Archive
New realities of competitive advantage
This week’s purchase of Yahoo suggests Verizon’s strategy department thinks much the same way as myriad other organisations; “size matters”. Whether it’s about minimising risk or increasing economies of scale, such logic has steered many companies to successful tenures. However, there are new trends in the marketplace that make such aphorisms more and more contentious.
It was a couple of years ago now that Rita McGrath wrote about “the end of sustainable competitive advantage”. Prior to this, the arrival of digital was, in general, supposed to have done away with such things. But perhaps the most recognisable face of the digital revolution over the past decade has been none other than Facebook. Facebook has consistently maintained competitive advantage through a savvy use of lock-in via network effects and an aggressive proclivity to buy out any competition (see Instagram, Whatsapp). Users spend about 50 minutes per day across these platforms.
What about organisations outside of TMT? For several years now, Zeitgeist has seen qual data showing the waning power of branding. As we’ve written extensively about in previous posts, this is partly to do with information asymmetry. In the early days of advertising, it wasn’t easy for an average person to be able to know much about a product like Colgate; a brand identity was a quick way to communicate what expectations a consumer should have. Nowadays, almost entirely due to the internet and digital communication, we are able to quickly ascertain what products meet our requirements (what size tube do I need), which are bullshitting (how much whiter teeth?) and which our friends use (still ranked as the most important data point for trying a new product). Companies like Colgate sit in the Consumer Packaged Goods [CPG] category, where most of the world’s most instantly recognisable brands reside. But according to research from Boston Consulting Group, between 2011 and 2015, CPG companies lost nearly three percentage points of market share in the US. Nestle has missed its sales growth targets for the past three years.
Part of what’s hitting the CPG sector is a sustained enthusiasm for “local”. Zeitgeist first saw this trend emerging in 2011 when he worked in a strategic capacity for retailers who were increasingly looking to tailor their store design and offering to the area they were in. This is happening in media too, where local content in the Chinese market is quickly adapting to the pyrotechnics and thrills of imported Hollywood fare, and reaping the rewards. Many of China’s businesses are built on being the home-grown version of x foreign product. Uber’s recent deal with Didi Chuxing is an example of this. Moreover, if you’ve decided you’re happy to pay a premium for a product, it is increasingly unlikely you’ll choose a mass produced one. A real treat would be buying a nice cheese from Jermyn Street’s Paxton & Whitfield, not from one of the thousands of Waitrose stores in the country. Deloitte report that US consumers would pay at least 10% more for the “craft” version of a good, a greater share than would pay extra for convenience or innovation.
Of course, as mentioned earlier, digital has had a profound impact on lowering barriers to entry. From The Economist,
[New entrants] can outsource production and advertise online. Distribution is getting easier, too: a young brand may prove itself with online sales, then move into big stores. Financing mirrors the same trend: last year investors poured $3.3 billion into private CPG firms, according to CB Insights, a data firm—up by 58% from 2014 and a whopping 638% since 2011.
Digital’s impact has also been to dovetail with the trends already mentioned. Consumers’ turning away from brand messaging and interest for local is a quest for authenticity in a crowded market. Rightly or wrongly, no other tactic has proved so successful to communicate a roughshod authenticity as the viral video over the past ten years. New entrants are communicating using different channels but also in different ways, that make incumbents uncomfortable. As pointed out though in an editorial from the FT this weekend, “It is tempting to see these young companies as miracles of branding. In fact, they expose outdated industry structures and offer dramatically more value to consumers.”
Large organisations, sensing the eroding advantage, are responding in different ways. P&G is increasingly focusing on its top tier brands, selling off or consolidating around 100 others. Unilever recently bought the famous Dollar Shave Club, and VC arms are popping up at companies like General Mills (think Lucky Charms) and Deloitte, which like other firms is also thinking about how to avoid disruption.
At the start of this piece we mentioned two reasons that going big could lead to sustained advantage: minimising risk and establishing economies of scale. In our eyes, the former is more at risk than ever, as firestorms on platforms like Twitter and Periscope can eviscerate a brand more quickly than ever; VW’s vast operations have not saved it from significant reputational damage. Economies of scale are also a risky proposition, as The Economist points out “Consolidating factories has made companies more vulnerable to the swing of a particular currency, points out Nik Modi of RBC Capital Markets”.
