business models

News Media Should Drop Native Apps

 

by Frédéric Filloux

When it comes to the most basic form of news delivery, facts keep piling up in a way that makes native apps more and more questionable. Here is why it’s worth considering a move back to mobile sites or web apps…  

One of the most shared statistic on mobile use is this one: Applications account for 86% of the time spend b’y users. This leaves a mere 14% for browser-based activities, i.e. sites designed for mobile, either especially coded for nomad consumption, built using responsive design techniques that adapt look and feel to screen size, or special WebApp designs such as FT.com.

This 86/14 split is completely misleading for two reasons: the weight of mobile gaming, and the importance of Facebook.

Take a look at this chart form Flurry Analytics:

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If you combine gaming, Facebook and Social Messaging, roughly 60% of time spent on mobile is swallowed by this trio. As for Facebook, it reaped the top four slots in downloads for non-gaming apps worldwide:

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Mobile consumption will concentrate even more as messaging and free direct communication (red dot in the chart) combine into the fastest growing segment by far. Mobile carriers have reason to be scared. Consequently, Facebook will tighten its grip on the mobile ecosystem as it commands the two dominant direct communication apps. If this wasn’t enough, there are two other fast-growing usages: Video streaming (+44% downloads last year) and Travel & Transportation — Uber, AirBnB, CityMapper — (+31%.)

The main characteristic of these services is they couldn’t be designed outside of a full-fledged application: They require key phone features not easily accessible through a browser such as radio modules, GPS,  image rendering (for maps, graphics), camera, etc.

By comparison, news-related applications do not requires a lot of phone resources. They collect XML feeds, some low resolution images and render those in pre-defined, non-dynamic templates. They use a tiny fraction of a modern smartphone’s processing power.

In fact, for news media, as the following matrix shows, native apps (iOS, Android and soon Windows) become a questionable proposition:

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Summing up, apps for news distribution are technically justified for speed, ability to send notifications, inApp purchases, and the hypothetical use of phone sensors. That’s much money and a lot of complications for a small number of features. (On this subject, see the previous The Future of Mobile Apps for News column.)

Unless you are fighting for the prime phone screens, say the first three swipes, or if you are determined to provide key visual or functional differentiators, going for a set of native apps must be carefully weighed. Depending on the level of sophistication and required features, developing a native application costs between $50,000 and $100,000, for each environment, plus dedicated SDKs for marketing, analytics, etc., plus a 30% fee paid to the app store if you go for a paid or subscription model, plus hassles for approval of the smallest update in the messy iOS App Store…

But if you are already big on social and SEO, a mobile site, lightweight, clearly focused on a small feature set can be quite effective. Disappointing as it may be, HTML5-based web apps are all but dead (the difficulty lies in finding good developers and in managing them.)

Among all players, Google has the ability to overhaul the mobile ecosystem. If it comes up with an SDK or a framework aimed at creating simple and effective apps, indeed with limited performance but with enough features to accommodate news delivery, this could become an industry game-changer.

frederic.filloux@mondaynote.com

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The NYTimes could be worth $19bn instead of $2bn  

 

by Frédéric Filloux

Some legacy media assets are vastly underestimated. A few clues in four charts.   

Recent annual reports and estimates for the calendar year 2014 suggest interesting comparisons between the financial performance of media (either legacy or digital) and Internet giants.

In the charts below, I look at seven companies, each in a class by itself:

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A few explanations are required.

For two companies, in order to make comparisons relevant, I broke down “digital revenues” as they appear in financial statements: $351m for the New York Times ($182m in digital advertising + $169m for digital subscriptions) and, for The Guardian, $106m (the equivalent of the £69.5m in the Guardian Media Group annual report (PDF here).

Audience numbers above come from ComScore (Dec 2014 report) for a common reference. We’ll note traffic data do vary when looking at other sources – which shows the urgent need for an industry-wide measurement standard.

The “Members” column seemed necessary because traffic as measured by monthly uniques does differ from actual membership. Such difference doesn’t apply to news media (NYT, Guardian, BuzzFeed).

For valuations, stock data provide precise market cap figures, but I didn’t venture putting a number the Guardian’s value. For BuzzFeed, the $850m figure is based on its latest round of investment. I selected BuzzFeed because it might be one of the most interesting properties to watch this year: It built a huge audience of 77m UVs (some say the number could be over 100m), mostly by milking endless stacks of listicles, with clever marketing and an abundance of native ads. And, at the same time, BuzzFeed is poaching a number first class editors and writers, including, recently, from the Guardian and ProPublica; it will be interesting to see how Buzzfeed uses this talent pool. (For the record: If founder Jonah Peretti and editor-in-chief Ben Smith pull this off, I will gladly revise my harsh opinion of BuzzFeed).

The New York Times is an obvious choice: It belongs to the tiny guild of legacy media that did almost everything right for their conversion to digital. The $169m revenue coming from its 910,000 digital subscribers didn’t exist at all seven years ago, and digital advertising is now picking up thanks to a decisive shift to native formats. Amazingly enough, the New York Times sales team is said to now feature a ratio of one to one between hardcore sales persons and creative people who engineer bespoke operations for advertisers. Altogether, last year’s $351m in digital revenue far surpasses newsroom costs (about $200m).

A “normal” board of directors would certainly ask management why it does not consider a drastic downsizing of newspaper operations and only keep the fat weekend edition. (I believe the Times will eventually go there.)

The Guardian also deserves to be in this group: It became a global and digital powerhouse that never yielded to the click-bait temptation. From its journalistic breadth and depth to the design of its web site and applications, it is the gold standard of the profession – but regrettably not for its financial performances, read Henry Mance’s piece in the FT.

Coming back to our analysis, Google unsurprisingly crushes all competitors when it comes its financial performance against its audience (counted in monthly unique visitors):

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Google monetizes its UVs almost five times better than its arch-rival Facebook, and 46 times better than The New York Times Digital. BuzzFeed generates a tiny $1.30 per unique visitors per year.

When measured in terms of membership — which doesn’t apply to digital media — the gap is even greater between the search engine and the rest of the pack :

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The valuation approach reveals an apparent break in financial logic. While being a giant in every aspects (revenue, profit, market share, R&D spending, staffing, etc), Google appears strangely undervalued. When you divide its market capitalization by its actual revenue, the multiple is not even 6 times the revenue. By comparison, BuzzFeed has a multiple of 8.5 times its presumed revenue (the multiple could fall below 6 if its audience remains the same and its projected revenue increases by 50% this year as management suggests.)  Conversely, when using this market cap/revenue metric, the top three (Twitter, Facebook, and even LinkedIn) show strong signs of overvaluation:

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Through this lens, if Wall Street could assign to The New York Times the ratio Silicon Valley grants BuzzFeed (8.5 instead of a paltry 1.4), the Times would be worth about $19bn instead of the current $2.2bn.

Again, there is no doubt that Wall Street would respond enthusiastically to a major shrinkage of NYTCo’s print operations; but regardless of the drag caused by the newspaper itself, the valuation gap is absurdly wide when considering that 75% of BuzzFeed traffic is actually controlled by Facebook, certainly not the most reliably unselfish partner.

