Competition

On Monday, the New York Times reported about Amazon “disrupting” itself, not referring to Clay Christensen or his disruptive innovation theory by name, but using it in that sense.  (Coincidentally, VC Marc Andreessen had a 17-part tweetstorm on the disruption concept and its misconceptions yesterday, which DisCo has covered before.)  One aspect of this theory is that companies may have to radically shift directions when faced with competition from disruptive entrants — or cannibalize their own existing revenue stream when they realize that a disruptive innovation is what consumers will want and need, not an incremental innovation on their existing product.  As DisCo has explained, Christensen’s work notes that executives at dominant companies are often hesitant to change business models to adopt lower profit margins:

One of the reasons why successful incumbents are so vulnerable to disruptive technologies — as Clayton Christensen pointed out in his seminal work — is that they have a hard time adopting a lower margin business model that would mean sacrificing their current hefty profit margins.  This initial hesitance is often their death, as they are quickly forced out by new, more efficient competitors.

The New York Times discusses how, although Amazon’s revenues went down this quarter, it’s because they are in the process of shifting from a focus on physical books to digital media consumption, including television, movies, and music.  Apple similarly disrupted itself when it released the iPhone, which made the iPod irrelevant, and shifted its focus from personal computers to consumer devices.  Companies like Autodesk have also disrupted themselves with apps.  Many other technology companies face these challenges, as Vivek Wadhwa wrote in a great Washington Post piece earlier this year about the technology industry and disruption, and challenges in leadership.

Self-disruption is likely to occur even more now that technology companies provide so much more than just technology products and services, and compete in industries like entertainment, media, and communication.

{ 0 comments }

Sit down before you read this: Internet companies pay more corporation tax than the European average, in some cases many times more.

According to the European Commission the average ‘effective’ corporate tax rate in the European Union and EFTA is 12.9%; in 2012 Amazon had a whopping 78% in corporation tax on its global profits. In that same year Yahoo had 37% and Google 19.4%.

It is important to note that corporation tax is paid on profits and not on revenues. In 2012 for example, the Commission says Amazon had global revenues of USD 61 billion, but profits of only USD 544 million. The difference comes from being a low margin business and from investments. If you don’t make much profit, you don’t pay much tax.

The Lux Leaks files list 340 companies who have received ‘comfort letters’ from the Luxembourg tax authorities. Of these, 32 are categorised as ‘Tech’, meaning more than 90% are not tech. Other sectors include: energy, finance, food, health, manufacturing, media, retail and travel. There is also a broad geographical spread with prominent European names including Ikea, Burberry, Vodafone, Volkswagen, GlaxoSmithKline and the Guardian Media Group.

The files have one clear message: companies from all sectors and all regions of the world have been using tax optimisation techniques.

A review of the tax incentives for the knowledge economy will need to address the whole knowledge economy and not just the digital sector. This is the conclusion the European Commission has arrived at.

MORE »

{ 0 comments }

In discussions of Taylor Swift pulling her music from Spotify because the service wouldn’t make the music available solely to paying subscribers, which pays higher royalty rates, and Aloe Blacc’s Wired op-ed calling for higher royalties for songwriters from streaming services (but see: Spirit Animal frontman Steve Cooper’s thoughtful piece in Business Insider on “why Spotify is not the enemy”), there are a few important economic realities being ignored.

Spotify currently pays about 70% of its revenue to rightsholders.  That typically goes to middlemen — publishers for the musical work copyright, who then pay a portion to the songwriters, and record labels for the sound recording copyright, who then pay a portion to the musicians.

VC David Pakman (who testified in November 2012 before the House Judiciary IP Subcommittee about why the current music licensing scheme deters VC investment in new music services) recently analyzed data from middlemen in a few industries and found that many legacy middlemen are not earning the large share they take from creators in the digital age.  Record labels, for example, contributed a lot more value when they coordinated and financed studio time (which can now be done with a basic computer and Internet connection, and possibly a Kickstarter campaign), manufacturing records and CDs and got them to retailers (which is no longer the primary way of selling music), and marketing (which can be done online with free services).  Now, in the digital age, many of these services are no longer needed or performed.

