Author Archives: subhankarbhattacharya

Digital Investment Prioritization Framework (DIPF)

Posted on by

Recently, I had the opportunity to spend a considerable amount of time with a group of senior executives of a major media conglomerate. We discussed about modernization of the technology infrastructure to support the business growth of the organization; primarily in the digital space.

I was supported by our technology team that deals with application modernization. The team carried out a technology assessment study and came to the conclusion that a good 60% of the technology infrastructure will need to be replaced to support digital growth. It was a slam dunk business case- at least so was the team thought.

Within a few days, we heard back from the CFO who was asking for the business justification for the modernization spend. It turned out, to the surprise of many, that the business cases are not so much slam dunk as they were thought to be. There were issues with ROI with some of the business cases. But the bigger problems were around prioritization of initiatives between “Enhancing Consumer Experience” vs “Improving Digital Operation”.

Unfortunately, this is not an isolated business situation at all. Despite the fact, that digital transformation is a must for most companies, organizations have been struggling to prioritize to maximize ROI on their digital investment. Many a times, it become a game of power play, with the functions having better clout at the moment, corner a higher percentage of the investment in their favor.

Looking at this problem of prioritization between “Consumer Experience” and “Digital Operation”, we decided to put a simple 2X2 matrix that could drive the investment prioritization decision . We can call it “The “Digital Investment Prioritization Framework” or DIPF.

For the X axis of the framework, we used a parameter of “Digital Value Add”. This value defines the degree to which digital is important to a brand’s core offering (Current). We can use a scale of 0% to 100%. The value of 0% signifies digital has little to no value-add to the brand, where as 100% means that all of the value of the brand is coming from digital.

For Y axis, we used a parameter called “Relative Brand Strength”. This value signifies the current brand strength compared to a brand’s nearest competitor. We can put a scale of -3X to +3X ,which would hopefully can handle most brands within a segment. (This scale could be adjusted)

The idea is to put any brand in one of the four buckets created by this 2X2 matrix and drive the digital prioritization initiative through that grid. To illustrate, we have put some example companies in the four grids that could be used as template. (People may disagree with the placement of the brands in the grid. This placement is purely based on my judgement at this moment)

Grid 1- Here you have a situation where the brand strength is low and digital value add is also small. This group is an extremely vulnerable group and something must be done to enhance the consumer experience through digital value adds. Brands in this group should consider digital operation as secondary, unless it is directly liked with consumer experience.

Take for example the case of Pizza Hut vs Domino’s. Pizza Hut has been struggling with its digital strategy forever. In contrast, Domino’s have leapfrogged in digital experience. Right from social strategy to “order to deliver” experience, Domino’s is a winner in digital. The impact digital has made on Domino’s brand, is for every person to see.

Another example in this grid is a company like Best Buy. Cornered by Amazon, Best Buy has lost much of it sheen. As an electronic retailer it should have a strong digital strategy, but it has failed to gear up to the challenge. The brand, as a result is struggling. Brands such as Blockbuster got obliterated because they could not add digital in their value. This grid is a place of opportunity as well. Many commodity products ranging from fans to light bulbs are adding IOT capabilities and breaking out from grid 1 to grid 4.

Picture 1

Grid 2- This grid comprises of companies that are mostly born out of digital revolution. However, there could be multiple problems in the group. One problem could be the fact that the industry itself is reaching the commodity status because the services are utility in nature.

Take the case of broadband service providers in the consumer space. There is not much to differentiate among Verizon, AT&T or Comcast broadband services, but what makes the difference for the consumer is the quality of the service which is defined by their operational excellence. If the broadband goes down three times a day, no amount of peripheral digital consumer experience is likely to cut it. For this group, digital operation remains a priority. Alternate way of getting out of grid 2 to and move onto grid 3 is to come up with new business models that could monetize the broadband service in all together different ways.

Or take the case of Orbitz. This online travel solution provider is finding it hard to distinguish itself in a commodity market place, which is dominated by Priceline. For a company in this kind of predicament, it could be ideal to look for additional business models as source of revenue. It may not be good enough to concentrate on either consumer experience or operational excellence to survive.

Grid 3- This grid consists of companies that we call “born-digital”, “digital native” or “born to be digital”. This group includes tech companies such as Google, Facebook, Twitter, Uber etc. Majority of the value of these companies is coming from digital. And there is companies like Netflix and Amazon which probably draw 40% value from content/products and 60% from digital.

These companies need to spend equal amount in digital operation and consumer experience. You can’t afford to have Facebook application down for hours. At the same time, the consistent upgrade in consumer experience keep these brands ahead of any potential competition. (Remember how My Space died)

Grid 4- This grid consists of two kinds of companies. There are handful of companies who has a physical brand that’s hard to dislodge. One good example would be Disney parks. It won’t matter to consumers whether Disney park App is working or not for someone to visit the park. Then there are other kind of companies such as Nike or Under Armor, which have invested heavily in digital experience to break out from all other fitness apparel firms in the world. For either of these groups, investment in consumer experience remains a priority over investment in digital operation.

DIPF_strategy

To summarize, companies who are high on digital value, have to focus more on digital operation compared to companies who are less on digital value. The priority on digital investment for organizations will change from Consumer Experience to Digital Operation as brands derive increasingly more value from digital.