As if the above wasn’t enough, a final look confirms the oddity of market valuations. Riding the unabated trust of its investors, BuzzFeed brings three times less money per employee  than The New York Times does (all sources of revenue included this time):

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I leave it to the reader to decide whether this is a bubble that rewards hype and clever marketing, or if the NYT is an unsung investment opportunity.

frederic.filloux@mondaynote.com

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How Many Laws Did Apple Break?

 

by Jean-Louis Gassée

Apple’s most recent quarterly numbers broke all sorts of records and, as we shall see, a number of laws.

Apple just released its numbers for the quarter ending last December, the first quarter of its 2015 Fiscal Year. The figures are astonishing:

iPhones:  Apple sold 74.5M, + 57% over last year’s same quarter. iPhone revenue was $51.2B, + 57%. That’s enough iPhones for 1% of the world population, 9.4 iPhones for every second of the past quarter. I hope to see some day a documentary movie on the supply chain heroics leading (parts manufacturing, assembly, transportation logistics) required to achieve such numbers. But I’m not holding my breath.

Overall company revenue grew 30% to $74.6B, with the iPhone representing a never-before 69% of total sales. This why some now call Apple the iPhone Company.

Profit (a.k.a. Net Income): $18B. This appears to be the highest quarterly profit ever achieved by a company:

Apple Largest Quarterly Profit Ever Edited

Record quarterly profits is becoming commonplace for Apple. The company has broken into the top ten list five times since Q1 FY 2012.

(The Wikipedia article on record profits and losses has Fannie Mae’s $84B in 2013 in the #1 spot, but Fannie’s categorization as a Government-Sponsored Enterprise puts it in a different race – not to mention the $77.8B and  $64.2B losses in Q4 2009 and Q4 2008 respectively.)

Cash: After generating $33B from operations, the company now holds $178B in cash and cash equivalents. To get a sense of the magnitude of this amount, $178B represents $550 for every US citizen, or $25 per human on Earth. The World Bank has more data here on income levels and other such numbers, and the Financial Times has a helpful blog entry, If Apple were a country…, that compares Apple’s “economy” to those of various nations.

If you’re hungry for more Apple numbers, I suggest you feast your eyes on Apple’s 10-Q (its quarterly SEC filing), especially the meaty MD&A (Management Discussion & Analysis) section starting on page 24. Management also discusses the quarterly numbers in its customary conference call; the transcript is here.

But not everyone thinks highly of Apple’s doings.

We have academics spewing sonorous nonsense under the color of authority, such as Juan Pablo Vazquez Sampere’s We Shouldn’t Be Dazzled by Apple’s Earnings Report, published in the Harvard Business Review. Sampere, a Business School professor, finds Apple’s display of quarterly numbers unseemly:

Announcing boatloads of money, as if that were point, makes us think Apple no longer has the vision to keep on revolutionizing.

John Gruber offers a reasoned retort to the professor, but it probably won’t sway the likes of Joe Wilcox, a Sampere defender who writes: Atop the pinnacle of success, Apple stands at the precipice of failure.

Or consider Peter Cohan, an habitual Tim Cook critic, who recently told us there are “6 Reasons Apple Is Still More Doomed Than You Think”.

Apple… always one foot in the grave. But in whose grave?

This last quarter hasn’t been kind to the Apple doomsayers. A bundle of their lazy, ill-informed or poorly reasoned — and often angry — predictions are offered here for your compassionate amusement. Or we can turn to the ever reliable Henry The iPhone Is Dead In The Water Blodget for morsels such as this one, from November 2013: Come On, Apple Fans, It’s Time To Admit That The Company Is Blowing It. One of Henry’s points was Apple prices were too high. It’s getting worse: Last quarter, the average price per iPhone rose to $687.

We now turn to law-breaking.

Law 1: Larger size makes growth increasingly difficult.
This is the Law of Large Numbers, not the proper one about probabilities, but a coarser one that predicts the eventual flattening of extraordinary growth. If your business weighs $10M, growing by 50% means bringing in another $5M. If your company weighs $150B, 50% growth the following year would require adding $75B – there might not be enough customers or supplies to support such increase. Actual numbers seem to confirm the Law: Google’s FY 2014 revenue was $66B, +19% year-on-year; Microsoft’s was $87B, +11.5%; Apple’s $183B in revenue for 2014 was a mere +7%.

And yet, last quarter, Apple revenue grew 30%, breaking the Law and any precedent. iPhone revenue, which grew 57%, exceeded $51B in one quarter — close to what Google achieved in its entire Fiscal 2014 year.

Right now, Apple is “guiding” to a next quarter growth rate that exceeds 20%. For the entire 2015 Fiscal Year, this would mean “finding” an additional $37B to $40B in sales, more than half a Google, and a little less than half a Microsoft.

Law 2: Everything becomes a commodity.
Inexorably, products are standardized and, as a result, margins suffer as competitors frantically cut prices in a race to the bottom.

Exhibit 1: The PC clone market. As mentioned, the iPhone ASP (Average Selling Price) moved up, from $637 in Q1 FY 2014 to $687 last quarter. Moving the ASP up by $50 in such a competitive market is, to say the least, counterintuitive. At the risk of belaboring the obvious, a rising ASP means customers are freely deciding to give more money to Apple.

We’re told that this is just a form of Stockholm Syndrome, the powerless customer held prisoner inside Apple’s Walled Garden. Not so, says Tim Cook in a Wall Street Journal interview:

“…fewer than 15% of older iPhone owners upgraded to the iPhone 6 and 6 Plus…the majority of switchers to iPhone came from smartphones running Google Inc.’s Android operating system.

This correlates with Apple’s 70% revenue growth in Greater China, a part of the world where, in theory, cheap clones rule.

Law 3: Market share always wins.
Why this one still has disciples is puzzling, but here we go. With the bigger market share come economies of scale and network effects. Eventually, the dominant platform becomes a gravity well that sucks application developers and other symbionts away from the minority players who are condemned to irrelevance and starvation. Thus, just as the Mac lost to Windows, iOS will lose to Android.

Well… As Horace Dediu tweets it, Apple’s loss to Windows hasn’t hurt too much:

Dediu Losing PC War

Apple has gained PC market share in all but one quarter over the past eight years — that’s 31 out of 32 quarters.

But even that impressive run isn’t as important as the sustaining number that really does matter: profit share. Despite its small unit share (around 7% worldwide, higher in the US), Apple takes home about half of all PC industry profits, thanks to its significant ASP ($1,250 vs $417 industry-wide in 2014, trending down to $379 this year). Apple’s minority unit share in the mobile sector (13% to 15%) captured 90% of mobile profits this past quarter.

Small market share hasn’t killed the Mac, and it’s not hurting the iPhone — which enjoyed a much happier start than the Mac.

Law 4: Modularity Always Wins.
This is one of Clayton Christensen’s worries about Apple’s future. In the end, modularity always defeats integration:

“The transition from proprietary architecture to open modular architecture just happens over and over again. It happened in the personal computer. Although it didn’t kill Apple’s computer business, it relegated Apple to the status of a minor player. The iPod is a proprietary integrated product, although that is becoming quite modular. You can download your music from Amazon as easily as you can from iTunes. You also see modularity organized around the Android operating system activity that is growing much faster than the iPhone. So I worry that modularity will do its work on Apple.”

