Some Thoughts on 5G

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The promise of 5G wireless connectivity as the backbone of the “4th Industrial Revolution” has brought predictions of how the global economy will be changed both positively and negativity. Social impact aside here are some quick thoughts on how I think some tech leaders today will evolve.

Apple

Remember when everyone was touting the revolution of wearables with Google Glass, etc.? Well, Apple is the clear winner so far with AirPods and Watches. 5G will make it imperative that they continue to iterate on these two categories as the iPhone will become less important, unless you are streaming video. More apps will integrate Siri in a meaningful way “Siri get me a Lyft”, “Siri order a salmon bowl from Digg Inn”, etc. Siri can also be used in China, which isn’t the case for Google Assistant.

It would be interesting for them to create some sort of TV SDK beyond an app store for Apple TV, similar to what they have done with HomeKit or CarPlay for 3rd party hardware partners to make it easier to stream video to all of your TVs without buying Apple TV hardware for every set in the house. Roku has done a fantastic job with this strategy to extend reach beyond hardware. Maybe this will come for Apple with whatever they are developing in the TV streaming space.

Amazon

Alexa will be the cornerstone of their connection to the consumer in the 5G era. How they extend the primary consumer engagement point beyond speakers into wearables will be interesting to watch as they are totally dependent on 3rd party hardware manufacturers for headphones, etc. that haven’t broken through in a big way. They are rumored to have a plethora of Alexa connected devices coming out this year – including a microwave and car specific device. Their early lead in speakers has been challenged by recently by Google’s aggressive pricing in the US market so they will need to find new platforms to connect the consumer with Alexa.

Google

Their first foray into hardware wearables, Google Glass, didn’t gain widespread consumer acceptance and Android partners like Samsung haven’t been able to crack the space to compete with Apple as they have in the phone category. I think the current iteration of Google Assistant is superior to Alexa or Siri so it will be imperative that they get the gear side of the business fixed. They are showing promise in connected speakers by taking share from Amazon with aggressive pricing.

Facebook

Facebook is late to the voice computing but they were also late to mobile when 4G rolled out and they thrived. Things have changed mightily for them over the last two years with consumer trust at an all time low and the intimacy of voice controlled experiences could put them at a big competitive disadvantage. They are developing speech recognition under the name Aloha and have a smart speaker in the works.

They also could win in cloud powered VR that eliminates the need for the cumbersome hardware with Oculus which has been a bust since being acquired in 2014.

Netflix/Disney

Netflix has a huge lead in direct to consumer SVOD but with Disney’s marketing capability and best in industry library and IP I predict that they will have a US subscriber base as large as Netflix in 24 months following launch in 2019 (a big caveat will be getting the UX right which is why they acquired BAMTech). The battle for new subscribers will then shift to preventing churn in the US market and global expansion with China being the golden goose where Disney currently has a competitive advantage.

Comcast/Verizon/AT&T

Hi-speed internet, cable and wireless packages will finally blur and merge enabling true cord cutting and they will need differentiate with gated offerings of exclusive content to stream directly to TVs and phones. This imperative has been the driving force behind the M&A frenzy to build scale and a library of valuable IP along with the data that comes with the direct connection to the audience.

Is the PBS model next for Netflix?

Netflix has done an incredible job over the last two years of establishing itself as a creative powerhouse akin to HBO in their glory days. However, original content like House of Cards and Orange is the New Black doesn’t come cheap and it is already having a negative impact on profit margins, even with 50 million paying subscribers globally.

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The marketplace for other content is also going to increase in cost  driven by competition from all fronts including Amazon, there is only so much watchable stuff in the marketplace. With more than $8 billion in short and long term content cost obligations on their books it might make sense to move to a PBS model where certain programming is underwritten by a brand sponsor in order to keep their per monthly subscription cost below $10. I don’t think they would ever try to sell traditional :30 interruptions during a program. The caveat for Netflix would be having to share how many people stream each program which they now closely guard as a negotiating tactic with content suppliers. I think there would be a huge market to advertise on their platform and the market will eventually make this a no brainer option for them to offset the coming tidal wave of content costs.

Everything You Need to Know About the Future of TV Advertising is in the New NBA Deal

The NBA reached a new 10 year rights agreement with Disney/ESPN and Time Warner/Turner over the weekend that will at least double and possibly triple the current annual rights fee paid to the league. The most interesting aspect of the deal is the de-bundling of at least some games from cable TV packages. From the Wall Street Journal:

“The league also laid plans in partnership with ESPN for a new online video service that would show live regular season games, the people said. In a significant move for ESPN, which derives its huge profits from the pay-TV ecosystem, that service will be open to people who aren’t cable or satellite TV customers.”

This is a big risk for their current business model as they derive around 60% of their revenue from cable TV providers as part of your cable package. However, it is where the market is going and the potential revenue from a la carte purchases (buying a game or a package of games) and more targeted advertising could bring in much greater revenue that the current business structure. What happens when people can consume content without a cable package? What could make up the revenue shortfall?

