UltraViolet: Analogue Conservatism Masquerading as Digital Innovation

When UltraViolet – the movie studios cloud locker play – was announced last year it rightly caused something of a stir.  Finally the uber cautious movie studios were taking a lead in digital content strategy.  However since then the project has faced a number of criticisms ranging from clunky implementation through to lukewarm consumer adoption (approximately 1 million users have registered to use the service since its October launch).  This week Ultraviolet got two welcome boosts, in the shape of Dreamworks signing up to the initiative and, more importantly, Walmart pushing ‘Disc to Digital’ – its implementation of UltraViolet – across US stores. But as encouraging as these developments are, UltraViolet remains doomed to failure unless it undergoes substantial change.  UltraViolet is an evolutionary, sustaining technology at a time when the movie industry needs transformational innovation. Disc-to-Digital is a Sustaining Innovation Designed to Protect Analogue Business Models With Disc-to-Digital consumers are expected to take their old DVDs and Blu-rays into Walmart so that they can then pay $2 per title for the privilege of being able to watch the movie again via Walmart’s VOD service.  DVD owners have to pay $5 if they want to view the HD version. In short, consumers are expected to pay an extra fee to watch an old movie they have already got and have already paid for.  If this ever takes off I will eat my hat….if I wore one. The problem with Disc-to-Digital is that it is a sustaining innovation designed by the movie studios to protect their traditional business while at the same time giving the gentlest of nods towards digital.  But as appealing an option as sustaining innovations can appear they typically leave traditional companies vulnerable to decimation by disruptive technologies that do a much better job of meeting consumers’ needs.  Recent history presents us with illustrative precedents: while the record labels locked downloads in DRM file sharing went global; while Nokia clung to keypads Apple and Android touch screen smartphones stole their market leadership.  Disc-to-Digital is no different.  The movie studios are missing a crucial opportunity to grow their market with transformational innovation. The Physical Video Product Transition Needs to Start Now Of course with transformational innovation comes disruption, but the price of doggedly clinging to modest incremental changes while consumer behaviour lurches forward in quantum leaps is to end up like the news or music industries, presiding over dramatic loss of revenue.  Movie studios have been partially cushioned from disruption by the unique experience that movie theatres continue to deliver even in the face of numerous digital alternatives.  Although the day-date release debate continues to rage, of more pressing need is overhauling physical sales strategy.  DVD and Blu-ray sales are crucial to studios and are often the way that movies actually end up turning a profit.  Blu-ray proved to be a mistimed and ill-judged last throw of the physical product dice.  Titles priced too high for marginal additional consumer benefit, at exactly the same time that consumers were being presented with a host of new ways to get video content into their living rooms, such as VoD, PPV, IPTV and PC streaming. The net result was that Blu-ray failed to drive the universal format replacement shift that DVD had done.  Many consumers will simply skip Blu-ray, ignoring the last chapter in physical video formats en route to on-demand alternatives. All of which underscores just how important it is for movie studios to play a proactive role in driving the digital transition of their customers, even if that comes at the cost of hastening the demise of the evolutionary dead-end that is Blu-ray.  If movie studios don’t hold their customers’ hands on this journey then consumers will make the move without them and a priceless opportunity to have some degree of control over the digital transition will be lost. This Narrowing Window of Opportunity is the Most Pressing Window Argument Forget the release window debate for a moment, this narrowing window of opportunity is the window that the movie studios should be occupying themselves with.  The book publishers have been uniquely fortunate to be able to help shape their industry’s digital transition by being intimately involved with the technology that triggered readers’ digital transition i.e. eReaders.  Although the digital cat is already out of the bag for video, the digital consumption journey for mainstream consumers is only just beginning and the movie studios have the opportunity play an influential role in that process in a manner that record labels and newspapers would bite their hand off for. UltraViolet could yet prove to be the vehicle – the importance of having most of the big studios pulling together should not be underestimated.   But charging your most loyal customers $2 for the privilege of watching an old movie they’ve already paid for is not a strategy.  The role of UltraViolet should be to deliver new, high quality, convenient digital experiences for customers, not to squeeze extra income out of them for products they have already paid for. Until that change is made though UltraViolet will remain a sustaining innovation aimed at protecting the old way of doing things and as such wholly inadequate for helping the movie studios transition their physical sales businesses.