But what about Facebook? At the start of the article we talked about its ongoing rule of the social world, but that definition seems too narrow for what the platform is trying to accomplish. Zuckerberg has talked about Facebook becoming a “utility” as part of a long-term vision over the coming decades. This is interesting given this is exactly what every mobile phone network operator in the world is trying to avoid. Reflecting on Yahoo’s demise last week, the Financial Times wrote that “the Achilles heel of each new wave of technology is that it eventually turns into a utility”. Teens don’t tend to find utilities exciting, and perhaps then it is no surprise that Pew reports declining usage and engagement with the platform from this age group. For Facebook then, commoditisation is as much a risk as disruption by a new entry.
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.
Too much content, too many channels, too little time?
We all seem to have less time to ourselves these days. But there seems to be more to watch – on more platforms – than ever before. What trends have led to this, and what’s the result? Much editorial ink has been spilled over the years about how our lives seem to be getting busier, with less free time to ourselves. This is somewhat of a painful irony given that many of our more intellectual ancestors thought our evolution as a species would quickly lead to a civilisation mostly consumed by thoughts of how to fill the days of leisure. In last week’s New Yorker, Harvard professor Thales Teixeira noted there are three major “fungible” resources we have as people – money, time and attention. The third, according to Teixeira, is the “least explored”. Interestingly, Teixeira calculated the inherent price of attention and how it fluctuates, by correlating it with rising ad rates for the Super Bowl. Last year, the price of attention jumped more than 20%. The article elaborates,
“The jump had obvious implications: attention—at least, the kind worth selling—is becoming increasingly scarce, as people spend their free time distracted by a growing array of devices. And, just as the increasing scarcity of oil has led to more exotic methods of recovery, the scarcity of attention, combined with a growing economy built around its exchange, has prompted R. & D. in the [retaining of attention].”
It’s such thinking that has persuaded executives to invest in increasingly multi-platform, creative advertising during the Super Bowl, and to media production companies taking their wares to the likes of YouTube and Netflix. But it’s all circular , as demonstrated last week when Amazon announced it would be producing films for cinema release. The plurality of such content over different channels carries important connotations for pricing strategies. At its most fundamental, what is a product worth when it is intangible and potentially only available in digital form? It chimes with an article written earlier this month in The Economist on the customer benefits of e-commerce. Though most knee-jerk reactions would assume price is the biggest benefit to customers, recent research illustrates this is not always the case. Researchers at MIT showed on average people paid an extra 50% for books online versus in-store. This isn’t because that latest David Baldacci is sold for more on Amazon, but rather because of the long tail. Which means more products are able to find the right owner, for a price, whereas in store comparatively they go unsold. More channels have meant more availability for content, which should benefit consumers in that more content destined to be a hit now finds a home, where once it might have been lost if turned down by the major TV or radio network stations. The Economist elaborates,
“Seasoned publishers have only a vague idea what book, film or song will be a hit. A major record label can sign only a fraction of the artists available, knowing full well it will unwittingly reject a future superstar. Thanks to cheap digital recording technology, file sharing, YouTube, streaming music and social media, however, barriers to entry have been dismantled. Artists can now record and distribute a song without signing to a major label. Independent labels have proliferated, and they are taking on the artists passed over by major labels. Hit songs are still a lottery, but the public gets three times as many lottery tickets.”
So while we may have less time to consume it, more content over more channels will allow for greater chances for breakout hits, particularly with avid niche audiences. Amazon Prime video content was until recently confined to a niche audience, and the show Transparent dealt with niche subject matter. But the show has broken out into the zeitgeist and won two awards at the recent Golden Globes ceremony. (Full disclosure, we know a producer on the show and were lucky enough to visit the set on the Paramount lot in Los Angeles last summer). It is likely such a great show – recently made available free for 24 hours as a way to upsell customers to Prime – would not have found a home on traditional TV networks, and thus in people’s homes, were it not for this plurality.
TMT Trends 2015 – Star Wars, Tech Wars & Talent Wars
***
*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.
The future of retail – What digital will do next for commerce
Back in July of this year, while schoolchildren dreamt of holidays and commuters sweated their way to work, management consultancy McKinsey sat down with president of eBay Marketplaces Devin Wenig. The interview is above; we’re going to pick on some highlights below as Wenig pontificated on the future of bricks and mortar stores, the change needed in marketing, the fallacy of big data and what will make for good competitive advantage over other retailers in the months and years to come. Often with talking heads the output can be generic and anodyne. Wenig though offers some insightful thoughts.