This was written in May 2012. Three years later, the iPod is all but gone. The music player that once generated more revenue than the Mac and paved the way for the iPhone by giving rise to the iTunes infrastructure has become an ingredient inside its successor. With 400M units sold, Apple no longer even reports iPod sales. One could say integration won.

Christensen rightly points out that in the PC clone market, modularity allowed competitors to undercut one another by improving layer after layer, smarter graphic cards, better/faster/cheaper processing, storage, and peripheral modules. This led to the well-documented PC industry race to the bottom. But Christensen fails to note that the Mac stubbornly refused (and still refuses) to follow the Modularity Law. And, as Apple’s recent numbers show, the iPhone seems just as immune to modularity threats.

I have no trouble with the Law of Large Numbers, it only underlines Apple’s truly stupendous growth and, in the end, it always wins. No business can grow by 20%, or even 10% for ever.

But, for the other three, Market Share, Commoditization, and Modularity, how can we ignore the sea of contradicting facts? Even if we set Apple aside, there are so many “exceptions” to these rules that one wonders if these so-called Laws aren’t simply convenient wishful thinking, a kind of intellectual Muzak that fills an idea vacuum but has no substance.

As Apple continues to “break the law”, perhaps we’ll see a new body of scholarship that provides alternatives to the discredited refrains. As Rob Majteles tweeted: “Apple: where many, all?, management theories go to die?

JLG@mondaynote.com

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News Heads Back to Intermediation

 

by Frédéric Filloux

Thanks to digital, news publishers thought they could build a direct relationship with their customers. Recent deals signal the opposite. 

Two recent deals between media and technology companies struck me as a new trend in the distribution of news. One involves the personal note management service Evernote and Dow Jones (publisher of the Wall Street Journal and owner of the giant database Factiva); the other involves Spotify and Uber.

The first arrangement looks symmetrical. Based on the Evernote Premium user’s profile and current activity, an automated text-mining system — “Augmented Intelligence” in Evernote’s parlance — digs up relevant articles from both the WSJ and Factiva. A helpful explanation can be found on the excellent SemanticWeb.com quoting Frank Filippo, VP for corporate products at Dow Jones:

Factiva disambiguates and extracts facts about people, companies and other entities from the content that comes into its platform. With the help of Factiva’s intelligent indexing, “as users capture their notes, we detect if a company name is mentioned and dynamically present back a Factiva company profile with related news about that company” from any of its premium news and business sources.

The deal is reciprocal: WSJ Subscribers who pay $347.88 a year (weird pricing) get one year of Evernote Premium (a $45value); and Factiva subscribers are eligible for a one-year five-login Evernote Business membership (a $600 value). This sounds like a classic value vs. volume deal: per subscriber value is high for Dow Jones while it should allow Evernote to harvest more Premium and Business accounts at smaller ARPUs. At this stage — the service starts this month and for the US only — it’s unclear which company will benefit the most.

At first, the Spotify-Uber deal doesn’t look at all related to the news business. But it breeds a broader trend in the distribution of news products. The agreement provides that Spotify Premium users will be allowed to stream their music in participating Uber vehicles. In this case, respective ARPUs differ even more than in the DowJones/Evernote arrangement. A Spotify Premium is charged $10 while, according to Business Insider, the average Uber rider spends about $50 to $60 a month. To sum up, it looks like this:

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In the these two deals, the advantage goes to the distributor. Without risking anything, Evernote get access to a valuable professional target group. As for The Wall Street Journal and Factiva, they push content that bears the risk of being more than rich enough for Evernote Premium users – without further need of a subscription to the Journal or Factiva. In this case, the key metric will be the conversion rate of users who are in contact with WSJ articles and opt for a trial subscription. (Based on past experience, publishers always overestimate the attractiveness of their paid-for contents.) This doesn’t mean Dow Jones should have passed on the deal; every new distribution channel needs to be explored. As for Spotify/Uber, it shouldn’t move the needle for either partner.

Except for the data issues.

This is the key point in which parties may not equally benefit. Having dinner with a business predator like Uber requires a long spoon — a strong legal one — to determine the accessibility of stats and customer data. To me, this is much more critical than the difficult to assess financial parameters of such deals.

What’s next? There is no shortage of possibilities. Among many:

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Deciding wether it is an opportunity or a danger for the news media sector is, to say the least, chancy. One sure thing: Digital technologies have successfully reconnected news media publishers to their customers. Some media outlets such has The Financial Times have successfully removed the intermediaries in the path to their audiences– whether these are B2C or B2B.

Today, everyone is worried about the unfolding of Facebook’s ambition to become the essential news distributor (see a previous Monday Note: How Facebook and Google Now Dominate Media Distribution.) In such context, letting other tech companies control too many distribution channels might create vulnerabilities. Possible ways to prevent such hazards are: (a) bullet-proof contracts and (b) approach new distribution schemes in a collective manner. (That’s the science-fiction part of this column.)

frederic.filloux@mondaynote.com

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Payment Systems Adventures – Part II: Counting Friends And Foes

 

by Jean-Louis Gassée

It’s still too early to tell if Apple Pay will square the circle and emerge as a payment system that’s more secure, more convenient, and is widely accepted. MCX, a competing solution that faces more challenges than Apple Pay, helps shed light on the problem.

Apple Pay was announced on September 9th with the new iPhone 6, and rolled out on October 20th.

Where it works, it works well. The roster of banks and merchants that accept Apple’s new payment system is impressive, with big names such as Visa, American Express, Bank of America, Macy’s, Walgreens, and Whole Foods.

But it doesn’t work everywhere.

At launch, Apple Pay covered just a corner of the territory blanketed by today’s debit and credit cards. Then we had a real surprise. Within 24 hours of the roll-out, a handful of merchants, notably CVS, Rite-Aid, Target, and Wal-Mart, pulled the plug on Apple Pay. Apparently, these retailers suddenly remembered they had signed an exclusive agreement with Merchant Customer Exchange (MCX), a consortium of merchants that’s developing a competing payment system and mobile app called CurrentC. How a company as well-managed as CVS could have “forgotten” about its contract with MCX, and what the threatened consequences were for this lapse of memory aren’t known…yet.

We could wade through the professions of good faith and sworn allegiance (“We are committed to offering convenient, reliable, and secure payment methods that meet the needs of our customers”, says Rite Aid PR flack Ashley Flower), but perhaps we’re better off just listing MCX’s Friends and Foes.

Let’s start with the Foes: MCX hates credit cards. As Ron Shevlin of Snarketing 2.0 reports, the hatred isn’t even veiled:

“At last year’s BAI Retail Delivery conference…I asked Mr. Scott [Lee Scott, former Wal-Mart CEO] why, in the face of so many failed consortia before it, would MCX succeed? He said: ‘I don’t know that it will, and I don’t care. As long as Visa suffers.’”

