Disney’s Growing Character Arsenal, Amazon’s Publishing Troubles, Machiavelli in Citibank

Star Wars

Disney buys Star Wars studio for $4B: As the cognoscenti now know, Disney swooped up Lucasfilm, of Star Wars fame, for $4B (half cash, half disney stock). George Lucas, Lucasfilm’s visionary and legendary sole owner became richer and now owns about 40m shares of The Walt Disney Company. 

Why did Disney do it? Disney has been building up a war chest of comic book, fictional and mythological characters (its purchase of Marvel a couple of years ago, for example gave it 5000 such characters including Spider Man and many other lesser known ones), with the intent to further monetize them via sequels, prequels, amusement park rides (anyone want to guess how popular and money generating Star Wars themed Disney Park rides will be?). So expect Disney to really milk this one in a way that is tasty for fans and shareholders. Lucasfilm’s video game unit, LucasArts may (not sure or clear at this time) boost Disney’s own highly anemic performance in the ever expanding and growing video game market. 

A huge part of the acquisition is the merchandizing. In fact, in terms of cash flow, the Disney will realize the cost of the acquisition in about 5 years (though becoming NPV-positive may take more time, based on costs):

Lucasfilm’s consumer-products revenue this year will be comparable to the $215 million Marvel generated in 2009, when Disney acquired it…suggesting 2012 sales of about $860 million for all of Lucasfilm. Disney seeks to expand “Star Wars” merchandise beyond toys and sees international markets, now 40 percent of consumer-product revenue, as a growth opportunity, he said.

And why did George Lucas do it? He was getting old and at 68, wanted to pass the baton on to someone who would keep the flames burning. Nice way to do it, if you ask me. 

Amazon – becoming a book publisher is hard: Amazon, as we know, started with books. And while it tries to sell everything to every customer out there, it hasn’t stood still in the book industry either, where it has tried to integrate forward and backward in the book industry. In terms of backward integration (replacing or supplanting the big publishing houses it bought the books from, for sale on its website), it has been trying very hard to become a publishing house. 

The economics are simple. A $10 book might give the author $2 in royalties or so, but generate $3 for the publishing house and $5 for the retailer. So Amazon wanted to see if it could eliminate the $3 that the publishing houses (Penguin, Random House et al, from my post yesterday) captured, capture some more of that value itself and cut customer prices some more. 

So why the trouble in paradise? Two things. One, many of the big publishers out there still supply most of the physical books and the eBooks that Amazon sells. And they haven’t been too happy in the past, which means that the number of books they make available to Amazon goes down. Two, and more importantly, authors are getting cold feet – especially the famous ones (whom the publishing houses made famous in the first place) so they are not signing up with Amazon to publish their books. And they are getting cold feet because of what is happening to authors that make Amazon their publishing house:

…But a likely factor in the book’s poor sales is its severely limited availability. It wasn’t stocked in the 689 stores of Barnes & Noble Inc., Wal-Mart Stores, or Target. Some independent booksellers don’t stock the title either. Nor is the digital book for sale in e-book stores operated by Sony Corp.,  Apple Inc. or Google Inc.

The boycott of Amazon Publishing is deliberate on the part of these book sellers. Like the WSJ article quoted above says, why would a Barnes and Noble store promote a book published by Amazon?

Still, as always, never discount Amazon. It will be interesting to see how it solves this problem.

More rules = corruption: While I find corruption morally repugnant, the sadder thing about corruption is that instead of a million people becoming more prosperous, only a 100 become millionaires because businesses don’t get started, competition doesn’t thrive, jobs are not enabled and prosperity cannot take root.

An interesting article in The Economist argues that as opposed to the lack of no rules like in Somalia which is not exactly known for its thriving multinational corporations, few simple clear (enforced I would imagine) rules go a very long way in promoting businesses – and by implication, the virtuous cycle of value creation and capture (this blog’s raison d’être, as I never tire of reminding my readers).

Doing Business

(Above: The chart lifted from The Economist’s article)

The short piece is worth a read.

Citi’s CEO ouster was a result of its chairman’s Machiavellian moves: A fascinating piece in the New York times details how Citi’s CEO (until a few days ago), Vikram Pandit, was ousted because of its Chairman’s well orchestrated and executed campaign over a number of months that culminated in

…Mr. Pandit, the chief executive of Citigroup, was told (by the Chairman, in a face to face meeting) three news releases were ready. One stated that Mr. Pandit had resigned, effective immediately. Another that he would resign, effective at the end of the year. The third release stated Mr. Pandit had been fired without cause.

The choice was his.

A longish but fascinating piece.

Less of You on YouTube

 

YouTube Front Page

As Internet access becomes faster and ever cheaper, customers have been “cutting the cord” and watching more TV and more video entertainment on various devices (phones, tablets, laptops, etc.) that are connected to the Internet. 

Americans still watch a lot of TV though and that’s not going to end in the near future:

“The average American watches nearly five hours of video each day, 98 percent of which they watch on a traditional TV set,” the report states. “Although this ratio is less than it was just a few years ago, and continues to change, the fact remains that Americans are not turning off. They are shifting to new technologies and devices that make it easier for them to watch the content they want whenever and wherever is most convenient for them. As such, the definition of the traditional TV home will evolve.”

But because of both a fundamental shift in economics, disposable income ($80 on a cable bill = $80*12 = $960 a year; sustainable in the long-run?) as well as the generations that have and are coming of age on the Net, it is clear that web-enabled TV and video entertainment is the future. YouTube, for one, is laying the groundwork to capture this audience, as much as that audience will allow itself to be captured – given the plethora of choices. 