In remarks last week at the Web Summit Conference in Dublin, Bono explained that rather than fighting against streaming, artists should be fighting for transparency:

Spotify is giving up 70% of all their revenues to rights owners.  But it’s just that people don’t know where the money is going because the record labels haven’t been transparent.

MORE »

{ 0 comments }

The Internet has brought change to our society, just like previous technological advances such as the printing press, canals, cars, or mobile phones. Every advance engenders a debate about the appropriate policy and regulatory response. Sometimes actors affected by the changes around them call for a regulatory response to preserve that status quo or slow change.

In recent months, we’ve heard two arguments in European circles about Internet companies: the first is that Internet companies are not regulated; the second is a concept called “platform neutrality.”

Let me explain why both of these concepts are wrong.

MORE »

{ 1 comment }

For tech industry watchers, a recent narrative has emerged that involves Amazon and Google evolving into head-on competitors.  Although this iteration of the narrative is new, the plot is merely a variation on a common theme: two Internet giants who started in different markets evolve quickly into fierce competitors.  (In fact, the Economist devoted a feature article to this phenomenon a few years ago, aptly named “Another Game of Thrones”).  The most famous recent example of this is Google and Apple in the mobile space, where Google’s former CEO, and now its Chairman, Eric Schmidt was booted off of Apple’s board after the two companies quickly morphed into fierce rivals.

Schmidt features in this story as well, as he — to the surprise of many — identified Amazon as Google’s biggest rival in a recent speech:

Many people think our main competition is Bing or Yahoo. But, really, our biggest search competitor is Amazon. People don’t think of Amazon as search, but if you are looking for something to buy, you are more often than not looking for it on Amazon. They are obviously more focused on the commerce side of the equation, but, at their roots, they are answering users’ questions and searches, just as we are.

It is helpful to look back at the origin stories of the two companies to understand how they are evolving.  When Google was founded in 1998, the number of websites on the World Wide Web was just starting to climb up the exponential growth curve.  At that time web search engines were relatively dumb (and “portal focused”) and one of the biggest Internet problems was how to find websites that had information that users were looking for.  Google set about revolutionizing the search space.  It also presented Google with its business model: if it could build a better search tool, it could also use the same insights behind that search tool to serve up more relevant ads to users.  The more relevant the ad, the more useful the ad would be to advertisers and the more they would be willing to pay for it.

Amazon, on the other hand, was founded to tackle a different problem with the early web.  The potential for the Internet to change how people shop was readily apparent (even to the U.S. government), but the logistical problems were immense.  A company needed grand ambitions, if its goal was to scale to such a size where shopping online would present a feasible alternative to running to the nearest big box store.  Skepticism about the security of exchanging financial information online was one of many 800-pound gorillas in the room; another was the daunting prospect of streamlining backend IT and warehouse technology to work efficiently at such a scale.  On top of that, the cost of shipping items around the country would be an added cost that its brick and mortar competitors did not have to bear.

MORE »

{ 0 comments }

Perennial concerns about piracy might suggest that ‘the sky is falling,’ but the latest economic data from the “Sky is Rising” series reaffirms that an unprecedented amount of creative content is reaching consumers, through a growing number of authorized means.  With today’s release of the third Sky Is Rising report (infographic below), research firm Floor64 updates its previous surveys (1, 2), focusing on the significant growth in the U.S. in four segments of the digital content market: music, video, books, and games.

Internet-enabled access to content continues to drive growth in digital content consumption and availability, even in the wake of an economic downturn.  Data collected in the report reflects growing overall creative output, with more creators able to sell their work through more venues.  As a result, consumers are enjoying a greater and more diverse amount of entertainment, findings that are consistent with recent media accounts and DisCo posts.

MORE »

{ 1 comment }

The mainstream media is catching onto the disruption theme we noted in last week’s post on the new HBO and CBS services.

On Friday, we covered announcements from HBO and CBS to offer over-the-top (OTT) video services, independent of cable packages.  Moreover, in addition to HBO and CBS’s recently announced projects, earlier this month ESPN had announced a nine-year deal with the NBA to deliver basketball games via an Internet streaming service, and just this morning Lionsgate and the Tribeca film festival organizer announced their own subscription video-on-demand (SVOD) service.

