-hour news channel. Smith told The New Yorker, “Let’s say, hypothetically, you become the default source for news on YouTube. You get billions of video views, WPP monetises it. Then you are the next CNN“. This would be a dramatic shift in the way it makes its money now, from those sponsorships mentioned earlier. Quixotic efforts such as the North Korea trip, as well a recent bungling of a story on John McAfee, on the run from police, where Vice inadvertently gave his location away, would have to be curtailed. “If Vice does become a global news network, it might have to rethink some aspects of its prankster approach to reporting”.

Murdoch and other CEOs have much to learn from Vice’s business model

It’s becoming abundantly clear then that what news publishers need to do to survive is embrace a diversity of platforms. This will be a long road for legacy incumbents. The FT now produces a great deal of video content, but it is still largely lost on the app and on the website. There is no hub where videos are categorised in any way. Few if any publications allow someone, upon purchasing a hard copy of the newspaper / magazine, to have access to that same content online, if only temporarily. These are simple but fundamental things that companies like this must do if they want to present their audience with a cohesive experience. That’s about operations and user experience. From a content perspective, journalism also faces new challenges. Fareed Zakaria, who Zeitgeist has been an avid reader of since the reporter’s days writing for Newsweek International, says Vice’s TV show for HBO has “loosened the format” of television reporting, as it tries “to get a news audience interested in the world”.

What are the implications of such a loosening? Vice CEO Shane Smith defended the company’s North Korea trip to The New Yorker, going on to say, “Is it journalism? It depends on what the definition of journalism is”. Um, well, yes, quite. If we’re to maintain any distinction between content that is supported and promoted by advertising, editorial that has a particular bent, and unbiased news rather than sensationalist reportage, we need to start having a serious conversation about what journalism is. In particular we need to discuss what the balance is between the desire to entertain and the task of informing the populace. If the onus is truly on the latter, then it becomes a genuine public good that must, at worst, be subsidised by public money. The issue The New Yorker raises in its article on Business Insider crystallises the dilemma; the medium in which people consume news has changed, thus so have their habits. They are now less likely to dedicate time to reading long articles; so writing these kind of articles is increasingly an unprofitable exercise. An end to thorough investigative journalism would surely have dire consequences. While fears over the death of journalism have been greatly exaggerated, a dramatic shift is underway, and perhaps for the worse. And that’s true no matter what your definition of journalism is.

On the contemporary art market – Expertise, Marketing and Money

“If all signs are autonomous and refer only to one another, it must seem to follow that no image is truer or deeper than the next, and that the artist is absolved from his or her struggle for authenticity.”

– Robert Hughes, 1989

Tom Wolfe, one of America’s greatest living writers, recently had his latest work, Back to Blood, excerpted in Vanity Fair. In it, the author excoriates the miasma of power, money, influence and ignorance that surrounds the contemporary art market. Wolfe describes the billionaires descending on Art Basel Miami as a “raveling, wrestling swarm of maggots”. What has become of art, its pursuit and its collection?

The pursuit of excellence can sometimes can be a quixotic quest, all the more so when dealing with something as ephemeral as art, and particularly with the contemporary art market today. But how does excellence, or authenticity, in art cope with a nexus of questionable experts and highly liquid but bifurcating market, in a world where promotion is all?

Part of this problem resides in the question of expertise, its influence and its value. If one thinks of artists in the period of the Italian Renaissance, the quality of the fresco or sculpture is mostly self-evident in the verisimilitude of the work. Moreover, the media worked with often necessarily involved painstaking, long-term commitment and toil. What artists like Marcel Duchamp began and Andy Warhol perfected was the thought that works of art should be valued by their conceptualism. In other words, not necessarily how much time or effort was put into making an object, or whether it was any “good”, aesthetically speaking, but with more emphasis on the power of the underlying idea – representation – behind the work. “Art can be expressed purely as a thought or action”, wrote the FT recently. This postmodern concept has not evolved since the time of Warhol. Without being able to critique the amount of expertise in the manufacturing of an object, it becomes harder to address the worth of an object, unless you are in the presence of a designated ‘expert’. The situation risks creating an echo chamber of unedifying art that speaks to no-one and is so self-reflexive it loses all meaning. It also allows for an artificial inflation of prices, creating a false market that shuts out all but the ultra-rich, whose tiny but influential numbers can significantly skew the market. One need only look at how much the Chinese taste for wine is influencing global production to see such an instance in action.

