These two companies have the potential to make a great deal of money from their products' data.
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Alexander Soley
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Freakanaut design (sold out) One of the most well-established crowdsourcing design companies is Threadless (est. 2000), a design company that does not create designs but instead sources them from its users and sells them. The users create designs to put [...]
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Good article!
As for myself…
I am a fan of Netflix, but on a personal level the machine learning tends to vex me more than anything else. I tend to pick one show or movie and stick with it for a while, which means if I see something I like I just “add” it to my list. I wonder how much that alters the list…
As for your point, I am not so sure how much this applies to all of its series however. When I heard that Netflix’s data led to House of Card, I misunderstood; I thought they created House of Cards based off of the data, but it bought it instead. For that matter, I remember hearing that The Unbreakable Kimmy Schmidt was supposed to be on NBC until its humor- especially its racial humor- scared the network.
That said, as much as I can say that Netflix just saw opportunities like Arrested Development Season 4 and took them, I do not know what opportunities it may have missed (in retrospect they may have kicked themselves over not getting Community in the United States), or what data may have misled Netflix (the first season of Hemlock Grove had a mixed reaction at best, and the AV Club gives a good description on how broadcast TV at least lets the writers readjust their writing based on reactions to the first few episodes; see http://www.avclub.com/tvclub/emhemlock-groveem-96734. That said, it did get three seasons). In 20 years, when Netflix is either a well-established institution or buried by Comcast or Internet 5.0 or so, it will be interesting to see more “behind the scenes” information on what Netflix learned from how it used its data. That will be a very interesting book indeed.
The surveillance angle has already been tackled- but needs to be mixed with good cyber security. There have been stories about hacked baby monitors with backdoors and such for years (see http://fusion.net/story/192189/internet-connected-baby-monitors-trivial-to-hack/ for a recent one). There are also questions about where the data from the barbie goes- does it go to ToyTalk’s cloud? Would the parents mind if they found out their children’s words were being relayed to Mattel? Or if they were used as spying products?
Granted, if Barbie is going to talk, she will be collecting data to better respond to “her” playmate. The toy companies are going to have to act before parents fear that Barbie is going to be dangerous and retreats to completely analog toys, or a video game system that does not receive voice commands without a peripheral such as the Playstation 4.
“The third lesson drawn from Expedia’s efforts to collect data is that it is much more efficient – and profitable – to only chase a few selected categories of information. Too many data requests to the customer can drive him away from the platform. That’s what happened with the “company information” optional box in the checkout page before finalizing the purchase. Not a lot of people were filling it, and taking it away drove 1 million USD profits in a month….”
This is the part I find somewhat fascinating. Considering how much we have talked about how data can be used to find new opportunities such as how BandPage can figure out which data drives more people to buy more merchandise for certain bands, it is interesting to hear something that amounts to a bug fix. “If only we asked for less information, we would have gotten more money.” Nice to see how data can lead to streamlining, not just expanding.
I’m afraid that question is better for those of us who currently drive cars, have one of the devices (these are just two companies which make these devices; I know more about them than their competitors and that is why they are highlighted here), and have discovered problems through their car adapter. https://www.youtube.com/watch?v=ebKUj6aK_q8 talks about how the Zubie compares different trips, error codes and what they mean, give actionable information, etc. They both offer next steps and offer tips on how to keep your vehicles in rude health. That much I know. I do not have any personal experience with the UI.
Reddit’s problems with free speech (either too much or too little, depending on which side of the debate you are on or how honest you think they are) are legendary. But I would argue that, free speech drama aside, Reddit is going through a very Internet 1.0 problem right now: making money. To quote the CEO:
“We are thinking of posting a public graph with no numbers but updated regularly with the relative amounts of revenue vs expenses on a quarterly/monthly basis (depending on how precisely we can get our accounting) so that people can see how far/close we are from being profitable. There is a common misconception that we are “part of a billion-dollar conglomerate” and/or “already very profitable, so why keep giving them money” that is kind of frustrating for us: reddit was given its freedom when we were spun out, so the price of freedom is paying our own way and no one else is paying the bills – a graph like that might help make things more clear.”