 

How I Missed the Netflix Rally and what should I do now?

Posted on by

Have I not been working in the Media & Entertainment sector and was not so much entrenched with the economics of the sector, I would have probably bought Netflix on 2nd November 2012 at $ 77 ($11 Equivalent post-split price). By that time the shadow of the economic collapse has already faded and one could argue that the stock was a decent buy. Assuming an investment of $20,000 I would have a capital $300,000 just from one stock in three years (15 times).

But I didn’t buy the stock in 2012. I didn’t even buy the stock at $315 ($45 equivalent post-split) in January 2015. Even at January rate, my capital of $20,000 would have grown to $50,000 in six months. With every spike of the stock, I was assuming that it is just a matter of time the stock is going to crash.

My logic for that belief was very sound. Netflix has been in content distribution business which has a very low barrier to entry. Technically, anybody can put up a platform like that in a few months (albeit, a less robust one) and start streaming content. On top of that, most content providers now a days are very reluctant to share any premium content with Netflix and they are coming up with their own OTT (over the top/broadband) solution (such as HBO GO, CBS, etc.) Also every single carrier ranging from Dish to Verizon are launching their OTT solution, which would compete with Netflix.

New competitors like Amazon Video also pushing hard into the business. YouTube as well is bringing its own subscription service and premium content. All of these services didn’t come up overnight but I knew the overall trend. Being part of media industry, I knew many of these projects are in works and could be launched sooner than later.

While Netflix has come up with chartbuster content like House of cards and Orange is the new Black, I could not believe that that the company could possibly come up with smashing content like that on a consistent basis. In fact other than Disney, how many content providers that we have seen could produce consistently hit content? Even for Disney, they could not have been so consistent with their content strategy if they did not have such amazing franchise collection from Disney, Marvel, Pixar, Lucas films.

Netflix on the other hand does not have any major franchise and building a new franchise brand takes years of consistent success. On the whole, I thought, if we take it as a content brand, it could not be bigger than NBC, Warner Bros or Fox. If we take it as a distribution brand, it has a very low barrier to entry. Overall, I thought my analysis was sound but the new quarter came and once more Netflix had an amazing growth in subscriber numbers and even more amazing growth in its stock.

Netflix paid subscriber number

This time though, I thought that I would take a hard look at myself. I wanted to see my own interaction with Netflix brand to understand why I have been so wrong. I realized that I have a Netflix account for several years now. I cancelled the subscription in 2011 and re-subscribed it in 2013 and I really did not feel the need to cancel it any more. I called up a few friends and family. Everyone has Netflix, everyone use it sparingly and no one thinks of cancelling the service.

I started to think why I did not cancel it in spite of the fact that I am not a very frequent Netflix user. Well, for one thing, my daughter who is five years old, watches her program in Netflix occasionally. And it seems plausible that I was actually quite content paying $7.99/month fee to Netflix after watching the House of Cards series (1,2 & 3 and waiting for something new to come).

On the whole, expectation of new content, occasional catalog content and children’s content was a good enough combo for me to keep the subscription (My wife barely watches TV). One thing was quite sure for me that I was completely aware what I am getting out of Netflix. There is a clear picture in my head about Netflix. It’s definitely a brand, a very clear content brand.

It is a huge realization for me, because when I think of a comparable and older brand like HBO, I don’t have a clear picture about it. I really don’t know what to expect from HBO. I don’t know the difference among HBO, HBO2, HBO Signature, HBO Family, and HBO Zone etc. I also have cancelled and re-subscribed to HBO several time in last ten years. I rarely connect to HBO GO and I don’t have HBO Now subscription since I have HBO with my TV service. Has Netflix done the impossible of making it as strong a content brand in the entertainment business along with Disney, MTV & HBO?

But how did it happen in such a short time? Given that House of Cards is smashing hit and marvel’s daredevil and Orange is the new black did a very good job, there are other content providers who has made similar number of hit content but that did not make them as powerful as Netflix. Even HBO who has been producing great content that includes the Sopranos, Sex and the city, Game of Thrones, Band of brothers, for such a long time is arguably is not an infinitely stronger content brand than Netflix. How did that happen?

I found three reasons why the Netflix brand has gained such strength. I am not a marketing strategist and brand marketers may comment on the validity of this analysis but I could not find any other reasons how Netflix has become a strong content brand. (Not a content distributor brand)

Reason No 1- A very defined access to content.

When we watch content on Netflix, we know for sure that we are watching Netflix (because the overall experience is so different). How many of us remember very quickly, in which network we saw our hit TV series one year after watching it for the last time? HBO Now could become such a brand but it still early days for it. Amazon Video is still trying to find its feet and while YouTube certainly has a good brand, it is truly a brand for short form or user generated content.

