Category Archives: new media

Amazon, Apple, Google: Are they the New Conglomerates?

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Are Amazon, Apple and Google the new conglomerates? If so, should we be concerned that these leading digital businesses increasingly resemble ‘old school’ industrial behemoths?

The classic model of a conglomerate generally describes a holding company that either owns or has controlling stakes in a diversified range of operating businesses, often in unrelated industries.

Conglomerates largely went out of fashion in America and Europe in the 1980’s and 1990’s (following an era of acquisitions and asset-stripping in the 1960’s and 1970’s), resulting in leveraged buy-outs, spin-offs and partial IPOs, etc. as owners and investors  realised that the total value of the individual parts was greater than the amalgamated whole. Although some major cross-sectoral mergers and acquisitions did occur after this period (e.g., AOL and Time Warner, Vivendi and Universal) most M&A activity was confined to single industry players, in pursuit of market share, economies of scale and other business synergies.

Despite this trend, various types of conglomerates (grounded in the ‘traditional’ industrial model) still exist – including the Chaebol of South Korea, Japan’s Keiretsu, China’s mega-SOEs, the trading houses of Hong Kong, and the FMCG “House of Brands” that fill our supermarket shelves. The UK-based Virgin Group and India’s Tata Group  represent contemporary examples of ‘old’ conglomerates as they operate across very separate and distinct businesses and industries.

Conglomerates are usually created by a need for vertical/horizontal integration or a basic desire to build diversified revenue streams. Some build on a core competence, then find an opportunity in a seemingly unrelated field – thus a company like General Electric, with deep expertise in power generation, storage and transmission, diversified into financial services as a way to help customers fund the purchase of its products.

Sometimes, conglomerates evolve as a result of financial necessity – Canada’s Thomson Corporation (now Thomson Reuters) once owned interests in North Sea oil and gas alongside its newspapers and media companies, but then divested most of these assets to focus on its publishing businesses across legal, scientific, financial, tax and accounting information.

For a long time, it also owned a vertically integrated travel business in the UK, comprising a charter airline, a package holiday company and a chain of high street travel agents.

As it was explained to me when I first worked for Thomson in the late 1980s, the rationale for this diversification was simply a question of cashflow: most of the information businesses were subscription-based, with revenues usually collected in the 4th quarter. Although summer package holidays generated a far lower margin than the information businesses, customers paid up front – normally in the 1st quarter, and up to 6 months in advance, creating more consistent cash flows across the business.

At times, conglomerates may need to diversify into new geographic or sectoral markets to avoid anti-trust measures if they come to dominate a particular territory or industry. However, as we have seen in recent years (Microsoft, EMI, Thomson Reuters) anti-trust measures have been used to force divestment or corporate restructures, across jurisdictions and markets.

Whether they have done so by design or by default, the case can be made that Amazon, Apple and Google have become the new conglomerates. Let’s take each in turn:

Amazon – began as an on-line retailer of hard-copy books, and has since moved into sales and distribution of digital content (books, films, music, games, software); a trading and sourcing platform for a wide range of consumer products; an electronics manufacturer (Kindle); cloud computing and data hosting services; and its own branded credit cards.

Apple – originally a manufacturer of personal computers and proprietary operating systems, now a vertically integrated digital content distribution business; a bricks and mortar retailer; a smart phone manufacturer; a key platform for the capture, creation and playback of audio-visual content (with a growing presence in broadcast television); a provider of cloud services; and now exploring opportunities in the automotive sector.

Google – what was once a late-entrant to on-line search has probably become the closest of these three internet giants to being a ‘true’ industrial conglomerate. In addition to its e-mail and social network offerings, Google has developed its own mobile device operating system (Android) and web browser (Chrome), plus smart phones (Nexus) and laptops (Chromebook). It rivals both Apple (most notably in mobile phones and apps distribution) and Amazon (principally for ebook distribution), and is making inroads into Microsoft’s dominance of productivity software. Plus, with Google Cars, Google Goggles (not forgetting Google Maps, Google AdWords, the Google Books Library Project and the 2006 acquisition of YouTube), Google is clearly on a path to being a diversified technology-based business, with integrated businesses across digital content, entertainment, transportation, navigation, archiving, streaming….

