When we first began writing Faultline we described the difficulty of transitioning from analog to digital markets. It is not only beyond most companies to find the digital version of the rich analog seams they were once mining, but during a recession is becomes almost impossible, due to investor uncertainty.
If we stretch this story all the way back to the dotcom economy, we remember countless conversations with leaders in perfectly good companies, trying to work out how they could turn themselves into ‘New Media’ companies. They wanted to turn a bricks and mortar business into one based around a web site, because that way they would enjoy the kinds of massive multiples that web based businesses then enjoyed, and investors would find them more valuable.
That was a time when investor sentiment, mostly the sentiment of investors who had missed the big internet bubble, was black and white ‘ infrastructure companies – those who owned networks and consumer services, would always grow too slow, and what they wanted was a skyrocket, not an airplane (as one investor put it), in other words they wanted Facebook, not Comcast.
But in times of financial uncertainty it is tough to know what investors want, mostly it turns out, they want government stocks, and to bury their heads.
This week the issue is full of examples of this. Two reports out this week, one which says that advertising fell off a cliff in the UK during the last quarter (how surprising is that?) and another which says that more and more people are accessing social networking sites via phones in the US. The only likely upside in the advertising community is internet advertising.
If you are running an internet business right now (one of those Skyrockets) you are faced with a classic dilemma. People either pay for your services (an old model but predictable) or they do not, in which case either advertisers pay for it instead, stampeded by advertising auctions to get their message out over the internet, because it remains relatively cheap compared to the over hyped traditional advertising avenues of TV and radio. Or you sell traffic to someone else to drive their ecommerce activity.
In recessions, down goes advertising spend, but then again so do subscription sales, leaving sale of your traffic the only recourse. So internet based businesses are pushing affiliate networks and Google rankings for all they are worth, because they cannot sell any advertising to businesses which have slashed their budgets. Even ecommerce is prone to fall, because although consumers may spend more online as a percentage of their total spend, their total spend collectively is savagely down.
In this type of environment gravity is reversed. Take for instance the fact that in game advertising network IGA is now up for sale. This is a new, highly digital form of interactive digital advertising. IGA was known to have been used in getting across the Obama message during the election. It’s somehow gratifying to reach into the mind of the obsessed gamer and plant the seed of a message that grows into an opinion, or a fully fledged belief, while conventional media cannot touch the alienated, cynical 18 year old male which typifies this format.
But of course the 18 year old male, widely deemed to be the tipping point and the holy grail for no end of marketing campaigns, is no longer playing PlayStation or Xbox games exclusively. He is still watching less and less broadcast TV, and he is still watching PS3 and Xbox played video, but he is talking to friends on Facebook and MySpace and texting people on his iPhone. Potentially he is transitioning from playing games on an early digital format, which had a major market lead, to playing games on the move on an iPod Touch or iPhone, while still opting into the portable experience, touching up his Facebook site or sending someone a Twitter, between levels of Super Mario, the touch version.
So while we have been saying for five years that in-game advertising will be a $3 billion to $5 billion business any day now, and we still think that’s true, the games which are tied to a TV set may have had their day. So in-game advertising networks which once claimed to be the only way to reach this insular self-opinion forming 18 year old future home owner/industry leader, finds there is a parallel path into his mind via Facebook and many other mobile delivered experiences.
It’s not that in-game advertising has stopped working, it’s that no-one ever trusted it, and always wanted a more conventional advertising way of reaching the same candidate. This is neither the effect of the Faultline (analog to digital business model conversion) nor of the recession ‘ but a factor of experience fragmentation.
We have experience fragmentation around our TVs. What if all of the experiences on a TV could be harnessed to sell all forms of advertising, then the advertising would be device-centric. What we mean is what if advertising was all be sourced from the same place and made to be coherent across VoD, broadcast TV, DVD viewing, game console play, VHS recordings, DVRs and TV out ports on a handset. If it was seen on a TV screen, then the advertising would ALL come from a single source. Sounds mad doesn’t it.
In the current world IGA gets the in-game stuff, Sony gets the PlayStation Network ads and pay per view/play, Comcast gets the VoD advertising, ABC or Fox gets the broadcast advertising revenues, Viacom might get the money from its Cable network adverts, TiVo might get all the DVR advertising, and if content is sourced from a handset and contains adverts, no-one in the TV eco-system gets any control over it, that goes to cellcos.