The future of the store: “I think stores are going to become as much distribution and fulfillment centers as they are full-fledged shopping experiences… They’ll become technology enabled so that you can go to a store and see enough inventory, but you may shop “shoppable windows.” We’re building those right now for retailers around the world. You may end up hollowing out the real estate, where the showroom is a much smaller part of the footprint, and the inventory and the distribution center become more of that footprint.”
How marketing needs to change: “There are still many instances that I see where it is old-school marketing. It’s still about major TV campaigns, get people into the stores. That’s still important, and that’s not going to go away. But understanding how to engage in a world of exploding social networks, how to use search, how to use catalog, how to optimize, and how to engage—very different skills.”
Competitive advantage: “I think the answer is data… While from the merchant standpoint incredible selection may seem great, from the consumer standpoint it can be overwhelming. I actually don’t want to shop in a store with a billion items for sale, I’m just looking for this. Data is the way to connect a long-tail advantage with consumers that oftentimes want simplicity.”
Executing on strategy: “Great data is both art and science. There’s a lot of press about the science; there’s not as much about the art. But the truth is that judgment matters a lot… we bring quantitative analysis to that to say, “The right way to look at our customers is this, not this,” even though there are infinite ways we could.”
The fallacy of big data: “It’s not about big data, it’s about small data. Big data is useless… it’s about me connecting with you, my business connecting with you. You don’t want to be part of a big data set; you’re just looking to buy a shirt. And that’s about small data. That’s about understanding insights that I can glean about you that don’t feel intrusive, don’t feel creepy, and don’t feel artificial—but feel natural. That, to me, is the future. There are glimmers of success there. I wouldn’t say the industry has arrived. For all the rhetoric about data, it’s a work in progress, but a critically important work in progress.”
Merging experiences: “E-commerce [fulfills] a utilitarian function… Stores have an important element of serendipity… The future of digital commerce is trying to get the best of both… we’re trying to spur inspiration.”
On past and future innovation – Disruption, inequality and robots
How to define innovation, how has it been studied in the recent past, and what does future innovation hold for the human race?
Sometimes the word innovation gets misused. Like when people use the word “technology” to mean recent gadgets and gizmos, instead of acknolwedging that the term encompasses the first wheel. “Innovation” is another tricky one. Our understanding of recent thoughts on innovation – as well as its contemporary partner, “disruption” – were thrown into question in June when Jill Lepore penned an article in The New Yorker that put our ideas about innovation and specifically on Clayton Christensen’s ideas about innovation in a new light. Christensen, heir apparent to fellow Harvard Business School bod Michael Porter (author of the simple, elegant and classic The Five Competitive Forces that Shape Strategy) wrote The Innovator’s Dilemma in 1997. His work on disruptive innovation, claiming that successful businesses focused too much on what they were doing well, missing what, in Lepore’s words, “an entirely untapped customer wanted”, created a cottage industry of conferences, companies and counsels committed to dealing with disruption, (not least this blog, which lists disruption as one its topics of interest). Lepore’s article describes how, as Western society’s retelling of the past became less dominated by religion and more by science and historicism, the future became less about the fall of Man and more about the idea of progress. This thought took hold particularly during The Enlightenment. In the wake of two World Wars though, our endless advance toward greater things seemed less obvious;
“Replacing ‘progress’ with ‘innovation’ skirts the question of whether a novelty is an improvement: the world may not be getting better and better but our devices our getting newer and newer”
The article goes on to look at Christensen’s handpicked case studies that he used in his book. When Christensen describes one of his areas of focus, the disk-drive industry, as being unlike any other in the history of business, Lepore rightly points out the sui generis nature of it “makes it a very odd choice for an investigation designed to create a model for understanding other industries”. She goes on for much of the article to utterly debunk several of the author’s case studies, showcasing inaccuracies and even criminal behaviour on the part of those businesses he heralded as disruptive innovators. She also deftly points out, much in the line of thinking in Taleb’s Black Swan, that failures are often forgotten about, and those that succeed are grouped and promoted as formulae for success. Such is the case with Christensen’s apparently cherry-picked case studies. Writing about one company, Pathfinder, that tried to branch out into online journalism, seemingly too soon, Lepore comments,
“Had [it] been successful, it would have been greeted, retrospectively, as evidence of disruptive innovation. Instead, as one of its producers put it, ‘it’s like it never existed’… Faith in disruption is the best illustration, and the worst case, of a larger historical transformation having to do with secularization, and what happens when the invisible hand replaces the hand of God as explanation and justification.”
