Intel To Give Up On Pay-TV Disruption

That’s the latest, via Amol Sharma, on The WSJ:

Intel Corp. is in talks to sell all or part of its yet-to-be-launched TV venture to Verizon Communications Inc., reflecting the difficulty the company has had in building an online version of pay television, according to a person familiar with the situation.

For the past couple of years Intel has been planning a service that would stream TV channels over the Internet, and has made a significant investment in the operation, which now involves more than 350 people. The company has developed an advanced set-top box that was widely praised by media executives as significantly easier to use than boxes offered by traditional cable operators.

But, alas, it couldn’t overcome make-or-break issues.

Some TV programmers will offer their content only if several peers of similar size jump in, creating a chicken-and-egg problem for Intel, media executives have said. Price has also been a big barrier: programmers are insisting on a premium because they don’t want to disadvantage the cable and satellite companies that are their biggest customers.

Some smaller TV-content owners, meanwhile, have contractual obligations with their pay-TV partners that limit their ability to sell content to a company like Intel, media executives say. It isn’t clear whether those restrictions would become moot in the event that Verizon the venture.

That Intel is giving up on this, really shouldn’t be that surprising. The TV-content owner ecosystem has tens of billions of dollars at stake and it was always going to be exceedingly difficult to dilute its power. [Look at what happened to TWC as a result of its fight with CBS over fees last quarter: 306,000 subscribers left.] 

No, instead, what stands out for me is how mighty companies such as Intel, despite having top management talent, sophisticated models and strategies, willpower, power, money and the brand can stumble against deeply entrenched interests and some variation on Prisoner’s Dilemma. 

So what’s the answer? Not sure there is one, for this market, yet. 

Lessons in Supplier Power: Amazon’s Gazelle Project

One of things in business is to be careful with those that supply you with what you need, to make what you make, to sell to those that buy. 

That’s because, if they (the suppliers) become powerful – they can cut you off lest you give them what they want, which is almost always more margin. Soon, you find that you can’t live with them – yet can’t live without them. This is the uncomfortable truism behind Porter’s Supplier Power. 

And from the company that has so much to teach us all about business, by way of an article by David Streitfeld in The NYT, comes another lesson on this topic:

In negotiations with larger publishers, Mr. Stone writes, Amazon kept demanding more as it got bigger: steeper discounts, longer periods to pay and better shipping. Mr. Bezos, Amazon’s chief executive, then turned up the heat on the most vulnerable publishers — those most dependent on Amazon.

The company’s relationship with those publishers was called the Gazelle Project after Mr. Bezos said Amazon “should approach these small publishers the way a cheetah would pursue a sickly gazelle.” A joke, perhaps, but such an aggressive one that Amazon’s lawyers demanded the Gazelle Project be renamed the Small Publishers Negotiation Program.

Mr. Stone writes that Randy Miller, an Amazon executive in charge of a similar program in Europe, “took an almost sadistic delight in pressuring book publishers to give Amazon more favorable financial terms.” Mr. Miller would move their books to full price, take them off the recommendation engine or promote competing titles until he got better terms out of them, the book says.

And that was before Amazon launched its own imprint of course…

[Really looking forward to reading Brad Stone’s book on Amazon that this article was based on…should I buy it on Amazon though?]

PS: Yes, Supplier Power typically refers to those that supply you with raw materials…but in retail, I think that distributors are suppliers of sorts because they supply you with the channel to sell what you make to end customers. As such, Amazon’s website becomes yet another thing you are supplied with, to sell your wares. No?

The Joy Of Being Samsung

To be Samsung today is as good as it gets in the consumer electronics business. 

On the one hand, as Android’s flag carrier, you control the Android SmartPhone/Tablet market…so much so that Google both loves and fears you, as I wrote a couple of months ago. 

And on the other hand, Apple, despite the jousting in courts and stores, just can’t live without you. 

As Jessica Lessin, Lorraine Luk and Juro Osawa write on The WSJ (paywall), 

They were ideal partners a decade ago, when the two didn’t really compete. Then Samsung started rolling out smartphones that today eclipse the iPhone in units shipped. In the past year, Apple executives have expressed concern that their dependence on Samsung limits Apple’s ability to control its destiny by constricting Apple’s negotiating power and ability to use different technologies, according to people who have been told so by Apple executives.