This open animosity is understandable. When we look at Wal-Mart’s latest financials, we see that the company’s net income is 3.1% of sales. A typical Visa transaction costs them 1.51% of the amount that was charged. (See Credit Card Processing Fees & Rates for mind-numbing esoterica.)

For Wal-Mart and other big merchants, this 1.51% “donation” cuts too close to the bone, which is why they banded together to form the MCX consortium.

So we know who MCX’s Foes are…but does it have any Friends?

Not really. Counting the MCX merchants themselves as Friends is a bit of a circular argument — no sin there, it’s business — but it doesn’t build a compelling case for the platform.

What about consumers?

On paper, the MCX idea is simple: You download the CurrentC app onto your mobile phone and connect it to a bank account (ABA routing and account number). When it comes time to pay for a purchase, CurrentC displays a QR code that you present to the cashier. The code is scanned, there’s a bit of network chatter, and money is pumped directly out of your bank account.

Set-up details are still a bit sketchy. For example, the CurrentC trial run required the customer’s social security and driver’s license numbers in addition to the bank info. MCX says it doesn’t “expect” to have these additional requirements when CurrentC launches in early 2015, but I’m not sure that it matters. The requirement that the customer supply full banking details and then watch as money is siphoned off without delay is essentially no different from a debit card — but with a middle man inserted into the process. And while debit card use surpassed credit cards as far back as 2007, US shoppers are loathe to leave the warm embrace of their credits cards when it comes to big ticket purchases (average debit card charge in 2012: $37; credit card: $97; see here for yet more estorica).

What does MCX and CurrentC offer that would entice consumers to abandon their credit and debit cards and give merchants direct access to their bank accounts? The consortium can’t offer much in the way of financial incentives, not when the whole point is to remedy Visa’s 1.51% processing fee.

Now let’s look at Apple Pay; first, consumers.

Apple has recognized the strong bond between consumers and their credit cards: The average wallet contains 3.7 cards, with a balance of $7.3K outstanding. Apple Pay doesn’t replace credit cards so much as it makes the relationship more secure and convenient.

Set up is surprisingly error-free — and I’m always expecting bugs (more on that in a future note). The credit card that’s connected to your iTunes account is used by default, all you have to do is launch Passbook and re-enter the CVV number on the back. If you want to use a different credit card account, you take a picture of the card and Passbook verifies it with the issuer. Debit cards also work, although you have to call the bank…as in an actual telephone call. In my case, the bank had a dedicated 877 number. Less than 30 seconds later a confirmation appeared on my device.

Paying is simple: Gently tap the phone on a compatible, NFC-enabled point-of-sale terminal and place a registered finger on the TouchID button; the phone logs the transaction in Passbook and then vibrates pleasantly to confirm.

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On the security side, Apple Pay doesn’t store your credit card number, neither on your  phone nor on Apple’s servers. Instead, the card is represented by an encrypted token; the most you can ever see are the last four digits of the card — even on an unlocked phone, even when you’re deleting a card from your Passbook.

Simplifying a bit (or a lot), during a transaction this encrypted token is sent through the NFC terminal back to your bank where it’s decrypted. Not even the merchant can see the card.

We can also count the banks and credit card companies as Friends of Apple Pay. For them, nothing much changes. A small fee goes to Apple (0.15%, $1 for every $700). Apple Pay isn’t meant to make money in itself, its goal is to make iDevices more pleasant, more secure.

Banks also like the potential for cutting down on fraud. In 2013, payment card fraud was pegged at $14B globally with half of that in the US. How deeply Apple Pay will cut into this number isn’t known, but the breadth and warmth of Apple Pay adoption by financial institutions speaks for their expectations. Wells Fargo, for example, put up a large billboard over the 101 freeway and promoted the service on social media:

What about merchants? This is a mixed bag; some seem to be fully on board, although, as ever, we mustn’t judge by what they say for the flackery on the left is just as disingenuous as the flackery on the right. Regard the declaration from pro-Apple Pay Walgreens: “Incorporating the latest mobile technology into our business is another way we are offering ultimate convenience for our customers.” Sound familiar?

Others, such as Wal-Mart are resolute Foes. Of the fence sitters, time will tell if they’ll jump into the Apple Pay camp or desert it. It’s still very early.

Questions remain regarding “loyalty” programs, a cynical word if there ever was one when considering the roach motels of frequent flyer miles. A quick look at in-app payments provides a possible answer.

One such example, no surprise, is Apple’s own App Store app where you can pay with Apple Pay after scanning an accessory’s barcode. The app triggers a confirmation email that shows that the merchant, Apple, is aware of the transaction. Other merchants can, and will, build their own apps, but there’s still the question of how a loyalty program will work for point-of-sale transactions where merchants can’t see your data.

In a clumsily worded comparison, MCX CEO Dekkers Davidson tries to imply that his company’s exclusivity requirement is much like AT&T’s arrangement with Apple in the early days of the iPhone, and arrangement that wasn’t permanent and that worked out well for both parties. In the meantime, one can visualize Apple engaging in an encircling action, patiently adding partners and features quarter after quarter.

We’ll know soon if this battle is won before it’s even fought.

JLG@mondaynote.com

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How Facebook and Google Now Dominate Media Distribution

 

The news media sector has become heavily dependent on traffic from Facebook and Google. A reliance now dangerously close to addiction. Maybe it’s time to refocus on direct access. 

Digital publishers pride themselves on their ability to funnel traffic from search and social, namely Google and Facebook (we’ll see that Twitter, contrary to its large public image, is in fact a minuscule traffic source.) In ly business, we hunt for the best Search Engine Optimization specialists, social strategists, community managers to expand the reach of our precious journalistic material; we train and retrain newsroom staff; we equip them with the best tools for analytics and A/B testing to see what headlines best fit the web’s volatile mood… And yet, when a competing story gets a better Google News score, the digital marketing staff gets a stern remark from the news floor. We also compare ourselves with the super giants of the internet whose traffic numbers coming from social reach double digit percentages. In short, we do our best to tap into the social and search reservoir of readers.

hand_drawn_social_media_icons_by_rafiqelmansy-d41q4gm

Illustration by Rafiq ElMansy DeviantArt

Consequences vary. Many great news brands today see their direct traffic — that is readers accessing deliberately the URL of the site — fall well below 50%. And the younger the media company (pure players, high-performing click machines such as BuzzFeed), the lower the proportion of direct access is – to the benefit of Facebook and Google for the most part. (As I write this, another window on my screen shows the internal report of a pure player news site: In August it only collected 11% in direct access, vs. 19% from Google and 24% from Facebook — and I’m told it wants to beef up it’s Facebook pipeline.)

Fact is, the two internet giants now control most of the news traffic. Even better, they collect on both ends of the system.

Consider BuzzFeed. In this story from Marketing Land, BuzzFeed CEO Jonah Peretti claims to get 75% of its traffic from social and to not paying much attention to Google anymore. According to last Summer ComScore data, a typical BuzzFeed viewer reads on average 2.3 articles and spends slightly more than 3 minutes per visit. And when she leaves BuzzFeed, she goes back to the social nest (or to Google-controlled sites) roughly in the same proportion. As for direct access, it amounts to only 6% and Twitter’s traffic is almost no existent (less than 1%). It clearly appears that Twitter’s position as a significant traffic contributor is vastly overstated: In real terms, it’s a tiny dot in the readers’ pool. None of this is accidental. BF has built a tremendous social/traffic machine that is at the core of its business.