Reddit has been having problems with this for a while. the Gold donations help, but clearly aren’t enough. A lot of the Redditors are traditional computer geeks who run adblock everywhere and there are fears that too many ads could drive people away. An experiment on ads that can be voted on had difficulties once the advertizers complained about getting downvotes.
Meanwhile, Reddit has found itself in a series of difficulties because its open system allows its users to do whatever they want and it is unclear if the owners want or can find questionable subreddits before Anderson Cooper publicly outs them for having subreddits dedicated to “creepshots” or another bunch of subreddits become havens for stolen pictures of naked celebrities. Finding these problems before they can fester into bad news that drives people away takes time and money.
So what’s the solution? Part of the reason the IAMA subreddit blew up recently was because a well-known employee was fired without telling the moderators first. This discourages people from taking Reddit too seriously; if Reddit won’t keep one of its most famous subreddit’s moderators (and potentially profitable) in the loop, then that discourages people from taking part because they know the owners will do little for them. That can blunt the incentive to crowdsource and the potential to create powerful indirect network effects such as the IAMA subreddit in the first place. It could cut its costs, but that could lead to other problems that could into giving people the money and time to innovate on the platform and keep it marketable.
This is going to take some work. I know most start-ups take years to be profitable, but it has been ten years. This is one of the best known forums right now and, questionable areas (and simply illegal, racist, and/or terrible ones) aside, it seems to be doing a good job keeping people invested in the platform. Now it either needs to cut its costs (which is perhaps part of the reason that employee was fired in the first place) or build its revenue.
I’m a little shocked myself. The money could go to other things though, such as covering a bad year (especially if news of their particularly good years gets out). I would suggest “considering an expansion,” but Wikipedia is not out to be a profitable business. It could also go to legal funds to ensure it can continue for some time (there have been issues in the past as people try to modify their own articles or declare data classified even though it isn’t- for instance, the time the French secret service tried to censor a web page about a station related to French nuclear deterrence that became a victim of the Streisand Effect: http://www.theguardian.com/world/2013/apr/07/french-secret-service-wikipedia-page). At the very least it should have enough money to last a while…
I think there is some validity to the idea, it just seems to be a huge logistical nightmare. You need to communicate to the citizens what their role is, engage in a back and forth to ensure people do not put in questionable policies (there are legitimate reasons why some people refuse to back pure proportional representation and why multi-member districts are not necessarily the best methods of representation available, but that’s another blog post), and so much more. It is actually surprising it got that far.
The main problem with this, and the main problem with innovation in general, is that it is hard to explain to the current incumbents why you should get a voice, especially if it could mean the end of your business. I understand the point of the process was to keep the politicians out, but as you say there is no chance of that happening barring a truly disruptive event.
True direct democracy is almost impossible in a massive country, even one as small as Iceland. It is just difficult to coordinate a large number of people. PBS claims there were only 40,000 people with the right to vote in 5th century Athens (http://www.pbs.org/empires/thegreeks/educational/lesson1.html), whereas about 240,000 Icelanders voted in the last election. If a country can successfully pull off direct democracy with a bigger base than 50,000 people, I will be impressed. Otherwise, I think Switzerland is the best example of crowdsourcing legislation that we have.
Yeah, Threadless at least acts as a good testing ground for one’s skills. In that way it is quite similar to TopCoder, whether the boss likes it or not: after you win a few contests you can use your skills to get hired by an employer who wants your particular set of skills or freelance on your own. I am not sure Threadless just wants to be a design student’s college career however.