Apple, Cupertino, Calif.,has cut back on some purchases. It no longer buys iPhone screens from Samsung and has reduced iPad-screen purchases, suppliers say. And Apple has been buying more flash-memory chips—an essential component for storing data—from other makers, say former Apple executives and officials at another chip supplier.

But Apple remains critically dependent on Samsung. The microprocessor brains that control iPods, iPhones and iPads are Samsung-built. And some new iPads still use Samsung screens, according to examinations of the devices by industry analysts.

And why can’t it look elsewhere? 

Apple’s conundrum: Samsung is the world’s biggest maker of some of the most sophisticated parts that Apple craves, such as processors, memory and high-resolution screens. Apple also has more than a half-decade invested in working with Samsung to build custom chips. Replicating that elsewhere is daunting, former Apple executives say.

Of course, and at the same time, it is not as if Samsung doesn’t need Apple:

Samsung has reason to keep the Apple relationship alive. Apple is still Samsung’s biggest customer for components, and a complete retreat by Apple from Samsung would hurt Samsung’s earnings, analysts say.

Apple’s component orders from Samsung were set to hit around $10 billion last year, says Mark Newman, an analyst at Sanford Bernstein in Hong Kong. That represents a significant chunk of the 67.89 trillion won ($59.13 billion) Samsung posted in sales from its component business, which includes chips and displays. The Apple processor, where Samsung is currently the sole supplier, accounted for $5 billion of purchases in 2012, he estimates.

Still, Apple must do what it needs to, and dilute Samsung’s supplier power. Allowing your destiny, success and profits to rest on 3rd parties is good only and as long as you are the one calling the shots.

Verizon’s Interesting Move Against Cable Channels

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Verizon, the 6th-largest cable-TV provider in the US is trying to disrupt pricing in the US cable TV ecosystem. Cable TV pricing is a favorite topic on this blog (previous posts here and here) as some of you may know. 

Traditionally large media companies, such as Viacom, have charged Verizon $X per channel based on how many households receive a channel. But in reality, just based on data from my own household, we regularly watch 5 or 6 of the 80 or so that are piped in 24×7. And perhaps 2 or 3 more of those channels once or twice a month, if that.

So in a move that is not (yet) a challenge to the frustrating lack of a-la-carte pricing, Verizon is proposing to pay providers based on how many households actually tune in to a channel for at least 5 minutes each month. Makes sense, right, especially when you consider that viewership numbers and the % of cable fees collected are not very tightly coupled?

Last year, for example, Walt Disney Co.’s ESPN averaged one million viewers watching its programming live on any given day and up to seven days after broadcast. That was slightly less, according to Nielsen, than the 1.3 million who were watching USA Network, owned by Comcast Corp.’s NBCUniversal. Yet distributors like Verizon paid ESPN an average of $5.04 a month per household last year, according to SNL Kagan, while USA got just 68 cents a month.

And Verizon plans to do this using data from its own set-top boxes, in a potential long-term offensive move against Nielsen’s sampling-based viewership data. Of course, Nielsen’s data is used to set ad prices, not determine cable fees, but its not difficult to envision a future where Nielsen’s revenue model is under threat from some kind of aggregated data collected from various providers’ set-top boxes.

Anyway, getting back to Verizon, unfortunately, the move will not reduce the ever-rising monthly cable bill in the near future:

The proposal, if implemented, wouldn’t reduce FiOS subscribers’ cable bills, Mr. Denson said. But over time, he said, he hoped the shift would “stabilize retail prices for consumers,” unless more people started watching smaller and midsize channels. If retail prices increase, “it would be due to consumer consumption,” he said.

So why is Verizon even doing this? Ostensibly because it, along with other cable companies, thinks that if cable prices rise too much then consumers will “cut the cord” and move away to Netflix and Hulu and others in greater numbers. Perhaps…But don’t be surprised if this is just a way for Verizon to pay less to certain channel providers while keeping customers’ costs where they are (analogy: banks in the US these days are enjoying cut-rate mortgage rates thanks to US Treasury policies, but have opted to not pass on most of those low rates to customers, resulting in very high mortgage profits).






Swatch and the Swiss Watch Industry


The Swiss are to watches, what the Germans are to cars.