Such were the ramifications of the piece, that when questioned on it recently in Harvard Business Review, Christensen confessed “the choice of the word ‘disruption’ was a mistake I made twenty years ago“. The warning to businesses is that just because something is seen as ‘disruptive’ does not guarantee success, or fundamentally that it belongs to any long-term strategy. Developing expertise in a disparate area takes time, and investment, in terms of people, infrastructure and cash. And for some, the very act of resisting disruption is what has made them thrive. Another recent piece in HBR makes the point that most successful strategies involve not just a single act of deus ex machina thinking-outside-the-boxness, but rather sustained disruption. Though Kodak, Sony and others may have rued the days, months and years they neglected to innovate beyond their core area, the graveyard of dead businesses is also surely littered with companies who innovated too soon, the wrong way or in too costly a process that left them open to things other than what Schumpeter termed creative destruction.
Your new boss
Outside of cultural and philosophical analysis of the nature and definition of innovation, some may consider of more pressing concern the news that we are soon to be looked after by, and subsequently outmaneuvered in every way by, machines. The largest and most forward-thinking (and therefore not necessarily likely) of these concerns was recently put forward by Nick Bostrom in his new book Superintelligence: Paths, Dangers, Strategies. According to a review in The Economist, the book posits that once you assume that there is nothing inherently magic about the human brain, it is evidence that an intelligent machine can be built. Bostrom worries though that “Once intelligence is sufficiently well understood for a clever machine to be built, that machine may prove able to design a better version of itself” and so on, ad infinitum. “The thought processes of such a machine, he argues, would be as alien to humans as human thought processes are to cockroaches. It is far from obvious that such a machine would have humanity’s best interests at heart—or, indeed, that it would care about humans at all”.
Beyond the admittedly far-off prognostications of the removal of the human race at the hands of the very things it created, machines and digital technology in general pose great risks in the near-term, too. For a succinct and alarming introduction to this, watch the enlightening video at the beginning of this post. Since the McKinsey Global Instititute published a paper in May soberly titled Disruptive technologies: Advances that will transform life, business, and the global economy, much editorial ink and celluloid (were either medium to still be in much use) has been spilled and spooled detailing how machines will slowly replace humans in the workplace. This transformation – itself a prime example of creative destruction – is already underway in the blue-collar world, where machines have replaced workers in automotive factories. The Wall Street Journal reports Chinese electronics makers are facing pressure to automate as labor costs rise, but are challenged by the low margins, precise work and short product life of the phones and other gadgets that the country produces. Travel agents and bank clerks have also been rendered null, thanks to that omnipresent machine, the Internet. Writes The Economist, “[T]eachers, researchers and writers are next. The question is whether the creation will be worth the destruction”. The McKinsey report, according to The Economist, “worries that modern technologies will widen inequality, increase social exclusion and provoke a backlash. It also speculates that public-sector institutions will be too clumsy to prepare people for this brave new world”.
Such thinking gels with an essay in the July/August edition of Foreign Affairs, by Erik Brynjolfsson, Andrew McAfee and Michael Spence, titled New World Order. The authors rightly posit that in a free market the biggest premiums are reserved for the products with the most scarcity. When even niche, specialist employment though, such as in the arts (see video at start of article), can be replicated and performed to economies of scale by machines, then labourers and the owners of capital are at great risk. The essay makes good points on how while a simple economic model suggests that technology’s impact increases overall productivity for everyone, the truth is that the impact is more uneven. The authors astutely point out,
“Today, it is possible to take many important goods, services, and processes and codify them. Once codified, they can be digitized [sic], and once digitized, they can be replicated. Digital copies can be made at virtually zero cost and transmitted anywhere in the world almost instantaneously.”
Though this sounds utopian and democratic, what is actually does, the essay argues, is propel certain products to super-stardom. Network effects create this winner-take-all market. Similarly it creates disproportionately successful individuals. Although there are many factors at play here, the authors readily concede, they also maintain the importance of another, important and distressing theory;
“[A] portion of the growth is linked to the greater use of information technology… When income is distributed according to a power law, most people will be below the average… Globalization and technological change may increase the wealth and economic efficiency of nations and the world at large, but they will not work to everybody’s advantage, at least in the short to medium term. Ordinary workers, in particular, will continue to bear the brunt of the changes, benefiting as consumers but not necessarily as producers. This means that without further intervention, economic inequality is likely to continue to increase, posing a variety of problems. Unequal incomes can lead to unequal opportunities, depriving nations of access to talent and undermining the social contract. Political power, meanwhile, often follows economic power, in this case undermining democracy.”