Reason No 2- The effect of Binge Viewing

I watched the 1st season of House of Cards series in a span of week during a holiday break when my family was away. I had to forgo part of my daily sleep quota. I barely shaved once in three days and survived on pizza most of the time. I had difficulty concentrating on anything else for that week. I repeated my acts with every new season. (Reed Hastings talked about this strategy of binge viewing in Q4 2011 earnings call and how good it has turned out)

I guess this is probably how the drug addicts behave (I don’t have 1st hand experienceJ). The intensity of viewing left such a deep chasm in my brain that in my lifetime I can’t forget that I watched House of cards on Netflix. In contrast, every new TV show comes once a week. The excitement remains, but it is still controlled and modest. It’s not like a narcotic addiction but may be more like a caffeine addiction. I sometimes wonder, if HBO released The Sopranos like Netflix, how the consumers would have felt about the HBO brand. Would that have etched HBO in their brains forever? Would that make everyone pay $14.99/month as a simple gratitude towards HBO and in the hope that the next Sopranos may be just around the corner?

Reason No 3- Increase in original content

Last year Huffington post and YouGov did a study that came up with a result that half of Netflix subscribers would abandon the service if price goes up by $2. That just does not sound like a characteristics of a strong brand. Netflix themselves mentioned in their 2014 Q3 result that they lost US subscribers because of price increase. But over the next few quarters it was becoming clear to Netflix that the slew of new content that they have brought in, like the House of Cards season 3, Marvel’s daredevil, Dragon has completely changed the perception of Netflix as a content provider. In 2015 itself, Netflix has 34 Emmy nomination for 10 different shows and trailing behind HBO (126 nominations), ABC (42 nomination) and Fox (38 nominations). In terms of pure number of shows, Netflix has already eclipsed HBO, however they still lag HBO in consistent quality of content. Probably am outcome of HBO’s studio based model vs Netflix’s license based model of acquiring content.

The Impact of International Growth

While the growth of the Netflix brand is great, what has really propelled Netflix to a new high is the growth of its international business. It took a while for Netflix to understand its brand power internationally. But when it did, there was no stopping back. In last two years when the domestic market grew at an average of 5% every quarter, international market has grown an average rate of 15% every quarter.

The big advantage for Netflix in international market is, unlike its TV cousins, it is not stuck with multitude of complex deals that inhibits its content being distributed freely. This is particularly true for its original content. Television content distributors are so tangled in these international contracts that they have no option of offering them to international customers in a no holds bar fashion. In addition, European Union is pressing hard for a new rule that that will render geo restriction of content in OTT medium illegal. If that happens, all third party content that Netflix distributes, will be widely available for everybody in entire EU through Netflix.

Domestic and international growth q on q

If you look at the difference between Domestic and International growth in last two years, it is very clear that for international market winter holiday/Christmas is still the peak growth time and it continue to hold for 1st quarter, probably due to House of Cards new season opening.

In contrast, the domestic market is picking on 1st quarter, which is primarily due to House of Cards New Season. One can conclude that international market is a more resilient growth engine and not dependent on power of one show alone.

International paid subscriber base of 22 million in 2nd quarter 2015 stands at more than half of the domestic paid subscriber base of 41 million. At the current growth rates, Netflix will have equal number of international and domestic subscriber base in two years and in four years it will have 65% of its business from international market. One must remember that Netflix has just launched in Japan and it will be launching its services to China in 2016. Indian market could potentially be huge also once India up its broadband penetration.

Why did we discount the international growth all along? I suspect once again we took Netflix as a content distributor and not as content provider and believed any local content distributor could dislodge Netflix with ease. We forgot the fact that the local distributors will not have so much of US content and they will certainly not have House of Cards or Orange is the New Black. Sometimes we underestimate how big a brand United States is and content based on US plots still is a big draw for audiences worldwide.

Is this growth sustainable?

Now all this is good but the nagging question remains. Is this growth sustainable in the context that everyone is coming up with their own OTT offerings? HBO Now ($14.99/Month) has gone live in April 2105. CBS has just launched Showtime ($11.99/month) as well as CBS all access ($5.99) OTT service. Disney is mulling over ESPN OTT service. From the carrier side Dish has launched $20 sling OTT service. Verizon is launching its OTT service just about any time now.

No doubt, these launches will put question mark on Netflix. However my belief is that these services will impact TV services more than Netflix. HBO and Showtime has a pricing inflexibility so not to cannibalize its TV audience. As a consequence Netflix will continue to have the pricing advantage. On top of that, these OTT services are still domestic, whereas Netflix growth engine is international, which will not be impacted by these domestic developments. I also believe that the faster the TV content goes OTT, the faster will be the phenomenon of cord cutting and that might actually give additional support for Netflix domestic growth.

Among the other major competitor in this field is Amazon Web Video Service. My assessment is that if Amazon is serious, they could disrupt Netflix somewhat. But Amazon has its tentacles in so many places, I doubt they will be able to match the intensity of Netflix. Very recently YouTube has announced that it is going to introduce premium original content and also will launch a subscription service. We still have to watch and see how it spans out.

If one thing that is proven right by all these developments is that Netflix is on the right side of this business model and it will continue to grow. It has the 1st mover advantage and it has built a strong brand. Considering its large subscriber base, which allows it to keep its price very low could very well provide a very strong barrier to entry for any new entrant.

In the international market there is growing raze in favor of Net Neutrality. China, India & EU has shown tremendous resistance against any kind of pricing control by bandwidth providers based on type of service they carry. That’s a very good news for growth of Netflix.