For the first few years of YouTube’s existence, it was the repository of home made videos and LOLcats and the like without a lot of focus on advertising. That continued to be the case after Google acquired it, in the beginning. But since 2008 or so, the number of ads on YouTube have been steadily increasing and by all accounts, bring in a lot of money – but no one knows exactly how much and Google doesn’t tell anyone the details. 

Still, it clearly thinks that the shift to web-based viewing will accelerate going forward and is preparing for it in a big way:

The investments in the channels reflect Google’s belief that the Internet is the third phase of the television business, after network TV (with a few channels) and cable TV (with hundreds). “We’re not going from three to 300 channels but to millions of channels,” Mario Quieroz, head of Google TV, said in a recent interview. “The Web is essentially infinite content.”

The first step of that strategy, on the back end, was to set up a $100m or so production fund to fund the creation of original, YouTube-exclusive content, with producers of this content enjoying varying degrees of success. On the front end, 96 “channels” were created on YouTube to capture user attention and drive views and subscribers – all of which of course YouTube wants(ed) to monetize via ads. As a quick visit to YouTube.com shows, these channels are now heavily promoted and user generated content, the stuff that put the “You” in YouTube to begin with, is less prominent.

Anyway, the second step of that vertical integration strategy will be announced Monday, per a NYT article:

…it plans to announce that it is adding more than 50 original channels to the 100 it has introduced in the last year and expanding original channels to France, Germany and Britain.

 Further, Google is putting its money where its mouth is once again:

As part of the new effort, Google is investing a fresh $200 million in the channels — on top of the $100 million it invested last year — to market the shows, pay for production equipment and, in some cases, pay the full production costs.

But as I was saying above, “regular” TV watchers are not going to abandon the couch and the TV remote anytime soon and flock to YouTube. Google of course knows this and is focusing on a different demographic – one that’s grown up on the Net and one that’s used to watching 60 Minutes every week.

For producers, that ones that come up with the original content, as part of this strategy, Google not only finances them but also advertises their work on its gigantic worldwide ad network. Producers also benefit because YouTube allows them to cater to the “long tail” nature of viewer preferences (niche, ethnic, etc.) and also undercuts the time it takes producers to shop around shows on “regular” TV networks – a win-win-win (YouTube, Content Creators, Audiences).

Of course, as the article says, it will take a while before YouTube (and its ilk) gain serious traction, but it is quite clear which way the winds will blow:

David Grant, president of PopSugar Studios and a former president of Fox TV Studios…“There’s a fair amount of ways to go — years — before the online video industry has enough scale to move those dollars over. But it is inevitable.”

 

 

 

 

Frommer’s Publishes Google Campus Guidebook; Gets Acquired

NewImageJust kidding.

As far as I know, Frommer’s has not published a guidebook to the Google campus, but Google announced yesterday that it is buying Frommer’s.

Naturally, as with any acquisition, the question du jour is Why?

And the answer, like with most things Google does is: Product.

Unlike Yahoo, Google realized, as I was saying in a Yahoo-related post recently, that Product trumps everything in the “free” Internet business model. Build, and they will come. Once they (web users) come, find out a way to monetize their experience on your website. In Google’s case that monetization is heavily reliant on advertising (95.99% of Google’s Q2 2012 revenue comes from advertising, per Google’s cleanly presented financials).

Travel of course is an important (read: something that people spend a lot of money on) search and research category for people on the Internet.

From the Wall Street Journal article that broke the news (it also pegs the acquisition around $25m), some interesting market sizing data jumps out:

The U.S.-based leisure-travel industry spent $2.56 billion on online advertising last year, up 40.6% from a year earlier, according to research firm eMarketer Inc. Last year U.S.-based travelers spent more than $100 billion to book trips online, a figure that is expected to grow by around 10% annually, eMarketer said.

And when you search for travel to Brazil for example, or say, you want to find spas in the foothills of the Andean mountains, Google not only wants to show you search results, but it also wants to conveniently provide Frommer’s Brazil guides or spa guides. What will that do? It should, or Google hopes, that it creates a compelling user experience that makes you think of researching travel on Google (and not, say, Bing) again and again.

Compelling product / experience = More users and more visits = More advertisements = More revenue.

That same message is delivered better on Google’s philosophy page:

Focus on the user and all else will follow.

Since the beginning, we’ve focused on providing the best user experience possible. Whether we’re designing a new Internet browser or a new tweak to the look of the homepage, we take great care to ensure that they will ultimately serve you (emphasis their’s, not mine), rather than our own internal goal or bottom line. 

This will also make Google a more appealing advertising choice for hotels, airlines, tourism ministries and such. When the user searches for a hotel or destination, you would want to advertise on a site that has unbiased, objective and (hopefully) good reviews of your property or destination. Again, that’s what Google hopes I am sure.

So with billions of dollars at stake in this industry, concentration of power in Google’s hands has and is viewed warily (despite Google’s “do no evil” mantra – #6 on the philosophy page – since increasing one’s pricing power and marketshare is not inherently evil of course).

The same Journal article says though that this may not be an issue for the FTC because the deal is too small. Evidently the markets agree. TripAdvisor and Yelp are both down today: -1.67% and -5.90%, respectively (but shouldn’t at least one of them be up, assuming that as a defensive move, Microsoft/Bing swoops in on one of them…or maybe the markets think that Bing will partner with the BBC who owns the Lonely Planet series of travel guides).

It will be interesting to watch how the travel advice and ratings industry changes as a result of this “battle for eyeballs”.

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