Whether it is 75% of traffic coming from social for BuzzFeed or 30% to 40% for Mashable or others of the same kind, the growing reliance to social and search raises several questions.

The first concerns the intrinsic valuation of a media so dependent on a single distribution provider. After all, Google has a proven record of altering its search algorithm without warning. (In due fairness, most modifications are aimed at content farms and others who try to game Google’s search mechanism.) As for Facebook, Mark Zuckerberg is unpredictable, he’s also known to do what he wants with his company, thanks to an absolute control on its Board of Directors (read this Quartz story).

None of the above is especially encouraging. Which company in the world wouldn’t be seen as fragile when depending so much on a small set of uncontrollable distributors?

The second question lies in the value of the incoming traffic. Roughly speaking, for a news, value-added type media, the number of page views by source goes like this:
Direct Access : 5 to 6 page views
Google Search: 2 to 3
Emailing: ~2
Google News: ~1
Social: ~1
These figures show how good you have to be in collecting readers from social sources to generate the same advertising ARPU as from a loyal reader coming to your brand because she likes it. Actually, you have to be at least six times better. And the situation is much, much worse if your business model relies a lot on subscriptions (for which social doesn’t bring much transformation when compared, for instance, to highly targeted emails.)

To be sure, I do not advocate we should altogether dump social media or search. Both are essential to attract new readers and expand a news brand’s footprint, to build the personal brand of writers and contributors. But when it comes to the true value of a visit, it’s a completely different story. And if we consider that the value of a single reader must be spread over several types of products and services (see my previous column Diversify or Die) then, the direct reader’s value becomes even more critical.

Taken to the extreme, some medias are doing quite well by relying solely on direct access. Netflix, for instance, entirely built its audience through its unique recommendation engine. Its size and scope are staggering. No less than 300 people are assigned to analyze, understand, and serve the preferences of the network’s 50 million subscribers (read Alex Madrigal’s excellent piece published in January in The Atlantic). Netflix’s data chief Neil Hunt, in this keynote of RecSys conference (go to time code 55:30), sums up his ambition by saying his challenge is “to create 50 million different channels“. In order to do so, he manages a €150m a year data unit. Hunt and his team concentrate their efforts on optimizing the 150 million choices Netflix offers every day to its viewers. He said that if only 10% of those choices end up better than they might have been without its recommendation system, and if just 1% of those choices are good enough to prevent the cancellation of a subscription, such efforts are worth €500m a year for the company (out of a $4.3bn revenue and a $228m operating income in 2013). While Netflix operates in a totally different area from news, such achievement is worth meditating upon.

Maybe it’s time to inject “direct” focus into the obligatory social obsession.

frederic.filloux@mondaynote.com

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News Media: Diversify or Die

 

The era of news media based on single product is over. In every field, diversification is mandatory, but yields will vary. Decisive prioritization will make a big difference. 

Below is a list – by no means exhaustive – of products and services to be found in most media organizations. Their targets include both individual customers (I use the term on purpose because it goes well beyond the notion of readers), as well as corporate clients. Difficult as it may seem, I’ve assigned a tentative value to each item. In turn, the sum of items in any given mix must translate into the famous Average Revenue per User (ARPU), a number that should be everyone’s obsession. (In the end, the metric of choice ought to be the Margin Per User, but it is very complicated to assess for two reasons: one, some products take a while to take off and, two, in integrated media companies, most resources are spread across many products). These precautions aside, here is a quick overview:

338_table_diversif

Now, let’s examine each item in detail, looking at the nature of the product (or service), its business potential and its priority level.

Daily Print Occasional Reader. This is, by all means, the least valuable customer. For premium brands that increased their street price in recent years, the margin can remain significant. But, for the vast majority of media outlets, the costs of serving occasional, rare customers in remote places are staggering. The practice needs urgent reassessment. In most cases, this means eliminating the weakest point of sales.
Potential: Zero. Setting rare exceptions aside, this amounts to decay management.
Priority: Low. (Well, high priority when it comes to cleaning up this line of business.)

Daily Print Subscriber. Its indisputable value relies on a single fact: Some customers (note the emphasis) will pay almost any price to see their dead-tree copy on their doorstep or on their desk every morning. True. But less and less so. It won’t resist the generational shift nor the objective practicability – and depth – of the digital vector.
Potential: Limited due to unavoidable reader depletion
Priority: Limited. Stick to the well-known mechanism of subscribers gathering (good data management helps).

Weekend Print Occasional Readers and Subscribers. Basically, same as above – with one caveat: Some weekend print products still bring sizable advertising revenue. In the US, large dailies are said to bring half of their revenue on weekends (another reason to reconsider weekday products).

Digital Occasional Reader. Can be funneled in through SEO and similar tactics. In most cases, annual ARPU (mostly ads) remains in the single digit.
Potential: Depends on the ability to go for volume and on decisiveness in terms of advertising creation. To put it another way, if you stick to IAB-like formats, you’re doomed. Conversely, If you take control of advertising creation on your own properties, the stakes rise quickly.
Priority: High. Go beyond the usual low-yield system.

Digital Registered Users. In short, anything must be done to get your audience to leave names and email addresses. These are your high-contribution customers of tomorrow. Then, don’t spare any resource, both in terms of technology and smart people to operate it.
Potential: High.
Priority: Top.

Digital Subscribers. For quality media, this is the most precious revenue stream. (It doesn’t apply, of course, to commodity news providers or aggregators who bet solely on volume.) Hence the importance of harvesting as much registered users as possible. Next step is to work on the conversion rate. A good CRM mechanism is a plus, but a great, valuable, unique product is mandatory. User’s won’t pay for digital access (whatever the platform — desktop web, mobile, web, apps) unless they are convinced that you provide irreplaceable stuff.
Potential: High.
Priority: Top.

eBooks Publishing. Disappointing, so far. This must remain cheap to operate. Preferably, opt for partnering with an established digital publisher eager to take advantage of your brand’s reach and reputation. They’ll do the tedious part for you, sparing you most operating costs.
Potential: Average, can become a quiet and steady P&L contribution.
Priority: Low.

Intelligence & Special Reports / Customized Intelligence. This only applies to highly regarded B2B brands. It can be expensive to operate (it requires specialized staff — that must be kept small). Highly customized, bespoke intelligence reports carry significant upside, but they border on consulting.
Potential: Sizable if you are able to sell high premium products to a high-paying niche of solvent customers (every word in the phrase counts).
Priority: Average. There is a significant risk of losing money for a long time before achieving traction.

Events & Conferences. According to people who organize such, the segment is (a) very crowded, (b) highly dependent on the general business climate. Conference attendance usually is the first budget item slashed by corporations in down times. One sure thing, tough: Conferences & Event indeed are editorial products. They must be supported (ideally induced) by the news staff; like the so-called enterprise journalism, they must be the product of deep editorial thinking, with an angle; and they must be focused on providing something unique. If these boxes are checked, high margin will ensue. (Read The Eight Types of Journalism Events That Works on PBS Blog)
Potential: High if well engineered and executed.
Priority: Depends on the level of competition in your market. I’d say: High.