Meanwhile, all three have been investing in robotics; and surely telecoms (network carriers), biometrics, renewable energy, education, health, banking and financial services can’t be that far behind.

The risks for these neo-conglomerates are that they will either lose focus, over-reach themselves, or destroy the core businesses that lie at the heart of their success. Worse, they could fall foul of anti-trust provisions if they continue to become vertically and horizontally integrated – a threat equalled only by international moves to call tech-based multinationals to account for their cross-border tax planning.

As with all empires, the fortunes of conglomerates tend to wax and wane, and while the three companies discussed here have remained close to their core businesses, it will be interesting to see how each of them ensures that they continue to add value while not stretching the boundaries of their capabilities.

Pricing for the Digital Age – A Postscript

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Last week I wrote about pricing for digital content. In the past, I’ve also written about geo-blocking.

So, I decided to conduct a (very) small experiment in price comparison by market territory.

I chose a specific book title, and compared prices of the digital and print editions, between several retail sites, in 3 markets (Australia, UK and USA).

Before I conducted the exercise, my expectation was that Australia would be the most expensive (based on current exchange rates*), and USA the cheapest, but not much cheaper than the UK. But I was surprised by the results….

First, digital version:

Apple’s iTunes store: Australia A$37.99; USA A$37.76; UK A$41.83

Amazon: Australia A$20.60; USA A$20.61; UK A$33.18

eBooks.com: Australia A$40.95; USA A$37.72; UK A$48.03

Booktopia: A$39.95

I was surprised that the iTunes price between Australia and the USA was so close – when it comes to music, iTunes Australia is usually far more expensive than either the USA or UK. Amazon appeared to have the title on sale, but I can’t work out why the UK prices are so much higher. Thanks to geo-blocking, of course, I cannot access the slightly cheaper price in the US store. But I was able to buy it from Amazon.com (and at the same, cheaper price as Amazon.com.au).

Second, print edition (based on shipping costs to/within Australia):

Amazon: Australia not available; USA A$40.89 (inc. P&P to Australia); UK A$50.37 (inc. P&P to Australia)

Book Depository: A$32.31 (inc. P&P from UK)

Angus & Robertson: A$39.99 (inc. P&P within Australia)

Readings: A$40.95 (inc. P&P within Australia)

Booktopia: A$48.45 (inc. P&P within Australia)

Clearly, Book Depository is the best option by far (and is frequently so) and seems willing to undercut its parent company, Amazon – or maybe there’s a deliberate strategy as Amazon.com.au does not yet sell physical products. However, the much higher price charged by Australia’s Booktopia might speak volumes about the state of local retail….

 

NOTE:

Prices were converted from the published local price on each website, then converted to A$ using xe.com

 

 

Pricing for the Digital Age

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Understanding the 4 Ps of marketing (Product, Price, Place, Promotion) has traditionally been critical to commercial success.

Theory has it that if you produce the right product for your target market, at the right price, make it available in the right place, and give it the right promotion, the market will buy it.

The model has worked well for both goods and services. But how is the model holding up in the digital arena?

In the Digital Age, a combination of technology, different transaction models and new marketing tools means that the Product (content), Place (internet) and Promotion (social media) not only co-exist, they are so inter-twined that in some cases they are almost one and the same thing: for example, a Justin Bieber video clip on Vevo, an in-app purchase for Angry Birds, BBC news headlines on Twitter. The boundaries are blurred between the content, the means of production, and the point of distribution and promotion.

So, how do content providers approach Pricing? If that’s the main point of differentiation, how do they compete on price (even though we sort of know that competing on price alone is often a race to the bottom, where nobody wins)?

In fact, even though the price of digital content sold via services like iTunes and Google Play is set by the content owner, they generally have to price according to set price bands and at specific price points determined by the retail platform – and often for particular territories (thanks to the practice of geo-blocking). The alternatives are to sell direct (which means creating a separate sales and distribution infrastructure) or via 3rd party platforms (which may not have the market presence of iTunes or Google Play).

With so much content available for “free” (as long as customers are willing to submit certain personal information, or are prepared to tolerate advertising) the current wisdom suggests that you have to give (some) content away in order to attract customers who might be willing to pay for it (over time). But is that a long-term strategy for success?