In spite of all this positives, the importance of delivering consistently good content remain paramount for Netflix. If it fails in that count, we might see a reversal of all the positives. In absence of little to no bondage of the customer, the destiny of Netflix will be solely controlled by the quality of service and content that Netflix will bring. It’s a strategy that Netflix has embraced out of its own choice and this strategy has very little margin of error.

 What about pricing power?

Whenever it comes to pricing power of Netflix, people refer to Quarter 2, 2014 result of Netflix when allegedly Netflix subscriber growth dropped because of price Increase. However, if you look at the growth pattern in Q2 over Q1 year on year, it is very clear that the domestic growth is in a declining mode. The problem in Q2 of 2014 was that of the international growth which stumbled to 9.8% and could not make up for domestic decline. The slowness of Q2 in 2014 could not be attributed to price as there was no price increase internationally. It was an international execution issue as explained by Netflix when they presented their Q4 2014 result.

subscriber growth q1 vs q2

However, I suspect that for several years Netflix themselves has feared the pricing sensitivity of its business model. With better content at its disposal, Netflix could feel liberated now. The current pricing base is so low for Netflix, that even a $1 increase in subscription fee will add more than 12% to the bottom-line. New OTT services like HBO and ShowTime, which are priced at $14.99 and $11.99 has given Netflix a legitimate reference frame to work with. As of now, Netflix could easily increase its subscription by a dollar and I am positive it will not have any impact on its subscription base.

It could however face challenge with Verizon like OTT service which are powered by ad revenue. It may be possible that in future Netflix has to offer a premium an ad supported model for its content. That kind of a model could provide a lot of pricing flexibility to Netflix.

What about Investment, Expenses & Cash flow?

Netflix operating profit was at 3% of its revenue in Q1 2013. Over a period of year and half it grew up to 10% (Q2 2014) of revenue. However operating profit again went downhill from here and at the last quarter (Q2 2015) the operating income stands at 4% of revenue. The decrease is primarily due to increase in Marketing and Technology cost. I would presume that it is driven by their international expansion.

Given the strategy of Netflix is international expansion, I don’t see this number improving soon. But I don’t think anyone cares about operating margin of Netflix (at least next two quarters) as long as the topline growth remains strong. It will though become an issue later on when growth slows.

Netflix is also investing heavily on content and we know that good content does not come cheap. In 2014 alone, Netflix has added $3.7 BN investment in content. In six months of 2015, they have spent $2.5 Billion (Based on cash flow data. Addition of streaming content library). These are significant numbers and impact cash flow of Netflix as they amortize the investment over a four year period. However, with subscriber growth, Netflix will not require to invest in content on proportional basis. That should improve its cash flow by a large extent.

What should You, I should do now?

Now what about the next quarter? Will Netflix beat the Q3 guidance? The guidance given by Netflix is 1.13 million net domestic subscriber addition and 2.4 international net subscriber addition (Including free trials). I have come up with my own estimate on next quarter numbers. As per my analysis, Netflix may fall short on domestic growth but it will more than make it up in international growth.

Picture6

Netflix will launch in Japan towards the end of Q3 and will launch in Spain, Portugal and Italy in Q4. That should propel further growth during the year end. Japan could prove to be an ideal growth engine for Netflix, but it probably would take a few quarters for Japanese customers to embrace Netflix (That is a typical Japanese trend). But once established, just like Starbucks it could speed up the subscriber growth.

However, the real story that everyone would wait for is China, where Netflix will launch its service 2016. House of cards, which was launched through Sohu TV in China by Netflix was a blockbuster success. Given the Chinese affection for a good brand, my guess is people are waiting to lap up Netflix in China.

If Netflix can crack the China code, its subscription level could be propelled to the territory we have not imagined yet. However, exposure to international content is a thorny issue in communist China and we have to watch and see how Netflix approach the issue. If it could cross the political hurdle, I am certain that Netflix subscription level would grow exponentially from the current level.

Reed Hastings talks about 60-90 million domestic subscriber at peak level and the fact that eventually domestic subscription would be around 35% of total global subscription. That could take Netflix subscription level at 250 million households worldwide from its current level of 60 million worldwide households. At the current growth rate, that could be achieved in next five years. (The current growth pattern clearly support this 65% (international): 35 (domestic) theory.

If Netflix at the same period could increase its price by a modest 20% (which should be easily doable) and maintain its current investment at content (which is already quite high), we will witness a huge increase in profit for Netflix in next few years.

A suggestion for Netflix

And what about Netflix itself? Could it do something different from content strategy side? In my mind, they should invest on buying some new Franchise and not rely exclusively on license model for content acquisition. Steady Franchises may improve the consistency of quality from their part. For a start, both DreamWorks and Take Two interactive would be great buy.

Netflix already is a large customer of DreamWorks. So the working relationships must be already established. If they acquire Take Two Interactive, Netflix will get access to franchises like Grand Theft Auto. This could open up a completely new vista for Netflix in gaming sector and give the company a new kind of pricing power.

The Parameters of Success for the Sharing/Marketplace Economy of Uber & airbnb

Posted on by

Last week when I called for an Uber, a gentleman in his swanky new BMW arrived at my doorstep. Now it is not uncommon to get a ride in an expensive new car when you call for an Uber. But what struck me the most was the demeanor of the driver. He was a polished guy in his mid 40s, wearing designer clothes and watches and do not seem to have any particular reason to drive a car on a weekend for extra money.