So it would be pretty strange if in the end all advertising on a phone was from a unified value chain. But to a large extent that’s how cellular operators see this experience and how many research companies see it. Mobile advertising will be THIS big, go the reports, without saying how much of it will be in-video, in-game, on web, or off portal. Actually one new report this week did say that going out two or three years all handset advertising, services and most video would be off portal. They may be right.
So it turns out that we have another dimensional force operating alongside the Faultline and the recession, and this is form factor. There is a dimension that says that if an experience is portable, it’s better, it’s worth more.
But there’s at least one other dimension operating, one relating to where you are on the planet and which businesses, or which culture is influencing you. Throughout the 90s the European wireless networks and device designers dominated mobile networks, with US networks using a variety of technologies and being unreliable and behind the times with broadband. Today that’s no longer true, and with the emergence of the iPhone and Android, we see US centric ideas dominating cellular. More video is being watched, more adverts are being sold and more music is being held on US handsets than European handsets. But how long will this be true when the nations of the Asia Pacific region are now subscribing in such volumes, and which have their own technology champions.
In fact the iPhone has probably added another dimension to the portable, the dimension of touch, one that was long overdue and unlikely to have been achieved in a market dominated by conservative investors in groups that sprawled over continental Europe such as Vodafone, Telefonica, Orange and T-Mobile.
By agreeing to unleash ‘touch’ through the iPhone, AT&T triggered yet another revolution, and allowed the US to take control of the design agenda of the portable dimension. Touch allows devices to have complex or simple control mechanisms, with their software driven control regime deferring to the touch paradigm.
So within the subject of our research area, which we call the Faultline, success may be a complex combination of factors and perhaps this explains much of the news we read this week.
1) Has the service fully moved into the digital dimension from analog?
2) Is the device or service portable? Can it work across several screens
3) Does its business model rely on advertising or subscriptions or ecommerce?
4) Is the design agenda for that type of network currently led by the US, Western Europe or Asia Pacific
5) Does the device have an entirely software driven set of controls (touch)
And finally 6) does the company offering the service have visible liquidity.
In Sirius we had a satellite radio service which could qualify from points 1 to 5, but until Liberty Media stepped in last week, it failed on point 6.
In Blockbuster we have a company who’s main service fails to qualify on points 1, 2 and on 3 it is at the subscription end of the spectrum, it qualifies on 4 (because of Netflix) and fails on both 5 ad 6. And yet it has scale, and significant revenues, but failing in the sixth dimension, that of apparent liquidity, is a cardinal sin. Given low liquidity and a low score on all the other counts, it is small wonder it is in trouble and unloved by investors.
Look at TiVo through these criteria. It is fully digital, there is a portable version of TiVO in TiVOtogo (but not well established) but it can work across several screens. Its business model is a cross between advertising (for clients), subscriptions (for the TiVo service) and intellectual property licensing and TiVo itself still has control of the design agenda for DVRs. Its device controls are hardware based, but it can be controlled remotely from a handset interface, so it can be combined with touch, but not fully.
But TiVo has been up and down around that last dimension 6) as investors have worried in the past (no longer we feel) that the company might run out of money.
Increasingly and for the next 9 months the sixth dimension of apparent liquidity is the most important dimension and a company can qualify on the all the other fronts and be a potential market leader, and yet it could fall by the wayside.
Right now there are huge deals to be done in terms of bringing liquidity to those companies which qualify highly on dimensions one to five, but are in danger of either failing the sixth dimension, or worse ‘appearing’ to fail.
So to make a massive investment call on an illiquid company, you must first ask
Where is its product along the digital ‘ analog business model transition line?
Where is a service on the portable ‘ fixed line?
Where is the IPR for the business the company is in being driven forward, in the East or the West?
Is it portable or is it fixed?
Can you control it by touch, can it be different things just by changing those controls.
Because even if it qualifies on all counts, failing to comply along the liquidity ‘ illiquid line is currently a basis for disqualification and would be white knights need some kind of criteria in order judge whether or not it is worth saving.