There are those who say such fears of a rise in inequality and the whole destruction through automation of whole swathes of the job sector are unfounded, that many occupations require a certain intuition that cannot be replicated. Time will tell whether this intuition, like an audio recording, health assessment or the ability to drive a car, will be similarly codified and disrupted (yes, we’ll continue using the word disrupt, for now).
Embracing digital – New moves for old companies
Are incumbent companies starting to see the light when it comes to embracing digital? Evidence is slowly starting to point in that direction.
Artists are known for embracing change and innovation, but the art market itself has been slow to adapt to changing consumer behaviour. Now mega e-tailer Amazon is selling art on its site, and venerable auction house Christie’s is pushing headlong into online-only sales, as Mashable recently reported. And while fashion designers know how to use digital to push the envelope, the fashion industry as a business has been notorious for their skittishness at investing in efficient, immersive digital experiences for their customers, so worried are they about detracting from the brand. So it was reassuring to see during Paris Fashion Week recently that French marque Chloé had gotten the message. As Zeitgeist’s dear friend and fashion aficionado Rachel Arthur details on her blog, the brand launched a dedicated microsite for their runway show. Brands like Burberry and Louis Vuitton have been doing this for at least three years, so in of itself it’s nothing new. What made the experience different were two things. Firstly, the site created a journey that started before the show, and continued after it, rather than merely offering a stream of live video and little else. More importantly, it tried to make the experience one that reflected the influence of those watching. As Rachel points out,
“As the event unfolded, so too did different albums under a moodboard header, including one for the collection looks, one for accessories, another for the guests, and one from backstage. Users could click on individual images and share them via Twitter, Facebook, Pinterest or Weibo, or heart them to add them to their own personal moodboard page.
‘[We] are excited to see how you direct your own Chloé show,’ read the invite.”
The recognition of platforms like Weibo should be seen as another coup for Chloé. Too often, companies send out communications to global audiences with perfunctory links to Facebook and Twitter. Not only is there no call to action for these links (why is it that the user should go there?), but there is no recognition that one of the world’s most populous and prosperous markets are more into their Renren and Weibo.
Elsewhere, despite what seems like some niggling problems, Zeitgeist was excited and intrigued to read about Disney‘s latest foray into embracing how consumers use digital devices, this time creating a second-screen experience in movie theaters. Second Screen Live, as Disney have branded it, doesn’t immediately sound particularly logical, as GigaOm point out,
“Of all the places I’d thought would be forbidden to the second screen experience, movie theaters were near the top of my list. After all, you’re paying a premium ticket price for the opportunity to sit in a dark theater and immerse yourself in a narrative — second screen devices operate in direct opposition to that.”
And yet the Little Mermaid experience that the writer goes on to describe cannot be faulted for its attempt at innovation, at reaching beyond current thinking (not to mention revenue streams), in order to forge a new relationship between the viewer and the product. Kudos.
Lastly, Zeitgeist wanted to mention the US television network Fox as a classic example of a company that has slowly come to realise the power of working with digital, rather than against it. In years passed, companies like Fox were indisputably heavily involved in digital, but only from a punitive standpoint. Fox and others were ruthless in their distribution of takedown notices to sites hosting content they deemed to infringe on their product. Fan sites that exploded in support and admiration for shows like The X-Files were summarily threatened with legal action and closed. There was little thought given to the positive sentiment sites were creating around the product, and little thought given to the destruction of brand equity that such takedown notices brought about. Not to mention the dessication of communities that had come together from different parts of the world, their single shared attribute being that they were evangelists of what you were selling. Clips of shows, such as The Simpsons, appearing on YouTube would be treated with similar disdain. So it shows how far we’ve come in a few years that this morning when Zeitgeist went onto YouTube he was greeted on the homepage with a sponsored link from Fox pointing him to the opening scenes of the latest Simpsons episode, before it aired. Definitely a move in the right direction.
Once notorious for their stringent outlook on content dissemination online, Fox now pushes free content across multiple digital channels
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.
davidllewelynjones
jordiconnor
zeitgeist and stuff 