Such points were neatly summed up recently by the prestigious art critic and lecturer Dave Hickey, when he announced he was leaving the art world:

Writers, dealers, curators, advisers have become “a courtier class – intellectual headwaiters to very rich people”. For this 0.01%, “art is cheaper than it’s ever been” but “nobody cares if it’s any good, and everybody hates it when something’s really great”

The ‘experts’ who assign value to contemporary art objects have come full circle. Rightly recognising that there is art worth shouting about beyond an arbitrary, Westernised canon, it has now gone too far in the other direction. As a brilliant FT article on the subject recently pointed out, “The market loves theory because it spares the need for discrimination.” Making matters worse, the article quotes gallerist David Zwirner lamenting, “connoisseurship is really not valued, sometimes it is even looked down upon”. All of which leads to a highly fragile concentration of expertise and financial capital sitting with a select few. If we look again at the wine industry, American wine critic Robert Parker was at one time so influential that growers in France began changing their product purely to suit his taste so as to earn a higher rating on his guide. Zeitgeist asked art critic Brian Sewell at a debate earlier this year whether influential patrons such as Charles Saatchi and Francois-Henri Pinault were playing a similar role in the contemporary art world; shifting value perceptions of art and artists according to their personal whim. It helps little when major collectors like Frank Cohen admit publicly that they have “bought a load of bullshit”. The quotation may sound flippant, but it underscores the massive influence the bullshit they have bought has on the broader prices in the art market.

Auction turnover returns to pre-recession highs… just in time for slowing growth in BRIC regions?

Art adviser Lisa Schiff spoke openly about this recently to Forbes magazine, saying she was “worried that there are a lot of young artists that could really take a nosedive”.This influence is being felt keenly right now with small but highly influential – and influenced – groups of buyers in Russia, Brazil and China. But as the BRIC regions continue to stall, what will happen to arbitrarily in-demand art and artists if these markets suffer further losses or even a sudden shock? Such problems are further compounded by the massive rise and fear of litigation, as previous, bona fide experts able to certify works as being genuine are being scared away by the threat of legal action.

So there’s an expertise fallacy here, one which is not restricted to the world of art. Elsewhere, marketing, something that admittedly has always been part of the selling of art to an extent, is becoming increasingly essential for a successful artist or studio. The Montoya exhibition currently on at The Halcyon Gallery in London represents the epitome of this new trend. Full-page ads in The Economist and 30-second spots on CNBC (see beginning of article) are being taken out for the exhibition, placed seemingly without irony at the feet of the very audience the art seems to be mocking, or at least parodying. It is the increasing lack of ironic awareness that creates an emptiness in the purchase and reputation of some of today’s bigger artists, including Jeff Koons, Richard Prince and Takashi Murakami. Interestingly, the latter two have both seen stratospheric success that goes beyond the confines of the art world, helped in part by collaborations with luxury goods company Louis Vuitton.

Richard Prince’s famous Nurse motif was used for the Spring/Summer ’08 Vuitton show

The marketing of art is at its most visible at contemporary art fairs – of which there are now more than 200 annually around the world – mentioned earlier as a subject of Tom Wolfe’s new work. Frieze, which takes place annually in London, is one of the most well-known. It was intriguing to see that this year saw the debut of Frieze Masters, which some saw as an attempt to breathe new life into an event that had begun to lose its ability to surprise. It was also seen as a deliberate attempt to focus attention on more established names in order to avoid some of the volatility the market has seen with newer, less-known artists. So the market isn’t so insular that it doesn’t recognise the need for significant change.