Moocs & Training Products. One of my favorites. Three reasons: One is demographic: More and more people will have no choice but to immerse themselves in deep training simply to survive in the job market. The second is the dual market potential: Corporate for paid-in-advance products, and B2C for sponsored courses. I no longer believe in the ability for a media company to collect paid-for users since big Mooc outlets (Coursera, Audacity, Kahn Academy and others) are sterilizing the business of online education by proposing great courses at no charge. But media can leverage on their brand, reach, as well as their portfolios of advertisers.
Potential: High
Priority: Top. Because we are talking about tomorrow’s customers here. Better start showing up on their radar. Risk is limited as long as you stick to a cost structure in which productions costs are pre-guaranteed.

eCommerce. Important, but impossible to detail here: Too many possibilities. Some media are doing well selling tickets for sports events or concerts, other are more into high-priced items aimed at corporations. In the end, it depends on the performance of your lead-gathering machine. Many companies are learning fast. Potential varies widely, depending on your market.

Content Syndication. This needs serious consideration. Digital news is overwhelmed by shallow, recycled, often mediocre contents. Premium is rare because it’s expensive and risky to produce. Therefore it carries tangible value. Hence the importance of a selective dissemination towards outlets that can’t afford original production. In order to realize its full potential, quality editorial production needs the adjunction of essential attributes such as granular semantic and a powerful, API-based distribution platform.
Potential: High (especially for well-structured and well-distributed contents).
Priority: Should be on the very Top.

Again: Many more items can be added to this enumeration. But a fact insists: As journalism sees its economics faltering, diversification is mandatory. It requires agility, light structures (in some cases disconnected from the mother ship), dedicated staff who think fast and react faster. The upside is promising.

frederic.filloux@mondaynote.com

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eBay Under New Management – Again

 

Apple Pay, not even launched yet, is already making waves. Apple’s payment system has caused eBay to move people and business units around.

Early in 2012, PayPal’s President, Scott Thompson, abruptly left the company to become CEO of Yahoo. During his four-year tenure at the eBay subsidiary, Thompson had doubled PayPal’s user population and increased payment volume by 26% per year to over $120B. So why did he leave? eBay CEO John Donahoe put it this way:

“Scott wanted to be a CEO, and that’s great. He felt the opportunity wasn’t going to come along again. He had the best non-CEO job in the world, but he wanted to be a CEO, and wanted to go for it.”

Yes, Thompson wanted to be CEO…of an independent PayPal, but Donahoe and the eBay Board wouldn’t have it.

Fast forward to this year. Carl Icahn believes that PayPal would be more creative and make more money for its shareholders if it were freed from eBay tangles, so he makes a non-binding proposal to separate PayPal from its parent company.

In a January 23rd, 2014 blog post, Donahoe rebuffs the offer and doubles down on his position:

“PayPal and eBay make sense together for many reasons. Let me highlight three that we believe are among the most important [emphasis his]:
One: eBay accelerates PayPal’s success.
Two: eBay data makes PayPal smarter.
And three: eBay funds PayPal’s growth.”

Donahoe prays at the Church of Synergy and Leverage: Together, eBay and PayPal will ascend to heights neither is able to reach on its own.

That was then.

Last week, Donahoe left the Church. He and the eBay Board announced their three-part game plan for 2015:

  • PayPal will become an independent company led by Dan Schulman (American Express, AT&T, Priceline, Virgin Mobile)
  • Devin Wenig, currently president of eBay Marketplace, will replace Donahoe as eBay CEO.
  • After the separation is complete, Donahoe will no longer have an executive role but will  serve on the Board of one or both companies

(Compensation packages for the new CEOs are detailed in this SEC filing.)

What happened?

In eBay’s Investor Presentation, Donahoe extolls the union’s accomplishments, but explains that “Now the Time is Right for Two World Class Independent Platforms” and that the decision to part company “[r]eflects confidence we can preserve relationships and avoid dis-synergies through arm’s-length operating agreements”.

Spoken like a true consultant. (Prior to joining eBay, Donahoe had a stellar career at Bain & Company, where his eBay CEO predecessor Meg Whitman also worked.)

There is a shorter explanation: Apple Pay.

Apple’s new payment system, tied to the iPhone 6, is supported by American Express, Visa, and MasterCard, and recognized by a number of merchants including Walgreens, Macy’s, Target, and Whole Foods.

This changes the competitive landscape in two ways.

The first is the gravitational well, the network effect: More participants will attract more participants. It remains to be seen how well Apple Pay will perform, but we know the Touch ID feature works well — better than this skeptical user expected, and better and more securely than its current competitors.

The second way Apple Pay changes the landscape is much more alarming to competitors: Business Model Disruption. For Apple, revenue from a payment system is peripheral, it’s yet another part of the larger ecosystem that sustains the iDevice money makers. To PayPal, of course, payment revenue is all there is.

This distinction isn’t clear to everyone. In a conversation in Paris last week, an otherwise sensible friend insisted that Apple Pay will be a “huge profit opportunity”. No, Apple will earn about $1 for every $700 charged through Apple Pay. In order to reach the $10B “unit of needle movement”, Apple Pay would have to transact $7T (trillion). For reference, 2013 US retail revenue was $4.5T.

According to their 2013 Annual Report, eBay processed about $180B in payments in 2013, yielding $6.1B in transaction revenues. For that same $180B, Apple would content itself with $270M….that’s about 0.15% of the company’s overall revenue.

When eBay purchased PayPal for $1.5B in 2002, the deal made sense — it certainly made much more sense than the later acquisition and disposition of Skype. In recent years, PayPal has grown faster than eBay’s Marketplaces business, to the point where the two were roughly equal last year ($6.1B vs $6.8B). Today, Wall Street values the combined companies at approximately $67B (although it will be interesting to see how much the PayPal “half” fetches).

The fast-growth, synergistic business Donahoe vigorously guarded last January has been kicked to the curb because its business model is threatened by Apple Pay.

It didn’t have to be that way. We’ve recently heard that PayPal and Apple had been in “massive” talks earlier this year…until Apple found out about PayPal’s partnership with Samsung, thus ending any hope of a collaboration with the Cupertino team. Recall that PayPal’s President David Marcus unexpectedly left the company last June to lead Facebook’s mobile messaging initiative. The official explanation at the time was that Marcus was simply looking for a new adventure, but it’s more likely that Marcus was frustrated with Donahoe:

“eBay CEO John Donahoe pushed for the Samsung deal even though PayPal president at the time, who left for Facebook following the Apple-PayPal deal collapse, David Marcus was ‘purposely categorically against the Samsung deal, knowing that it would jeopardize PayPal’s relationship with Apple.’”

Looking at the game board three months later, Donahoe dissolved the eBay-PayPal union and deliberately wrote himself out of a job — undoubtedly with the “help” of his Board.