Eventually curiosity got the better of me and I had to ask him whether driving Uber is his main job. As I expected, he turned out to be a senior manager with a very large tech company. However, he explained that as he is going through a costly divorce, this is his way of getting back to decent financial health at the quickest possible way. .

However, this is not an isolated case. Over the last 12 months that I have used Uber, I have been driven by among others, a financial analyst from the Wall St., a ground engineer from United Airlines and a practicing lawyer from a reputed law firm. And it goes to show beyond doubt that in a “Sharing Economy” or a marketplace economy, whichever way you want to call this system, the general expectation of the product and service may not hold good. The question is, whether a sharing economy can provide a consistent value to its participants that will eventually make it win over the traditional products and services and make them completely redundant.

We all know that Uber is not an isolated business case that are all witnessing here. Airbnb, Etsy are growing at pretty rapid pace too and I am sure more soon will follow. Question is, can we put together a set of general principal that could indicate the chances of success of these new services?

Based on my observation, I have boiled down the chance of success on five key parameters. And I will take the example of Uber and few others to illustrate these parameters.

First parameter for success is the Supply and Demand Equilibrium. If the supply side is limited, the system may not work efficiently, as suppliers will hoard to get a better price. If buy side is limited, then the supplier will undercut each other and it will take the market down. This is not to say there should be equal number of sellers as there are buyers. It’s more about the number of either side which can promote a true marketplace behavior. If demand and supply is in equilibrium, market will operate at optimum inventory, the cost of sales will be largely distributed and overall dollar for dollar a buyer will get a better product/service.

The Second most important parameter of success is Transparency. Given, the product/service will be a marketplace product/service and for that matter branding may play a diminished role, it is important for buyers and sellers know exactly what they are buying and who they are buying/selling to. Take the case of Uber. Isn’t it a great comfort for everyone just knowing in advance the make/model of the car? Similarly for Airbnb, the quality of video and picture makes huge difference in the buying process. However, it is not only the transparency about the product. Transparency about buyer/seller detail, transparency about payment processing, transparency about grievance redressal, all pay critical role in the success of this economy. One crucial outcome of transparency is consistency. Transparency always weeds out the non-performers thus enhancing the consistency of the services.

The Third most important parameter is Convenience. A marketplace may provide a better value for the buck, but it is not always guaranteed that it is more convenient. However, if the convenience factor could be added to the product/service, it could enhance its value significantly. This is off course is the trump card for Uber. The ease of app use is a huge positive for Uber. The other not so talked about feature is the smart planning of Uber to get the tipping business out of the way. The fact that you could just walk away after taking the ride without taxing yourself how much to tip the cab driver based on his service quality is a big relief to many.

The Fourth most important factor is Complexity of the business model. When you are dealing with mass population, it is but given that higher complexity of business model is a recipe for disaster for a marketplace economy. Hence the simpler it is for the buyers and sellers to understand and execute the process, the better are the chances of success. It’s no coincidence that all marketplace economies such as eBay, Uber, Airbnb, etsy have the most simple business model. Particularly important in this case is the sell side complexity, as this could drastically reduce the service providers in the marketplace.

This bring us down the Fifth and the most important parameter of Risk. In Most marketplace economies, the primary risk of service quality or product usage is mitigated through user reviews. However there are graver form of risk such as physical harm or legal liability that could drag down this economy quite easily. In this hyper-connected social world that we live-in and where bad information could spread like a wildfire, management of Risk remains the single most important parameter that will determine the success of the sharing economy.

End of Net Neutrality- Winners and Losers

Posted on by

In case you are not following what is this big commotion about “End of Net Neutrality”, here is a short summary. I also have picked my winners and losers in the ecosystem because of abolition of this rule.

For people unfamiliar with the basic concept of Net Neutrality, it refers to the policy that ensures internet service providers (ISPs) such as Verizon, Comcast, AT&T etc. to offer equal quality of service to all business seeking to leverage internet as its distribution medium. To illustrate, Comcast isn’t expected to cut a deal with Netflix for faster speed of delivering content compared to YouTube content. One must note that Net Neutrality has nothing to do with consumer pricing by the ISPs. As probably you have already seen, that the ISPs already charge higher prices to the consumer for better quality internet service.

I am not going to go into detail about the legality of the situation or even why and why not of Net Neutrality. This blog will analyze how the stakeholders in the ecosystem will be impacted by the abolition of Net Neutrality.

Let’s start of this analysis with the Internet Service Providers (ISPs). With the abolition of Net Neutrality, the ISPs will be allowed to offer different levels of service to the business that wants to ride on its backbone. As a consequence, they will introduce new and differentiated products in the market and their revenue will go up. This ability to control price and service will increase their bargaining power and they probably will make more money even for the current service that they offer in the market. This is a game changer for them.

Now let’s look at how video distributors such as Netflix will be impacted. Netflix has been openly critical about abolition of Net Neutrality. On one hand, more bargaining power for the ISPs may naturally mean less bargaining power for the video distributors. That may be the reason why Netflix does not support it. On the other hand, this ruling will severely constrict possibility of any new video distributor coming in the market. That will definitely benefit Netflix. The only problem is that, all ISPs such as AT&T, Verizon and Comcast are video distributions as well. As a result the benefit that Netflix will get because of less competition in the OTT space (Read broadband), will be nullified by the greater play by the ISPs as content distributors.