In all of these packages, the details will matter (and likely vary) greatly, but a review of the headlines shows that journalists have latched on to the potential end of the cable bundle’s reign.

At the New York Times, David Carr writes that the competition and certainty provided by Netflix may have been the catalyst for cable and broadcasting incumbents unpredictably venturing into this new territory:

Netflix pointed a way forward by not only establishing that programming could be reliably delivered over the web, but showing that consumers were more than ready to make the leap. The reaction of the incumbents has been fascinating to behold.

He also used theories about disruptive innovation and competition:

For any legacy business under threat of disruption, the challenge is to get from one room — the one with the tried and true profitable approach — to another, where consumers are headed and innovators are setting up shop.

MORE »

{ 0 comments }

TV is finally catching up with the digital age and catering to new generations of consumers — those who rely on services like Netflix, Amazon, and YouTube for most of their video entertainment.  This week may have been a tipping point for online television, with HBO and CBS announcing over-the-top (OTT) services that don’t require a traditional TV subscription.  HBO’s announcement came on Wednesday, with a product launch expected for 2015, and CBS’s CBS All Access was announced and launched yesterday to 14 cities, with more on the way.  These new offerings should help encourage cord cutting and more competition with established broadcasters and cable companies.

The New York Times has a great run-down of the business and competition issues at stake, even pointing out the classic innovator’s dilemma of whether to cannibalize an existing revenue stream when faced with disruptive innovation and competition:

Television executives are eager to woo those viewers, who often are younger and represent their future audiences. But at the same time, these traditional television networks must perform a careful balancing act to not cannibalize the billions of dollars in revenue they generate each year through existing business models.

The Times also mentioned that this week’s announcements mean that “viewers have more options to pay only for the networks or programs they want to watch — and to decide how, when and where to watch them,” and quoted CBS CEO Leslie Moonves saying that their “job is to do the best content we can and let people enjoy it in whatever way they want.”  But they did not point out that this is the classic formula for reducing piracy.  As DisCo has said over and over (often quoting Kevin Spacey or Netflix executives), making content lawfully conveniently available in the format consumers want reduces piracy.  A stand-alone HBO service is likely to increase the amount of subscribers.  As The Oatmeal explained so well, there isn’t currently a lawful way to watch Game of Thrones for cord cutters.  Giving people what they want — piracy demonstrates market demand — should help convert pirates into customers.  Research confirms this, including studies of Spotify and Netflix entering the market in Norway and Spotify’s introduction in the Netherlands.

This week’s news demonstrates great potential in the market for OTT video, evidenced by Netflix’s meteoric rise and Aereo’s ongoing legal battle.  A recent update from Aereo shows that it is “still standing up for innovation, progress, technology and our consumers,” now willing to even accept MVPD regulation in order to lawfully enter the market for online television.  And on the subject of Aereo, the Times also noted that CBS had been planning this service for more than a year — which means the planning started during the Aereo litigation.  As Moonves told the Times, “I am the old broadcasting guy here,” adding, “I continued to poke holes in it for the last year.”  That’s certainly one way of putting it.

{ 0 comments }

Even before the landmark United States v. Microsoft Corp. antitrust case, competition law was a bit schizophrenic when it came to the question of interoperability. Monopolists have no general duty to make their products work with those of competitors, but what about the situation where a dominant firm deliberately re-designs products to render them incompatible with others? That is the provocative question raised by several pending antitrust lawsuits filed against Green Mountain Coffee, manufacturer of the Keurig line of single-serve coffee makers and coffee “pod” products.

TreeHouse Foods alleged in a complaint last winter that after its patent on “K-Cups” expired in 2012, Green Mountain:

abused its dominance in the brewer market by coercing business partners at every level of the K-Cup distribution system to enter into anticompetitive agreements intended to unlawfully maintain Green Mountain’s monopoly over the markets in which K-Cups are sold. Even in the face of these exclusionary agreements that have unreasonably restrained competition, some companies, such as TreeHouse, have fought hard to win market share away from Green Mountain on the merits by offering innovative, quality products at substantially lower prices. In response, Green Mountain has announced a new anticompetitive plan to maintain its monopoly by redesigning its brewers to lock out competitors’ products. Such lock-out technology cannot be justified based on any purported consumer benefit, and Green Mountain itself has admitted that the lock-out technology is not essential for the new brewers’ function.