First, these assumptions can be made about where the market is going:

  1. Video on demand is driving content consumption. This can be live or recorded and through an internet or cable connection. The channel and time driven tune in window programming format is on the way out.
  2. More targeted advertising through programmatic buying platforms has re-shaped how internet advertising is purchased. Big spending advertisers will demand that TV eventually be sold the same way. 65% of advertising on the internet is now purchased on a performance based model.

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As smart set top boxes evolve, “smart TV” penetrates more households and more content is consumed on mobile devices the opportunity for hyper-targted advertising through TV/video will become the standard in the marketplace. The tools marketers that use to build deep data profiles constructed by piecing together a consumer’s engagement across multiple touch points that live in the cloud driven by Adobe, IBM, SalesForce, Oracle and SAP will drive more change in the $75 billion dollar TV advertising business than anything else in the last 60+ years.

Rethinking the Video Ad Unit

I firmly believe that video is the best way for brands to engage their audience. With the convergence of internet and TV, programmatic buying platforms, marketing cloud solutions that create deep consumer profiles and branded content as a pillar of a solid marketing plan I think it is time to re-think how we look at video ad units and consider everything branded content to sell your story. Each of these units has a place in the consumer’s journey and some make more sense for a brand depending on what you are selling and how considered the purchase is. Free organic reach is quickly going away so thinking about your content creative in the context of everything as a paid ad makes more and more sense. Here are the definitions I am going to start to use:

  • Less than 1 minute – Short Form
    • old definition “TV ad or pre-roll video unit”
  • 1 – 25 minutes – Long Form
    • old definition “branded video”
  • 25 minutes+ – Programming
    • old definition “infomercials”

In the context of a campaign you might buy short form to generate awareness to drive the consumer to long form to complete the path to purchase. If you think of this as one big story across multiple media platforms creative consistency across all of the touch points becomes even more essential for the story to make sense.

Apple is winning the talent war

iPhone 6 orders are forecast to be the most in demand product in the 38 year history of the brand. Just last year analysts and journalists were bemoaning the death of the brand with the passing of Steve Jobs. What they didn’t account for was the culture he created and the empowerment he entrusted with Tim Cook to make the brand his own. When a real sense of mortality and reality set in with Jobs he seemingly spent a lot more of his genius focused on creating not just a new iPhone but a company culture inspired by his values of the intersection of art, technological innovation and emotive marketing. If you look at the list of recent hires from Dr. Dre, Jimmy Iovine, Angela Ahrendts, Marc Newson, Ben Shaffer, etc. Tim Cook is creating an unparalleled culture of creativity all built around the values Steve Job espoused and created the most interesting company training program in the world. In any business your most valuable asset is the team of people who work there, I think Tim Cook’s roster of talent may exceed the current market capitalization that is already the most valuable in the world.

The NFL implosion, will it hurt TV ratings?

Has any sports league imploded faster than the NFL over the last week? The Ray Rice video and the Adrian Peterson child abuse charges certainly seem like the tipping point in negative public sentiment against a league that has been bullet proof as a money minting machine. The big question is when will people stop watching? As a father of three daughters I find the whole week disturbingly repulsive and will skip football this Sunday for the first time in thirty or so years. I think that is the only way the owners will come to their senses and make a change at the top by firing Roger Goodell, unless they are unexpectedly influenced by Bill Simmon’s mailbag column. The only thing these guys understand is money and with the unforgettable video and graphic images of abuse how can the league ever recover?

What is Vice’s next move?

Vice now has $500 million to build the next iteration of their business. It will be interesting to see where they go beyond expanding their footprint by covering different subjects and opening up new audience targets. Their core business is selling ads around video and delivering branded content targeting under 40 year old males, which is a valuable demographic (just look at NFL TV rights), how does this model scale beyond their current $2.5 billion valuation? From the previous investment by A&E and failed negotiations with Turner it was rumored they want to run a cable TV channel. My question is why? The shift towards on demand programming is moving at a rapid pace and the revenue model where cable providers pay high carriage fees is on the way out. There is also the high cost of creating enough TV quality content to fill a network schedule, their margins would unquestionably suffer. As eyeballs shift towards mobile devices (especially phones) it would make sense for them to focus on what has been delivering staggering growth at high margins in the near term. Regardless of how they move forward it will be one of the most interesting things to watch in the media and advertising space.

There’s Gold in Them There Sports

This Wall Street Journal article really got me thinking about whether there is a ceiling on all things sports related in the US market target both men and women. TV ratings continue to climb in the NFL, NCAA football, EPL soccer and the NBA in the face of double digit ratings declines for traditional TV programming. Next season Kevin Durant will earn more from Nike than he does playing for the Thunder. What will the ceiling be on all things sports related? Are yoga pants now considered business casual? How much will LeBron James demand if he hits the open market on his next Nike deal?

What’s Up with Willard’s Taxes?