Their luxury watches continue to dominate the global market for luxury watches, and have seen impressive growth (32%) in value, over the last two years.

A lot of that success appears to be traceable to the Swatch group, both directly and indirectly.

Directly because Swatch, with its stable of brands (Omega, Logines, others and of course, the memorably “cute” Swatch brand itself), accounts for over 33% of all Swiss watch sales.

But more impressively and indirectly, it looks like Swatch is the “engine” that powers the rest of the Swiss watch industry –  supplying 70% of other swiss watches’ movements and 90% of the balancing springs, per an article in The Economist (which contributed the specific numbers cited above).

Talk about “supplier power”.

However, Swatch is not very happy with the state of affairs:

Swatch became the watchmaker to watch in the 1980s, when it merged two weak companies and launched Swatch watches as a relatively cheap brand (though not nearly as cheap as a typical Chinese timepiece). It remains dominant, in part, because other firms find it easier to let someone else go to all the trouble and expense of producing their watches’ most fiddly and essential components.

But Swatch now finds this arrangement irksome. It supplies parts to rivals (Swiss and foreign) which then spend lavishly on advertising. Swatch would like to curb its sales of components, to 30% of the Swiss total by 2018. The Swiss Competition Commission agreed to modest reductions in 2012. After lobbying by watchmakers, Swatch will make no more cuts this year, but next year it will probably try again.

The article doesn’t detail exactly why Swatch finds this arrangement irksome…perhaps those that it supplies then compete with Swatch (successfully?) in different markets and segments, leading Swatch to think that if it stops “arming the enemy”, its brands could be more successful? The problem with that argument, as the article notes, if it progressively cuts off supply, it will encourage its competitors to develop their own suppliers.

So unless its capacity were fixed and/or it thinks that the movements and springs were sources of major competitive advantage, would it not be better off profiting from its dominant supplier position?

Any thoughts on that, readers?

Netflix’s Disney Coup: Classics Today, New Ones From 2016 Onwards


As noted on this blog in the past, because of a combination of supplier power (movie studios, and Internet Service Providers – to some extent), intense competition (everyone from Amazon to Apple to various other players) and some management challenges, Netflix has been under a lot of pressure since last year.

Most recently, Carl Icahn acquired a stake in Netflix to add to Netflix’ pressure. Netflix then adopted a poison pill, etc.

But today, Netflix scored a major coup by buying streaming rights for Disney for what The LA Times estimates at about $300 annually. The deal gives Netflix access immediately to Disney’s older titles and classics such as “Dumbo” (this is what all the news articles are citing as an oldie classic). The short-term reaction has been very favorable. [The stock jumped and a lot of Netflix shorts lost some money, I think.]

And then starting in 2016, Netflix gets access to all new Disney titles “seven to nine months after they are first shown in theaters“, which is sooner than what Disney’s current partner Starz gets them. Interestingly, Starz didn’t renew Netflix’s contract earlier this year so this must be causing some happiness at Netflix right now. (As an aside, it wasn’t clear to me if the annual $300m payments start in 2016 or earlier.)

A couple of things could happen going forward.

a. Other studios’ willingness to sign deals with Netflix could be changed thanks to this deal…perhaps Disney’s deal with Netflix indicates that they see the “streaming light” and think that Netflix is a good bet? As a move against Amazon’s power in so many different areas? Perhaps…


b. This strengthens Netflix’ already strong offerings for kids (special and easy access to Netflix’s kids selections on its iPad app indicate, to me, that a lot of parents and/or kids watch a lot of Netflix. It would be interesting to see how much of the reported 30% of US peak ISP traffic attributed to Netflix consists of kids shows and movies…). So this may make Netflix more appealing…but to young families, further boxing it in.

While I love the convenience of Netflix and its basic premise, based on customers paying $8 a month, it is difficult to see how it can strike deals with most major studies and truly become a source of all video entertainment (TV shows + movies). Or can it? Today it has around 30 million subscribers globally. If they are all paying at least $8 a month, then Netflix is earning $240m a month * 12 ~ $3B a year. Is that enough to strike deals with all major studios? 

Not sure if the economics work out.

Some of Netflix’s future direction and trajectory should become apparent based on which major studios Ted Sarandos, Netflix’s chief content officer, is able to sign up with, next.


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