Collecting art is something that few of us can turn into a committed past-time. Moreover, the vagaries of art over the past ten years-plus have been such that only a select few would be able to decipher the worth of a current artist’s produce. The value of their art has been dulled by demographic shifts and concentrations, by overly-excessive marketing tactics and by a reduction and muddling of the nature of what it means to be an expert. Regulation of the sector seems overdue, as conflicts of interest and an oligopolistic marketplace seem to cry out for legal oversight. Some of these problems are not restricted to the art world and it will be interesting to see if a paradigm shift sits on the horizon. The Internet is providing some antidote to this. Recent online-only auctions by Christies – one of ArtInfo’s top ten stories that moved the art market in 2012 – have made the process of bidding for items extremely popular, and small art-sellers like Exhibition A are illustrating there is room for innovation in the industry. Is the art market in an aesthetic and financial bubble, and will it burst? Time will tell.

An Olympic Reputation

Dost thou know what reputation is?

I ’ll tell thee,—to small purpose, since the instruction

Comes now too late.

Upon a time Reputation, Love, and Death,

Would travel o’er the world; and it was concluded

That they should part, and take three several ways.

Death told them, they should find him in great battles,

Or cities plagu’d with plagues: Love gives them counsel

To inquire for him ’mongst unambitious shepherds,

Where dowries were not talk’d of, and sometimes

’Mongst quiet kindred that had nothing left

By their dead parents: “Stay,’ quoth Reputation,

‘Do not forsake me; for it is my nature,

If once I part from any man I meet,

I am never found again.’

– Duchess of Malfi, III, ii

Zeitgeist went to see Duchess of Malfi at the Old Vic last month, a brilliant production, and was reminded of this fantastic quotation when thinking of the upcoming Olympic Games soon to descend on London. Though arguably less ephemeral than the brand of today’s salubrious celebrities – written about recently in Vanity Fair – the Games can hardly be said to provide any quantifiable burgeoning of brand to host countries of the past (except perhaps for Barcelona). As The Economist adroitly put it the other week, “When asked why the United States is a fine place, few would instinctively mention its hosting of the 1996 Olympics in Atlanta.”

Are Britain’s current economic woes related to anything that might be solved by hosting an Olympics? Probably not. Will the Games, much like the bloody affairs of ancient Rome, serve to please and distract the hordes? More likely. The Games themselves will have to be good enough to overcome the pre-event controversies of massive over-spending, Zil lanes, anti-missile protests and Olympic torches on eBay. Otherwise, as the above quotation describes, the reputation of many will be lost forever.

News Corp rendered asunder

Si fractus illabatur orbis, impavidum ferient ruinae

‘Should the world break and fall about him, its ruins will strike him unafraid’. Rupert Murdoch’s world can, without a great deal of exaggeration, surely be said to breaking and falling about him right now. After months of very public airing of dirty laundry, ranging from phone hacking to bribes at the highest levels of society and government, News Corporation could no longer survive in its current form. Though hidden away, nestled in the hills of the South of France for a short time, the news did not escape Zeitgeist’s notice. The empire, which The New York Times reports as being valued at $54bn, will be split into (increasingly unprofitable) newspapers on one hand, entertainment (movies, TV, cable and publishing) on the other. Murdoch said the split would “simplify operations”, though usually that phrase tends to be used as reasoning for when companies merge, rather than disintegrate.

On a personal note, when working a short stint at 20th Century Fox Film several years ago, it was interesting to see the News Corp dynamic at work. Publications like The Sun were a great place for the company to have articles generated concerning subject matter of the upcoming summer blockbuster we were trying to market. At the same time, emphasising the symbiotic relationship of the corporation, a message came down from up high that one of the team’s proximate objectives in the short-term was to shore up and direct eyeballs to The Sun, even at the expense of our own goals. Such a quid pro quo will no longer be necessary in the future.