In the consolidated multi-district litigation that ensued, Green Mountain is specifically charged with designing a so-called “Keurig 2.0″ brewer which features technology that allows it to detect whether a coffee cartridge is one of Keurig’s K-Cups or is made by a third party that does not have a licensing agreement with the company. The machine will not brew unlicensed coffee pods.

The federal court overseeing the MDL cases denied the plaintiffs’ motion for an injunction on procedural grounds in September, issuing an opinion which reasoned that commercial success of the “2.0” brewers was uncertain and that coffee competitors would still have open access to some 26 million Keurig “1.0” machines for several years. In other words, the court did not reach the merits of the monopolization claim against Green Mountain.

keurig_2color_corporate_logo-copy

So where does that leave Keurig? As Ali Sternburg observed before revelations of its new 2.0 technology, Green Mountain’s prior 20 years of patent protection allowed the company to build a competitive advantage by “cultivating its brand (which likely involves trademark protection), honing its supply chain efficiencies, and generally maintaining its dominance due to having the first-mover advantage.” More than ten years before those patents first issued, moreover, the federal courts had ruled that new product introductions by monopoly firms — in one well-known instance, Kodak — would not be considered an antitrust violation because “a firm that pioneers new technology will often introduce the first of a new product type along with related, ancillary products that can only be utilized effectively with the newly developed technology.”

MORE »

{ 1 comment }

Drones are leaving the U.S. for greener pastures, according to several media outlets (e.g., WSJ and Bloomberg).  In response to slow-moving U.S. domestic policy on commercial drone use, innovators are moving abroad, to jurisdictions where regulations have been updated to delineate when drones may be used in the commercial context.  (Keep in mind, we are not talking about fixed wing Predator drones with Hellfire missiles, but aircraft that are already available commercially with much of the same technology already incorporated into our mobile phones.)  Besides smaller companies actually moving abroad to places where they can sell their wares, even the likes of Google and Amazon have moved their drone testing to Australia and India, respectively.

Making matters worse, export control policies are poorly targeted, and prevent some drones made with widely available technology built in the United States from being sold overseas.  In fact, according to the Wall Street Journal, 3D Robotics — a San Diego-based company that specializes in drones with video capability — was only allowed to resume selling some of its products in a number of countries because the drones were manufactured in Mexico:

Export rules prompted 3D Robotics to temporarily halt shipments to 44 countries this spring. It has since secured a new classification from the U.S. Commerce Department, in part because it manufactures its drones in Mexico, allowing it to resume foreign sales.

And for those inclined to view this as a minor development in a niche market, at least one study predicts that allowing commercial drone use in the United States could create 100,000 new jobs and $82 billion in economic impact over the course of the next decade.

A lot of smart people have already said a lot of smart things about the drone situation, so I won’t delve too deeply into the nuances of streamlining commercial drone policy making.  Clearly, there are good reasons why commercial drones can’t take to the sky without some rules, but it is imperative that regulators move efficiently to establish a framework where, for example, a real estate agent or a surveyor can survey a property with a drone (in the same way it is currently legal for a non-commercial user to fly an off-the-shelf drone in her backyard).  That is not happening now.  According to the Department of Transportation’s own Inspector General, the FAA is likely to miss its Congressionally mandated deadline in coming up with rules that allow for the expansion of commercial drone use.

There’s a general point here worth expanding on: even if a country does everything right, creating a fertile environment for research, investment, and innovation (aka the hard stuff), innovation will nevertheless move overseas if outdated regulations impede the lawful sale or use of a product or service.  It does not matter if the United States has the brightest minds, best expertise and easiest access to venture capital; if you can’t sell, test or export drones here, then we will see those jobs and that talent go overseas to more fertile ground.  In fact, this is already happening.  And even if the FAA eventually comes up with a workable set of regulations that allow commercial drone activity, in fast moving industries — where first mover advantage is enormous — bureaucratic delays can be terminal.

MORE »

{ 1 comment }