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John Cassidy speculated as to why Mitt Romney hasn’t released his tax returns for the last 5-10 years in The New Yorker. Here are the reasons he outlined:

1. Extremely high levels of income. According to the tax filings and estimates he released earlier this year, Romney earned about $21.7 million in 2010 and $20.9 million in 2011—most of it from capital gains on investments related to Bain Capital. This is a lot of money, but Romney may well have earned considerably more in earlier years. His ten-year severance agreement with Bain Capital ended in 2009. The terms of it haven’t been revealed, but quite probably it allowed Romney to keep pocketing a substantial portion of the firm’s profits. And the years before 2008 were massively successful ones for Bain and other private-equity firms.
But even if Romney earned fifty million dollars a year in some years, would be that be sufficient reason for him to keep his returns secret? I doubt it. Americans don’t begrudge people a telephone-number income as long as they are perceived to have earned it. And insofar as any private-equity mogul earns the money he makes, Romney earned his. He created Bain Capital and ran it for (at least) fifteen years.
2. More offshore accounts. The Obama campaign has already made much of Romney’s Swiss bank account, his Bermuda-based investment company, and the income he receives from Bain Capital-related trusts that are domiciled in the Cayman Islands. It is perfectly possible that in the years before 2010, Romney and his financial advisers were even more aggressive in their use of overseas investment vehicles and tax shields. Hedge funds and private-equity funds, such as Bain Capital, routinely exploit offshore shell companies, to minimize their tax burdens but also to escape government regulation and oversight.
Here, too, though, I doubt whether this would be sufficient reason to justify not releasing the returns. Thanks to the Obama campaign, Romney’s name is already indubitably linked to offshore accounts. I doubt whether the average American is very shocked. Most people know full well that one of the reasons rich people employ so many fancy accountants and tax lawyers is to shield as much of their income from tax as possible, and that one of the ways they do this is by keeping cash offshore.
3. Politically explosive investments. Over the years, Bain Capital invested in all sorts of companies, including some that helped corporations outsource and offshore some of their operations, and one, a medical-waste-disposal company, that helped family-planning clinics to dispose of aborted fetuses. Romney, even after he left, kept much of his money in investment funds managed by the firm.

Read more http://www.newyorker.com/online/blogs/johncassidy/2012/07/why-wont-romney-release-more-tax-returns.html#ixzz213z42DZE

First I think all think all of these are true, I would like to speculate on point #3. What if his trust made bets against mortgage CDOs in 2007 or 2008 that delivered a huge return? By 2006 and 2007 the investment banks like Goldman Sachs that built the mortgage CDO industry began to bet against them in the form of credit default swaps usually sold by AIG. Goldman Sachs was the biggest of the profiteers at the expense of the American tax payer to the tune of a direct transfer from the treasury of $13.9 billion dollars which backed AIG’s bets at 100 cents on the dollar. If you add in the $8.4 billion AIG transferred in collateral they would transferred over $20 billion in risk that was covered by the US taxpayer. These default swaps would be extremely profitable for banks like Goldman as rates are similar to buying life insurance at a small premium and hoping they die quickly. What if Romney’s trust showed huge income from these sorts of investments while the US taxpayer was withering on the vine and their taxes were being used to bail out Romney’s hedge fund/investment bank ilk who took on extremely stupid risks? Is there a more made for TV political ad? Is this something the Romney campaign could recover from (I doubt it)? Romney released 10 years of records to the McCain campaign in 2008, some of these could have leaked to Obama campaign and they will be willing to spend all of their TV ad dollars until Romney is forced to release them knowing it will kill his campaign.

Eric Schmidt should run the SEC

When Mark Cuban wasn’t winning NBA titles he was predicting exactly what was coming in the stock market on his blog post here. There was also a 60 Minutes piece on it. In essence all of the proprietary trading platforms that make split second trades can cause a market flash crash (or up swing) due to lack of human oversight. The huge influx of capital invested by these platforms and the number of trades they make has created a volatility bubble that is going to drive more and more “regular” people out of the market. How can a retiree or someone close to retirement see swings of 500 or 600 points every day and not panic and pull their money out of the market at a low point? I would go as far as to say this is exactly what Goldman Sachs and the rest of what Cuban refers to as “hackers” want to have happen. They want to create a volatility bubble and buy up securities at a 30-50% discount and then sell them back to all of poor schleps with 401Ks when enough confidence is mustered once the market goes back up 20-30%. So when Cuban asks what business they are in I think I know, their business model is creating bubbles and taking advantage the market swings and in essence working people who are not “in the know”. What can be done from a regulatory perspective? The SEC is useless, I mean Bernie Madoff was the Chairman of the Board of Directors and on the Board of Governors of the NASD for Christ’s sakes. If I were Obama I would put someone like Eric Schmidt in charge of the operation. The argument that he doesn’t have a financial background all the more positive to me, he was the CEO of Google I think he knows enough about finance to get by. What they need is someone who understands extremely complex systems and architecture to decipher what the hell is going on. To prove my point that people get bad advice from people who don’t know shit about finance read this article in the Boston Globe today about investment advisers are like sheep, that may well be true but they aren’t making any of these trades that have caused the volatility over the past week or so. Here are some points Cuban makes in his post:

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else.  To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing.  A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it.  A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.