For more on media product innovation strategy get my latest report ‘The Media Format Bill of Rights’.  Just sign up for email updates to this blog to receive your free copy.

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Why Apple’s Dividend Payment Is Actually a Product Strategy Story

Let me say upfront that I’m not a financial analyst so this post is intentionally light on financial analysis, focusing instead on the strategic perspective.

Apple’s decision to use approximately half of its vast $97 billion cash surplus in a mix of dividends and stock repurchase says as much about the company from a strategic perspective as it does financially.

In these days of low interest rates on savings, having large reserves of cash isn’t the strategic plus it once was, which is why financial analysts and investors haven’t exactly been getting wildly excited about that $97 billion being left to sit in the bank.  By deciding to pay a dividend to shareholders and to repurchase stock, but to leave half the money untouched, Apple is able to have its cake and eat it. It has sent a positive message to the market, allowing investors to share further in the company’s current prosperity but at the same time it will retain approximately $50 billion, a vast chunk of working capital.   To date Apple has been using its cash reserves to fund areas such as product development, strategic investments and retail stores.  Apple has had the benefit of being able to invest in its own business in an organic manner with the agility necessary to anticipate and meet market changes and consumer demand.  It is no coincidence that during the same period Apple has been able to develop an unprecedentedly successful portfolio of products.

Apple’s Message: Innovate to Win, Not Acquire to Win

A common strategy for successful companies is to buy their competition out of the marketplace, particularly when that company has large cash reserves or easy access to capital.  But such a move isn’t for Apple.  In so many of their product categories Apple is the leader, in terms of either market share or innovation leadership, often both.  Apple could have, for example, bought a handset competitor, just like Google did (though for different strategic reasons) when it acquired Motorola for $12.5 billion last year.  But instead of going down that path, Apple is holding true to its current course and its core values of building better products.  A point underlined by CEO Tim Cook’s quote from yesterday:

“Innovation is the most important objective at Apple and we will not lose sight of that.”

Apple Is Still Surfing the Success Wave

By meeting the markets half way with a dividends pay out Apple helps put one set of persistent questions to bed, allowing it to focus market attention more squarely on the product story.  And by committing $10 billion to stock buyback Apple is also showing the market just how much it believes in itself.  Apple continues to ride the crest of a very, very big wave.  It has been on top of its game for close to a decade now, establishing leadership in its three core device categories with the iPod, iPhone and iPad.  Without compromising its pricing and positioning principles, Apple has stayed ahead of the competition despite being under simultaneous attack from multiple quarters. Things should get even better this year:

  • Android tablet competitors remain niche while iPad goes from strength to strength
  • iPhone continues to increase momentum, with Apple now the third biggest mobile phone company globally, and the iPhone 5 will almost certainly supercharge sales further
  • Apple looks set to finally play its TV cards fully.  If Apple gets its TV play right it will not only extend its footprint in the home, it will reach new households, potentially on a scale which would make current iPad sales look like small change.

Planning for the Trough

10 years ago Sony had the same momentum, prestige and allure of Apple, now it is firmly in Apple’s shadow.  5 years ago Nokia was at the top of its game, the clear global leader in smartphones, now it too toils in Apple’s slipstream.  Apple has that priceless commodity of momentum, momentum that has swept giants such as these aside.  But every single company in history goes through cycles, as indeed Apple has already done so itself.  And Apple’s management is smart enough to know that every peak of a wave has its trough.    When that time eventually comes (and it may be long way off yet) a $50+ billion cash reserve will come in supremely handy for rebuilding success, once again.