As we both can see Threadless needs to find a way to expand. Threadless has done some things in the past, such as creating a permanent store (http://www.yelp.com/biz/threadless-chicago) but closed it down for a number of reasons. It is also undergoing some difficulties; last year it cut 27% of its staff and closed the brick and mortar store (http://chicagoist.com/2014/01/14/threadless_announces_layoffs_store.php, http://www.chicagobusiness.com/article/20140112/BLOGS11/140119968/threadless-lays-off-27-of-staff-shifts-strategy). It says it is still focusing on retail; I think the Artist Shops is part of that. I remember some people suggesting it could have made a deal with a big retailer with Macy’s instead; that may have been preferable to the store. Let’s see what Threadless does next…
I think you have a point about targeting. There was an article talking about the new Pebble Time smartwatch “seems to be more about serving the customers who bought more than one million Pebble Watches than it is trying to expand its customer base” (http://www.gizmag.com/pebble-time-watch-review/38163/). Someone who is engaged with Starbucks already can come up with new ideas that will make them more engaged with the product, but they may be more interested in how to squeeze more product out of a brand they already care for. I think there is quite a bit of value in there, since it helps build ideas and absorb more money from people who would be happy to give their money to a brand they love. This is more about upselling committed people than getting new peole.
With that said, I do wonder how much the average person would engage with such an app if they were not engaged with Starbucks already, or whether they should. Someone who does not go to Starbucks that often and may prefer another place may not believe they will be heard. More importantly, there is the question for Starbucks whether that will really increase the base or if it may involve a lot of spending to please what turns out to be a niche customer. I still think you are right that this can help get new customers, but it is not that bad if it only upsells the current ones.
The Pebble is definitely interesting, and it seems to be doing okay. I like the idea, and the community will definitely keep it up as a niche market in case Apple or Samsung takes over the market.
The main difficulty right now in the watch market is that few people wear watches. Even on grad school campuses where you expect to see professionals who are already highly invested in electronics in general and Apple products in particular I never see people sporting smart watches. The first time I saw a smart watch in “the wild” was yesterday, and it was an Apple. This is a small data set, but the wearable market is still quite small and inactive. The launch of the Apple Watch was supposed to launch the market in the same way the iPhone took smartphones beyond the BlackBerry, but that apparently did not happen.
If the Pebble is to succeed, it needs to maintain its excitement and build on it. It is one of the few smart watches anyone knows about and, unlike the Apple Watch, is not locked into an ecosystem. Perhaps it can find it in an innovative suggestion from one of its users, or it can find one itself. As long as it can keep up a stable, locked-in base, it should be around for some time. It can stay as a niche product (as Apple still is in the computer segment), or start from a niche and build from it (like Facebook). There is a way forward, and as long as it manages its userbase well the Pebble watches should be around for some time to come.
Two questions, both regarding Sony’s future.
Given that the PS3 was originally backwards compatible (BC) with all of its predecessors, why did it still fall behind? How did the removal of its BC with PS2 games mess with the network effects? It seems that the pricing involved killed the economics; it was already too expensive to make the PS3 and getting rid of the PS2 portion allowed Sony to say “if you want PS2 games you have to buy them again online.” I wonder if they would have been better off just eating the loss and keeping the BC.
How does the lack of backwards compatibility affect the PS4? The system seems to be doing quite well right now, even though nothing got carried over this time around.
Just something on the last point. It is hard for me, personally, to see people sticking to Apple if Apple ever gets rid of the three month trial. I think it was a good idea, especially because people could still choose to do Spotify Free if they decide that Apple still lacks what they want. Or YouTube, or Pandora.
But that’s the crux of the problem. People are not picking between Apple Music and Spotify. They are choosing between listening to Spotify, Apple Music, Google Music (my preference is the free version since I already have a wide collection of music), Pandora, YouTube videos in the background, the radio apps on one’s phone, Google Music, iHeartRadio, and many other apps. I know people who shifted off of Sirius XM for YouTube and people who would only use YouTube if the audio did not shut off with the phone. It’s a big, complicated market where it is hard to make money. Even if Apple Music defeats Spotify/Rdio/etc., it still has to deal with the music ecosystem as a whole.
We will see what happens. In the meantime, Apple Music’s incompatibility with Android and Windows is still a deal breaker for me.
One of the biggest questions I have is “how do you monetize this?” In spite of its work bringing in celebrities like Arnold Schwarzenagger (who has been Redditing off and on for some time) and introducing the Reddit Gold program, the website has been unprofitable for years.