Among other video distributors, the one who has subscription or end user based revenue will gain more compared to the ad based service providers. Imagine the case of you tube. With billions of users and low value high volume videos, it might find it difficult to cut an economic deal with the ISPs. In contrast iTune which primarily deals with end user revenue could have easier opportunity to deal with ISPs for higher bandwidth. All in all content model riding on eyeballs will be negatively impacted.

For content creators/owners such as Studios and TV networks (Warner, Fox, Disney, NBCU, Sony), this is a mixed news. Lack of new entrants in the content distribution space will make the existing video distributors stronger. Also, more bargaining power to the ISPs even in the OTT space mean the revenue share of content owners could shrink. However, as explained in the earlier paragraph, the abolition of Net Neutrality may negatively impact the YouTube like business model of ad based revenue on non-premium media. That could mean that premium video will get a lift in the market. Another silver lining for the studios in this issue is that with Net Neutrality gone, content piracy could be badly hit. One can’t expect pirated content sites to cut a deal with Comcast for fast lane distribution.

For consumers, this is only a bad news. Abolition of Net Neutrality will drastically reduce the innovation and competition in the video distribution market. As a consequence we will see price rise for both content and access. However with content piracy gone, your computer might get less infected by computer virus (Just kidding)

To summarize, if you are an investor, go long on Comcast, AT&T and Verizon. Hold Disney and Turner. Sell your Netflix Shares and be ready for some austerity measures at home.

 

“Right to be Forgotten”- The Implication of Mario Costeja Gonzalez vs Google case verdict

Posted on by

Luxemburg court of Justice for European Union has delivered a very controversial verdict on internet privacy last week (13th of May 2014). The specific verdict refers to a section of the privacy law that defines a concept of “Right to be forgotten” which allows individuals the right to remove personal information available on the internet if there is no legitimate ground to retain it. The verdict has been heavily criticized by the advocates of freedom of information and welcomed by the staunch privacy supporters.

The case in point here is related to one Mario Costeja Gonzalez, a resident of Spain who had to auction his house 16 years ago to pay for his social security debts. This information continues to appear on search results, which as per Mario have damaged his reputation. He has been fighting a case against Google for long to remove this specific information from the search results. With this verdict, the court has agreed with his reasoning and asked Google to remove this content from its search results.

The verdict has a far reaching implication on how personal information might get censored in future, particularly for individual living within European Union. Interestingly enough, the proposed legislation, which formed the basis of this verdict, is barely in its draft stage. Led be Vivian Reading, European commissioner of Justice, the commission released its 1st draft in January 2012 and is expected to undergo further negotiations among participating countries. The verdict as a result has set a nice precedence on a relatively fledging piece of legislation.

Let us now look at what exactly the draft proposal says about “Right to be forgotten”. On page 26 point 53 of the draft it states the following

“Any person should have the right to have personal data concerning them rectified and a ‘right to be forgotten’ where the retention of such data is not in compliance with this Regulation. In particular, data subjects should have the right that their personal data are erased and no longer processed, where the data are no longer necessary in relation to the purposes for which the data are collected or otherwise processed”………. “However, the further retention of the data should be allowed where it is necessary for historical, statistical and scientific research purposes, for reasons of public interest in the area of public health, for exercising the right of freedom of expression, when required by law or where there is a reason to restrict the processing of the data instead of erasing them.”

Overall, we can summarize the concept as the following. “If individual’s right to erase his personal information is higher than that of public’s interest right to find it, data could be asked to be deleted”.

Personally I like the concept of individual data privacy. No one likes a personal mistake committed decades ago to hang around the neck and spoil his/her entire life. This is even more important for cases where unauthorized personal data such as pornographic material is distributed through the internet which ruins many lives.

However, all cases may not be that straightforward, the question therefore is who and how it is decided whether in a particular case individual’s right is bigger than the public interest?

To understand how the legislation propose to tackle the above question let’s first understand a few important concepts of the legislation.

As far as who is the responsible party that will be held accountable for removal of data from the internet, the legislation introduces a concept of an entity called “data controller”. In this “right to be forgotten” law the buck literally stops at the data controller who seems to have all the responsibility to establish and execute the law. The law defines data controller as the following:

“controller’ means the natural or legal person, public authority, agency or any other body which alone or jointly with others determines the purposes, conditions and means of the processing of personal data”.

 We all know that Google data search is highly contextual; it controls the output through a very well defined process. Hence by definition it is a data controller. Interestingly enough, the privacy law does not touch upon the publishers at all as source of information and that is why some of the concepts seem confusing. For example point 53 on page 26 talks about deleting data or restricted access. Google or any other search engine may not have any jurisdiction for deleting any content except may be cashed data. All it can do is take down the links to the data.

The draft also has a concept of data processor that process data on behalf of the controller. In this case also the responsibility is with the controller. So if someone uses personal data derived through Google search and use that data, the responsibility will still be with Google.

However the most revolutionary part of this legislation comes on page 27 point 56 on burden of proof.