In the meantime, we have PayPal’s reaction to Apple Pay: An ad mocking Apple for the selfies fracas. Yes, a number of individual iCloud accounts were compromised by clever social engineering techniques and outright password theft, but no one seriously believes the iCloud infrastructure itself was penetrated. Conversely, in May of this year, eBay suffered a massive security breach requiring all users to change their passwords because hackers did gain access to the company’s servers, something PayPal management chose to ignore.

Again, we don’t yet know if Apple’s payment system will live up to its promise, but with the iPhone 6 and 6 Plus looking like The Mother of All Upgrades (two weeks after the launch, people are still lining up outside Apple Stores), Apple Pay should be on solid ground on its rumored October 20th opening day. Nonetheless, with an ex-Amex exec at the helm of a soon independent PayPal, the payment game is going to be interesting.

JLG@mondaynote.com

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Brace For The Corporate Journalism Wave

 

 [Updated with fresh data]

Corporations are tempted to take over journalism with increasingly better contents. For the profession, this carries both dangers and hopes for new revenue streams. 

Those who fear Native Advertising or Branded Content will dread the unavoidable rise of Corporate Journalism. At first glance, associating the two words sounds like of an oxymoron of the worst possible taste, an offense punishable by tarring and feathering. But, as I will now explain, the idea deserves a careful look.

First, consider the chart below, lifted form an Economist article titled Slime-slinging Flacks vastly outnumber hacks these days. Caveat lector, published in 2011. The numbers are a bit old (I tried to update them without success), but the trend was obvious and is likely to have continued:

336_PRvsJ_516px

Update:
As several readers pointed out, I failed to mention a Pew Research story by Alex T. Williams that contains recent data that further confirm the trend: (emphasis mine)

There were 4.6 public relations specialists for every reporter in 2013, according to the [Bureau of Labor Statistics] data. That is down slightly from the 5.3 to 1 ratio in 2009 but is considerably higher than the 3.2 to 1 margin that existed a decade ago, in 2004.

[Over the last 10 years], the number of reporters decreased from 52,550 to 43,630, a 17% loss according to the BLS data. In contrast, the number of public relations specialists during this timeframe grew by 22%, from 166,210 to 202,530.

 Williams also exposes the salary gap between PR people and news reporters:

In 2013, according to BLS data, public relations specialists earned a median annual income of $54,940 compared with $35,600 for reporters.

And I should also mention this excellent piece in this Weekend FT, on The invasion of Corporate News. –

In short, while the journalistic staffing is shrinking dramatically in every mature market (US, Europe), the public relation crowd is rising in a spectacular fashion. It grows in two dimensions: the spinning aspect, with more highly capable people, most often former seasoned writers willing to become spin-surgeons. These are both disappointed by the evolution of their noble trade and attracted by higher compensation. The second dimension is the growing inclination for PR firms, communication agencies and corporations themselves to build fully-staffed newsrooms with editor-in-chief, writers, photo and video editors.

That’s the first issue.

The second trend is the evolution of corporate communication. Slowly but steadily, it departs from the traditional advertising codes that ruled the profession for decades. It shifts toward a more subtle and mature approach based on storytelling. Like it or not, that’s exactly what branded content is about: telling great stories about a company in a more intelligent way versus simply extolling a product’s merits.

I’m not saying that one will disappear at the other’s expense. Communication agencies will continue to plan, conceive and produce scores of plain, product-oriented campaigns. This is first because brands need it, but also because there are often no other ways to promote a product than showing it in the most effective (and sometimes aesthetic) fashion. But fact is, whether it is to stage the manufacturing process of a luxury watch, or the engineering behind a new medical imagery device, more and more companies are getting into a full-blown storytelling. To do so, they (or their surrogates) are hiring talent — which happens to be in rather large supply these days.

The rise of digital media is no stranger to this trend. In the print era, for practical reasons, it would have been inconceivable to intertwine classic journalism with editorial treatments. In the digital world things are completely different. Endless space, the ability to link, insert expandable formats all open new possibilities when it comes to accommodating large, rich, multimedia contents.

This evolution carries both serious hazards for traditional journalism as well as tangible economic opportunities. Let’s start with the business side.

Branded content (or native advertising) has achieved significant traction in the modern media business — even if the quality of its implementation varies widely. Some companies (that I will refrain from naming) screwed up big time by failing to properly identify what was paid-content as opposed to genuine journalistic production. And a misled reader is a lost reader (especially if there is a pattern). But for those who pull out good execution, both in terms of ethics and products, native ads carry a much better value than banners, billboards, pushdowns, interstitials, or other pathetic “creations” massively rejected by readers. I know of several media selling dumb IAB formats that find out they can achieve rates 5x to 8x higher by relying on high quality, bespoke branded contents. These more parsimonious and non invasive products achieve a much better audience acceptance than traditional formats.

For media companies, going decisively for branded content is also a way to regain control on their own business. Instead of getting avalanches of ready-to-eat campaigns from media buying agencies, they retain more control on the creation of advertising elements by dealing with the creative agencies or even with the brand themselves. Such a move goes with some constraints, though. Entering branded content at a credible scale requires investments. To serve its advertising clients, BuzzFeed maintains 50 people in its own design studio. Relative to the size of their entire staff, many other new media companies decided from the outset to build fairly large creative teams (including Quartz). That’s precisely why I believe most legacy media will miss this train (again). Focused on short-term cost control, also under pressure from conservative newsrooms who see branded content as the Antichrist, they will delay the move. In the meantime, pure players will jump on the opportunity.

Newsrooms have reasons to fear Corporate Journalism — in the sense of the ultimate form of branded content entirely packaged by the advertiser — but not for the reasons editors usually put forward. Dealing with the visual segregation of native ads vs. editorial is not utterly complicated; it depends mostly on the mutual understanding between the head of sales (or the publisher) and the editor; the latter needs to be credible enough among his peers to impose his/er choices without yielding to corporatism-induced demagoguery.

But the juxtaposition of articles (or multimedia contents) produced on one side by the newsroom and on another hand by a sponsor willing to build its storytelling at any cost might trigger another kind of conflict, around means and sources.

In the end, journalism is all about access. Beat reporters from a news media will do their best to circumvent the PR fence to get access to sources, while at the same time the PR team will order a bespoke story from its own staff writers. Both teams might actually find themselves in competition. Let’s say a media wants to write a piece on the strategy shift of major energy conglomerate with respect to global warming; the news team will talk to scores of specialists outside the company, financial analysts who challenge management’s choices, shareholders who object to expensive diversification, advocacy group who monitor operations in sensitive areas, unions, etc. They will also try to gain access to those who decide the fate of the company, i.e. top management, strategic committees, etc. Needless to say, such access will be tightly controlled.

On the corporate journalism side, the story will be told differently: strategist and managers will talk openly and in a very interesting way (remember, they are interviewed by pros). At the same time, a well-crafted on-site video shot in an oil-field in Borneo, or on a solar farm in Africa will reinforce the message, in a 60 Minutes way. The whole package won’t carry silly corporate messages, it will be rich, carefully balanced for credibility and well-staged. Click-wise, it is also likely to be quite attractive with its glowing, sleek videos and great text that will have the breadth (but not the substance) of professional reporting.