Part of the problem is that Reddit has an on-again off-again relationship with free speech. Its once (and future?) broad approach meant it had a large tolerance for the kinds of material that scare off the more “appropriate” (and lucrative) advertisers: people with swear words in their usernames like S***ty_Watercolour (who painted a picture for the Obama AMA), an open approach to pornography that is on the edge between “free speech” and “see no evil” (and until Anderson Cooper made it public, child porn- see http://nymag.com/daily/intelligencer/2012/02/policy-shift-reddit-bans-child-pornography.html), and a questionable maintenance system that usually leaves the subreddits to police themselves, which means the management team may legitimately not know about the worst portions of the site until a CNN anchor points it out. The theory goes that the more one buys into a product or service the more other people will buy into it. However, if you know a part of your forum is dedicated to making fat people feel bad, you may not want to risk associating yourself with such a forum.
I still think the network effects are generally in Reddit’s favor; as long as the management learns to communicate better, then it can cultivate the experience by convincing more (not racist or creepy) people that it is a fun place where you can ask the President about beer, post pictures about your cats in various costumes, and other fun tasks. But there are some big questions; do you risk hurting the website by building on the Reddit Gold program and making the experience too different from being a normal user? Do you try to find advertisers who will go to some subreddits and not others (members of r/apple will not necessarily be interested in fruits) or do you pick some subreddits and turn them into cash cows (focus on r/IAMA and some of the picture ones while leaving r/news to police itself unless it turns into a problem like the rabid r/atheism subreddit or a troubled child like r/technology)? Do you try to integrate the ads into the upvote/downvote system, or avoid that because no advertiser wants “downvotes”? And do you need to clean the community first? At what point do you claim Reddit has been purified? Reddit’s management team will need to answer all of these questions if it wants to go beyond being a cultural phenomenon to a profitable enterprise.
I heavily doubt it, and I blame network effects for “why.” The iPhone has been outsold by Samsung phones alone for most of the last five years, never mind the entire Android phone brand. Furthermore, the Apple Watch is fundamentally useless to people like me who have Android phones while at least a selection of Android watches (http://www.theverge.com/2015/8/31/9231293/android-wear-ios-hands-on-video-google-watch-iphone), Pebble watches, and probably others are compatible with iPhones. I am not an expert, so I do not know if Apple locked out the functionality that would allow a Pebble watch owner to see their iPhone’s texts, but I do not imagine it would be hard.
And all of this begs the ultimate question: what does an Apple Watch offer that an iPhone, Android phone, a BlackBerry (yes, I know people who have bought BlackBerries in the last two years) or whatever smartphone does not? If you need to check the time or make a call, a phone already does that. If you forget your watch, you may not notice, whereas I imagine it would take more time to text without your phone. At least Apple is creating Watch-native apps as opposed to ones that mirror the iPhone; without them the Apple Watch is nothing more than an expensive accessory to the iPhone, a way to get more money out of Apple users while most of the world uses other, cheaper, and at times more innovative watches.
That said, in spite of the fact that a minority of people use iOS devices, Apple phones are more profitable (http://www.wsj.com/articles/apples-share-of-smartphone-industrys-profits-soars-to-92-1436727458) and developers believe they get more money from iOS apps than Android apps (http://www.businessinsider.com/android-app-profitability-v-ios-2015-1). As long as this is true developers are more likely to invest in making apps for the Apple family of products before hitting the more populous Android market. That said, the big question may not be “Apple vs. Android.” It is ‘why buy a watch at all.”
It is worth noting that Microsoft has changed quite a bit. I think I have been able to change DOCX files to DOC, or at least I feel like that. Also, you can edit Word files in Google Docs. Microsoft had to change its business model in response to changing markets quite a bit, but what it did in the 1990s, it worked.
One question: did the “pay for MS DOS” thing stick around during the Windows era?