 “In cases where personal data might lawfully be processed to protect the vital interests of the data subject, or on grounds of public interest, official authority or the legitimate interests of a controller, any data subject should nevertheless be entitled to object to the processing of any data relating to them. The burden of proof should be on the controller to demonstrate that their legitimate interests may override the interests or the fundamental rights and freedoms of the data subject.”

On top of this burden of proof argument is the case of financial penalty. Article 79 that states supervisory authority, talks about a fine up to 500 000 EUR for individuals, or in case of an enterprise up to 1 % of its annual worldwide turnover. This fine is imposed to anyone who, intentionally or negligently does not comply with the “right to be forgotten” act.

To illustrate, if I want any of my personal content to go out of internet, I will ask Google to remove it. Google will have to decide whether my personal right is higher than public interest. If they don’t remove my data link, I can file a case against them and if they lose they will have to pay 1% of their annual turnover as fine.

Now Google specifically has very good takedown process of pirated content from the internet. Hence they may not have any problem in taking down the content if someone wants to do so. The problem is determining them on a case by case basis.

First Google will have to confirm the identity of the requestor. Secondly it has to establish that by taking down the information it is not violating anyone else’s constitional right. And thirdly, by removing the content it is not compromising any health or security issues. I suspect if Google is to perform all this actions it has to set up an equivalent of FBI and Scotland Yard in additional to employing couple of thousand lawyers in its premise. (In addition to the lawyers they already have)

In summary, while the legislation has a lot of merit, by imposing the burden of proof to the controller and creating a vague legislative structure in which the search provider has to work on, the EU has successfully passed the responsibility to Google. May be EU is hoping that by putting the ball on Goggle’s court, it could force the search giant to come up some proposed formula that could serve EU privacy cause in the long run.

In months to come we are likely to witness all kind of people ranging from financial imposters, crooks, convicted pedophiles to political criminals, who would seek refuge under this law. It would be interesting to see how Google will respond to those requests.

On a brighter side for Google, this might potentially open new business model for them. As more and more personal information is removed from Google search, people who need to run security clearance or journalistic research will probably need to approach the search engine for special closed loop search. These services would typically be business to business where Google already has an established revenue model

The irony of this entire episode is that since now Mario Costeja Gonzalez has become a public figure and could become the poster boy for the EU privacy law, chances are, his personal information will never go down from the internet. It is safe to say that his right to removal of his property auction data will be far outwitted by billion of people seeking privacy of their personal data, who will use Mario as a reference to their case.

Television Networks- Will they eventually go “full service”?

Posted on by

Since Google has unveiled Google Fiber in Kansas City, a new debate has been ignited on Google’s aspiration of owning the world. The move has further complicated the content distribution industry where cable operators, broadcast service providers and telecom providers are jostling for control of the consumer home.

However, it is not the content distribution industry alone which is uncomfortable with Google’s foray into the consumer home. For the Television Networks, none could be more threatening than to let their content flow through a goggle pipe. It really does not take an Einstein to figure out what Google might do to the TV advertising model once they have a complete grip on consumer content consumption pattern.

In order to strengthen its connection with the consumer, television networks have been contemplating a move towards retail “direct to consumer” initiatives for several years now. However among many initiatives, the only two true successes of reaching the consumer directly are Hulu and HBO GO. Both owe their success to premium and monopolistic content.

Otherwise direct to consumer as an initiatives have largely been morphed into digital marketing initiatives where investment on social platforms for creating consumer connect is the key driver. On the retail front, the direct to consumer initiatives have morphed into   “TV Everywhere” initiative where cable operators have a stronghold on the consumer.  Otherwise, most networks today are defining their business as “custodians of intellectual property” while a few still continue to invest on distribution platforms to create differentiation through the supply chain process.

But is that all the networks could do in the content ecosystem?

To put the things into perspective, networks don’t have the core competency to move into a consumer electronic business and compete with Apple, Google or Samsung. Unsuccessful experiments such as MySpace (Newscorp), Friends Reunited (ITV), Flux (Viacom)have proved that Television networks may not be able to compete in the social network space either.

Networks may not be interested to delve into technology-rich smart device market of Roku, Boxee, Apple TV or Google TV (The trend has been more of partnership. For example Roku has lined up extensive content from Dish, Fox and Disney in its platform).

While Time Warner cable and BSkyB are successful carriers, there is hardly any further space for another carrier in this competitive area (unless you are a Google). The question therefore is what is left for the TV Networks to create new leverage?

If the networks are to differentiate & grow, I believe they will eventually transform from a “TV only” industry to a “full service” content industry. The focus on investment will change from “buying another network” to investing on any content (News, article, Research paper, Video, Movie, Games, Blogs) within a genre.

This could eventually lead to restructuring for big media house which are today organized by media types  and not by content genre. However, one thing is certain that the first mover in this “full service” content strategy will have an advantage as important brands could be snapped up before competition gets a sniff or antitrust law kicks in to prohibit content monopoly.

One might ask as to why the Television Networks only while this theory holds good for any player in the content industry? Fact of the matter is that this is the only industry in the content space which has scale, which is still profitable, and who has the muscle power of a conglomerate. So anyone in the content industry, who could lead this vertical integration, it must be the Television Networks. The only other profitable and growth sector in content space is gaming but it is too one dimensional an industry to lead a vertical content strategy.