I’m painting this in broad strokes. But you get my point: Authentic news reporting and corporate journalism are bound to compete as audience could increasingly enjoy informative, well-design corporate production over drier journalistic work — even though it is labelled as such. Of course, corporate journalism will remain small compared to the editorial content produced by a newsroom, but it could be quite effective on the long run.

frederic.filloux@mondaynote.com

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The Ripple Effects of Disruptive Models

 

Last week, we discussed the impact of services such as Uber or Airbnb. More broadly, no sectors is immune to major overhauls. Today, we’ll have a look at the impact of Disruptors. 

Nested in Paris’ Le Marais neighborhood, a clever incubator/think-thank called TheFamily, made its mission to chronicle the digital transformation of our society. Largely inspired by the iconic Ycombinator incubator, TheFamily funds and provides all sorts of services to a hundred plus startups. But it also wants to rattle the establishment with an activist posture. Paraphrasing the “Barbarians at the Gate” book title, the incubator hosts a conference series titled Les Barbares Attaquent (Barbarians On The Attack) that examines all the sectors to be impacted by the digital tidal wave.

The latest event (#18) featured the book industry. Prior to that, human resources, retail, luxury, housing & construction, health, transportation, education, garment industry, consulting, insurance, finance and other sectors were dissected by TheFamily partners and guest speakers. Each time with a larger attendance.

One of the founders, Nicolas Colin, recently made headlines when his blog post (fr) denounced the notoriously archaic parisian taxi lobby (see previous Monday Note), triggering a lawsuit from Nicolas Rousselet, the owner of the main French taxi company G7. (Nicolas is the son of André Rousselet, himself one of former president François Mitterrand’s favorite oligarchs, anointed TV mogul in the late Eighties). By suing the blogger, Rousselet Jr. wanted to shut down any criticism of his company’s unrelenting conservatism. In fact, he completely underestimated the reaction of the French digital multitude that rallied en masse to support the blogger (and the media La Tribune, that republished the infamous post.)

This little Gallic tale illustrates the split between the old and the new economy. It could have happened in Brussels, Berlin or San Francisco where lobbies furiously oppose the rise of Disruptors that threaten transportation or short-term rental housing — among other things.

Before we go further, let’s look at the engine of the Disruptors’ phenomenal growth. It can be summed up to one phrase: unprecedented access to capital.

When it comes to technology, Uber or Airbnb are not rocket science. The platform and the algorithm needed to efficiently match supply & demand have been indeed brilliantly implemented, but there is no need beyond off-the-shelf technologies to set up the whole thing. By contrast, when Google started in 1998, it did stretch the limits of the technology of the day (networking and computing power); as for Facebook, despite the relative crudeness of the original concept, it had to deal very early with scalability issues. Actually on its very first day, Mark Zuckerberg’s hottest girl matching system (how nice) crashed Harvard’s network. No such headache for Uber or Airbnb who rely on proven technologies: cellular network, mapping, databases, LAMP-based softwares. As shown in the following three graphs, funding has been equally abundant for these areas:

319-google 319 facebook 319 uber 319 Airbnb

Not only have investors poured big money in Uber and Airbnb but they did so extremely fast, boosting the valuation of these two companies to staggering levels. Since there is very little technology involved, where did the money go? Mostly to market share acquisitions, the only way to leave the competition in the dust for good. Take Airbnb: in just one year, its number of listed spaces grew more than doubled to 500,000 listings in 33,000 cities and 192 countries. Its $10bn valuation puts it head-to-head with the giant group Accor that operates 3500 brick-and-mortar hotels and 450,000 rooms.

In these new models, the American venture capital ecosystem is acting as a weapon of mass domination. When Uber collects more than $300 million in VC money to expand in 100 cities worldwide, its London-based competitor HailO got “only” $77m and when it comes to the French LeCab, it only raised €11m ($15m). It shows how anemic the French system is when it comes to funding its startups; instead of patting the registered cabs sector in the back with demagogic promises, the successive digital economy ministers would have been better advised to act decisively to stimulate access to capital.

Still, the European way of resisting these new models won’t last for long. To be sure, in Brussels, the ill-named “ministry of mobility” decided to simply forbid Uber-like system; in France, the resistance is more messy when hundreds of yelling taxi divers blocked main streets and airport accesses. But grass-root movements are likely to morph into a more anglo-saxon-like lobbying, with highly paid professional hired to defend special interests.

Consider this: between 1998 and 2013, the amount spent in Washington DC alone by various lobbies has grown x16 in constant dollars to a staggering $3.23bn. Today, tech firms are the fourth contributor after pharmaceuticals, insurance and oil & gas: when a big pharma spend $1.00 to influence lawmakers, tech companies now spend $0.63 and the gap is closing.

Why am I mentioning this? It’s because the capital raised by Disruptors will inevitably find its way to effective lobbyism in Brussels (at the European Commission), and eventually in Paris or Berlin.

Disruptors’ lobbyists will argue that new urban transportations system and peer-to-peer housing rental do more good than harm in the community. And for the most part, they might be right. Sharing cars in congested cities via system such as RelayRides definitely makes sense from a environment standpoint when any individual car stays idle 95% of the time. A survey conducted by UC Berkeley (pdf here) on a 6,000 San Francisco residents participating on car-sharing system revealed a drop of 50% in the personal car ownership (the auto industry might not like it, but our lungs will.)

On the economic side, there is no shortage or arguments either. Terminating the paid-for license system (the so-called Medallion) would free €3 billion in Paris, and $10 billion in New York, sums now immobilized and promised to an inexorable deflation. In times of raising inequality, maybe it is not such a bad idea to let people make extra money by renting their apartment or their car — with limitations, of course. To put some figures on the idea: an Airbnb host in San Francisco is making $9,300 per year on average by renting his/er property 58 nights. As for those who makes their personal car available for sharing though RelayRides, they make on average $250 a month.

As for the hotel industry, evidence shows Airbnb’s growth to have very little impact. According to the Boston University School of Management, in the state of Texas, a growth of 1% in Airbnb supply translated into only a 0,05% decrease in the revenue of 4,000 hotels surveyed, while a single percentage point of increase in the supply of regular hotels rooms translated into a 0.29% decrease — 20 times more — in Texas hotel revenues. Of course, cheap hotels are more impacted than the local Hyatt.

Between consumers who are voting with their smartphones, enjoying Uber or Airbnb, and the fact that Disruptors are undoubtedly beneficial to the community, regulators and lawmakers will have hard time defending the status quo.

In fact, they are left with two levers: making sure that the consumer is properly protected form any abuse (that’s already the case, basically) and dealing smartly with the tax issue. The digital economy has a long track-record of linking success to hubris — in practical terms, it means a strong disregard for local tax systems. Here in Europe, the first thing Uber and Airbnb did was setting most of their operations in tax-friendly places such as Luxembourg or Ireland — like Apple or Google before them. On the long run, that’s obviously a mistake as politicians will seize on the opportunity to further single out these new models. In fact, Disruptors would be well-advised to play by the rules in order to insure the sustainability of their services.

frederic.filloux@mondaynote.com

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