Also: can these network effects ever be dented? While iOS and Android have taken over the mobile world and QNX is still the big name in cars and other large “computers,” Windows seems as strong as ever. Apple is doing better than before, but it is still a ways behind. Linux may never get there. Maybe Chrome OS could conquer the lower segments? But even that is dependent on an Internet-rich environment, as opposed to one where you need to find a Wi-Fi hotspot or an ethernet cable. Are we just stuck using Windows products because all of our programs are on it?
Thanks CC24! I do not know 100% what will happen with Walmart. I am a little biased because I have never been inside a Walmart before and the places I lived in- such as Boston and DC- were more likely to have negative publicity around Walmart than a physical Walmart. I gather there are a number of Americans (and non-Americans) who are in a similar position, and Walmart will have to find a way to get to us (and convince us Walmart.com is a good place to shop).
Branding will play a big role; there are studies that show that Best Buy’s prices are actually competitive against Amazon’s, which has a similar “always low prices” reputation to Walmart (http://www.cio.com/article/2979398/consumer-technology/surprise-best-buy-prices-often-on-par-with-amazon.html). Just as people “know” that Apple devices are malware free (a myth for decades; see https://nakedsecurity.sophos.com/2011/10/03/mac-malware-history/ for an outdated list), reputation will play a big part. We will see.
I agree that Comcast’s video subscription business is a a dire prospect and that it knows it needs to go digital to lead the way; Comcast has been trying to avoid the trap by increasing its customer base (hence the attempted Time Warner Cable merger, the purchase of content through NBC Universal, and investments in digital news media). I think Comcast will do well as an ISP and a content creator for some time. Unfortunately, I do not believe it is “winning” the video streaming race, at least not yet. Xfinity TV is designed more as a way to make sure people keep using cable as opposed to a proper OTT option. OTT specifically excludes services that require a multiple-service operator such as Comcast’s cable services or Time Warner Cable’s services, and Xfinity in particular is not available to anyone outside of Comcast’s cable customer base. I would contest that its user experience also leaves plenty to be desired (such as its tendency to run the same ad relentlessly throughout the same show) and it shares Hulu’s problem of inconsistent offerings (Hulu has some shows available and it is not clear to the consumer why it has 7th Heaven and CSI but not Big Bang Theory since they are all CBS shows). Admittedly it is difficult to measure Xfinity TV’s success due to regional differentiation and varied competition around the country, but it is not a proper OTT service until Comcast separates it from cable, which will require new contracts.
It is more likely that Comcast is going the HBO option, with Xfinity for cable subscribers and “Stream” for cordcutting and cord-never customers. Until it releases Stream and the reviews come out (will it be locked to areas with Comcast service? Will it have its audience’s favorite shows? Will it have ads for an audience that consistently rejected Hulu because they could not imagine a non-cable premium service with ads?), I have reservations about Comcast’s digital distribution offerings.
As for cable providers in general: Time Warner Cable is doing okay, if not compared to NFLX. Cablevision on the other hand lost half its stock value in ten years or so. We will see.
An interesting article, especially given how many times I have heard of people having trouble with PayPal. Whether it be people who had their accounts frozen for innocuous reasons, such as PayPal not understanding crowdfunding (http://smallbiztrends.com/2014/03/crowdfunding-paypal-no-longer-freeze-account.html) or wondering why one was putting so much money into one’s PayPal account (http://mywifequitherjob.com/why-paypal-freezes-or-limits-accounts-and-how-to-prevent-this-from-happening-to-you/). I have not heard of any positive experiences involving PayPal. By contrast, I know of a number of people who praise and use Venmo.
There are certain parts of your post I would dispute- Bitcoin is not a payment service like PayPal, and I do not know of anyone who talks about using Apple Pay or Google Wallet although I can think of a few stores that accept it- but generally I agree. At this point PayPal appears to be treading water and living off of inertia. Many people have been using PayPal for so long it will take some time for people to stop using it as a bank or stop using it entirely. It will take some time, but it will happen unless PayPal can find a way to change things around.