In my experience, pricing in the Digital Age is all about the 4 As:

  • Actual Costs – what are the costs of design, development, production and distribution (plus overheads)?
  • Acquisition Costs – what does it take to get new customers (and not just “followers” and “likes”)?
  • Adhesion Costs – what makes content “sticky” (and what will it take to keep your customers once they start paying)? Is it frequent new content? Is it service quality? Is it establishing brand loyalty?
  • Alternative Costs – what choices do your customers have (both traditional and non-traditional competition)? What are the switching costs?

Finally, when competing on price, especially if it’s not a like-for-like comparison, where are the acceptable customer trade-offs between your product and a competing service (e.g., do you know the customer drivers and the purchase decision processes)? What do your customers think they are paying for? Just because you place a high degree of value on some aspect of your content (e.g., exclusivity) does the customer value it the same way?

 

 

Publishers’ Choice: Be a Victim, or Join the Vanguard?

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I recently posted a blog about saving the Australian publishing industry, prompted by some research I was doing on government-sponsored initiatives, notably EPICS and BISG. This generated a couple of (indirect) responses, one from the Department of Industry itself, the other from a long-time colleague in the industry. More on these later.

The future of publishing - circa 2000....

The future of publishing – circa 2000….

But first, some more industrial archeology, by way of demonstrating that book publishers are not shy about new technology – remember the first electronic ink? When I was working at the Thomson Corporation in the late 1990s, we were given access to a prototype version of what we would now recognise as an e-reader. It was about the size and thickness of a mouse pad but less flexible, and could only hold a small amount of data in its memory (content was uploaded via an ethernet cable). It was described as the future of book publishing, and was predicated on the idea of portability (it could be rolled up like a newspaper if the screen was thin and pliable enough), and updating it with new content whenever it was (physically) connected to a computer or the internet.

However, whatever their apparent appetite for new technology, publishers struggle to adapt their business models accordingly, or they are fixated on “old” ways of monetizing content, and locked into traditional supply chains, archaic market territories (geo-blocking), restrictive copyright practices and arcane licensing agreements; and unlike other content providers (notably music, TV and newspapers which have shifted their thinking, albeit reluctantly) the transition to digital is still tied to specific platforms and devices, unit-based pricing and margins, and territorial restrictions.

Anyway, back to the future. In response to my enquiry about the outcome of the BISG initiative, and the creation of the Book Industry Collaborative Council (BICC), the Department of Industry offered the following:

“A key outcome of the BICC process was to have been the establishment of a Book Industry Council of Australia, an industry-led body based on the residual BICC membership that would come to be a single point of policy communication with government, though following its own reform agenda in the identified areas and unsupported by any taxpayer funding. Terms of Reference and so forth were drawn up but as nearly as we can ascertain from media monitoring and contacts, the BICA was never formed. It appears the industry is waiting to ascertain what the current government’s policy priorities might be, as expressed in the outcomes of the current Commission of Audit and Budget, before possibly resurrecting the BICA concept and/or the policy issues identified in the BICC report.” (emphasis added)

My read on this is that the industry won’t take any initiatives itself until it knows what the government might do (i.e., let’s wait to see if there are any handouts, and if not, we can plead a special case about the lack of subsidies/protection and the threat of extinction…).

This defeatist attitude is not just confined to Australia – my former colleague recently attended the 2014 Digital Book World Conference in New York. He commented:

“I was disappointed to see the general negativity of the publishing industry and the “victim” like mentality – also the focus on the arch-enemy – AMAZON! I see great opportunities for content – but companies have to get their head around smaller micro transactions and a freemium model. Big publishers are “holding on” to margins – it’s a recipe for disaster – [but] I think we can become small giants these days.”

There are some signs that the industry is taking the initiative, and even grounds for optimism such as embracing digital distribution in Australia, moving to a direct-to-consumer (“D2C”) model in the USA, and new approaches to copyright and licensing in the UK.

The choice facing the publishing industry is clear: continue to see itself as a victim (leading to a self-fulfilling prophecy of doom and extinction), or become part of the vanguard in developing leading-edge products and services for the digital age.