 

Is Facebook a Religion ?

Posted on by

Nowadays whenever I visit my Facebook account and start reading various posts by my family, friends or acquaintances, it makes me wonder whether I have gotten out of touch with them.  People who I thought barely have any remote interest in each other’s life would exchange pleasant comments and share details about their life in general.

I wonder whether a massive social meet up is happening behind my back where I am not invited.  But the great thing about Facebook is that nobody writes even remotely controversial or derogatory thing about others.  To think about it, isn’t it the ultimate society where everyone is nice and helpful to all of their friends and family? In other words Facebook has established a social norm in five years which traditional religion has not been able to do in 2500 years.

Now you may argue that it is all virtual and not real. However if we are to spend five hours on social media and two hours actually interacting with people in the real world, can we positively say which part of our life is real and which part is fake?. That brings us to the moot point, is Facebook a religion?

To answer that let’s go back to the basics of evolution. As living organism we are destined to do three things; survive, procreate and evolve to adjust to our physical environment. This process follows Darwin’s “Natural Selection” theory. As human beings we also have an added aspect of evolution; that is intellectual evolution.

We all know, as also many other living creatures that our chances of survival and procreation go up significantly when we are united or are in a group.  And hence we have formed many such groups throughout our history in the form of religion, country, color, language etc. In the social behavior scale, the role of religion has been very prominent, since most religion professes a way of living to its followers.

If we look back at the history, the role of religion into our process of intellectual evolution has been limited. It is mostly the philosophers and the scientific minds such as Descartes, Plato, Aristotle, Confucius, Leibniz, Marx, Nietzsche, Galileo, Archimedes, Newton, and Darwin who provided our evolutionary kick. Most of them in fact were in loggerhead with religion in their life because they provided advance theory in the static world of religion. To be fair to religion, it provided the basic civility that helped maintain order in the society where philosophers could have a captive audience. (Though hostile at times). However, no religion professed evolution because it would have been contradictory to the fixed beliefs that most religions are based on.

In the 21st century, all sources of unity that is based on physical attributes have lost its sanctity. Literally everyone speaks English and hence language is no longer helps in group identity. Globalization has enhanced mobility and consequently geographical parameters such as country are not the biggest unifying factor.  Religion, because of its strict guidelines has lost its context in the developed world.

However, as human beings we still need to feel part of a group because it is our natural instinct of survival. Facebook is providing a platform which makes us dynamically become part of group. This is the new reality of the 21st century. The role that Facebook has played in the Arab spring proves that beyond doubt.

Just to add to this thought, while Facebook is providing the factor of unity and group behavior, blogosphere is providing perfect foil where philosophy can prosper. However the relationship between Blogosphere and Facebook has been highly synergistic unlike that between religion and philosophy which were mostly confrontational.  That is because Facebook’s new identity ideas are driven by thoughts that are generated from the blogosphere.

Does that make Facebook a religion or a platform for thousand religions? To my mind it is not a religion. It is a new way of feeling part of a group just like religion, language or country.  It is part of our survival instinct that motivates us to become part of a group. However it differs from traditional religious characteristics in too many ways. Someday, somebody will give it a new name. Till then we will call it just Facebook.

DNA as a storage device..Capability & Possibility

Posted on by

Today’s Wall street journal (August 17th 2012) had a very interesting article on future of data storage. Researchers at Harvard University have successfully translated an entire book into actual DNA. The process seems to be very simple and intuitive. The binary codes of the digital book were simply translated into DNA base of A/C or G/T.  According to The WSJ, though the process of DNA sequencing of data is still very expensive, it has dropped from $10,000/million base pair to 10 cents/million base pair.

Harvard is not the only place where this cutting edge DNA storage work is going on. In January 2012, scientist from National Tsing Hua University in Taiwan and Karlsruhe University in Germany reported creation of storage device using Salmon DNA.

DNA as storing medium has other advantages. First of all from size perspective 1.5 milligram of DNA can store 1 petabyte of data. If we are to compare today’s storage technology with DNA based storage, 1 gm. equivalent of DNA storage would require 333 pounds of current storage medium (1:151000).  The other big advantage is that the genetic material need not be in a solid form. You can have organic matter as liquid that can vastly enhance the way we construct our devices. If we indulge ourselves into a fiction mode, we can visualize these storage devices being implanted in our own brain. After all it is DNA and our brain could possibly read the DNA strings better than flash drives.

I am further looking forward to read the upcoming book by Dr George Church and Ed Rechis titled Regenesis: How Synthetic Biology Will Reinvent Nature and Ourselves (Amazon link: http://www.amazon.com/Regenesis-Synthetic-Biology-Reinvent-Ourselves/dp/0465021751.) Dr Church along with Sriram Kosuri at Harvard and Yuan Gao of John Hopkins is leading this initiative.

If not anything, we can certainly predict a Google acquisition of a bioinformatics firm in near future.  This would be too tempting an area for Google to resist.

The WSJ article can be found at

http://online.wsj.com/article/SB10000872396390444233104577593291643488120.html

The original paper was published in the science journal on 16th of Aug. Here is the link for the same (You will need subscription to read it in Science. )

http://www.sciencemag.org/content/early/2012/08/15/science.1226355