AP, I wanted to make a comment on your portion in particular. I understand your concern about the EBITDA, but Netflix is not just a U.S. content distributor or U.S. content creator. A lot of its money is spent buying licenses to shows and movies, since many of these shows are released on a timed basis. One movie in particular, Mean Girls, was once put on to Netflix and then taken off of it within a month (https://www.reddit.com/r/netflix/comments/24nmr1/us_mean_girls_removed_already/). Another large portion is spent expanding overseas. Amazon Instant Video is only available in the United States and Hulu is only available in the United States and Japan. By contrast Netflix is now available throughout the Americas (including Cuba), much of western Europe, Japan, Australia, and New Zealand (https://help.netflix.com/en/node/14164). If Netflix was spending less on expansion and content creation the low profits would be more a cause for concern.
With that said, if pure content developers such as Time Warner (which is distinct from Time Warner Cable) cannot be compared with Netflix, Comcast can because it owns content delivery networks and NBC Universal, and its EBITDA multiple is less than 6x EBITDA. However, Comcast also owns a line of resorts and television channels that range from general (NBC and Telemundo) and the Weather Channel whereas Netflix owns the rights to some shows that other people produced (such as House of Cards, a Sony production, and Marvel’s Daredevil, which was co-produced by Marvel Studios and ABC) and content distribution through Netflix Instant in a number of countries.
I can see the argument that Netflix is mostly successful due to love for the current digital revolution. I can see a future where Amazon or a revitalized Hulu (or something like it) can become a potential competitor, especially if the broadcast networks finally allow a service such as the Playstation Vue to broadcast them live over the Internet (see http://www.wsj.com/articles/local-tv-creates-hurdle-to-streaming-1441325369?cb=logged0.8768051962833852 for some of the reasons preventing this from becoming a reality for now), but for now it looks like Netflix will do well for some time.
This is a very interesting post, thank you. Some of my own thoughts:
1. The content creation was driven by the fact that Netflix’s catalog continues to cycle in and out. Many films cycle in and out as contracts with production studios increase in price. One notable example is The Hunger Games: Catching Fire, which will soon be removed from the service. Some series that seemed to be permanent mainstays on Netflix, such as Battlestar Galactica (2004-9), are now missing from the service altogether. This is not uniquely a Netflix problem; in fact HBO started as a premium TV channel in 1972 and did not develop original movies and series until 1983. Netflix’s own competitors are coming to similar decisions. Amazon in particular got 11 Emmy nominations for its original series “Transparent” and Yahoo’s “Community” got one as well.
2. Netflix has done a good job building a brand name. There is a great deal of buzz around Netflix’s properties such as “House of Cards” but very few people talk about Hulu’s original series or even know Yahoo has a video service of its own. There have also been studies showing that many people are not aware that they have access to a great deal of content through their existing Amazon prime subscriptions; they just do it for the free two-day shipping. It is worth noting that 36% of U.S. households subscribe to Netflix whereas 13% subscribe to Amazon Prime (http://www.adweek.com/news/television/here-s-why-consumers-love-netflix-more-amazon-and-hulu-165547). This is odd, considering that a subscription to Amazon Prime ($100/year) is around the same price as the lowest, standard definition tier of Netflix ($95.88/year) and offers more with its Spotify-esque service, shipping, and more.
I see where you are coming from; there was a similar effect in the video game industry when console gaming moved from expensive cartridges to CDs which were much cheaper to produce. The rise of the CD allowed publishers to make bigger bets with games with fewer risks since it cost much less to make a disc than a cartridge.
One should also remember that Valve was not the first company to try to do digital distribution of video games. Sega actually tried it in 1994 with the Sega Channel, where people connected their Sega Genesis systems through their TV cable on a monthly basis. Sega used this service to deliver a catalog of games that were rotated in and out on a monthly basis, demos of games, contests, and games that were not accessible in other regions such as Alien Soldier. It was canceled after a few years due to Sega deciding to focus on its newer Sega Saturn console. There are other examples as well- such as Atari 2600’s GameLine- but Steam appears to be the best video game download platform in recent memory.