No. 325: Consolidation and Cable 2.0

The center of the home is still the room with the television. In that room, there is an arms race happening before our eyes. Streaming properties are adopting an end-to-end format that reflects the very nature of digitally native brands: own the product, own the channel, and you’ll own the consumer. But it wasn’t always that way and it may not always be.

This past weekend, my wife wanted to watch our favorite show. But in my parents’ market of Northwest Florida, that Sunday evening was disrupted. Their home was in a sort of in between, half traditional cable and half streaming services. But without HBO Now, we couldn’t watch the one show that we agreed upon. This situation was not without its irony.

Now-retired, Cleon Smith spent 30+ years as an executive in the cable industry. First for Time Warner, then Comcast, and finally – Cox Communications. It was within the walls of Time Warner that I interned with his upstart broadband internet department: code named “Road Runner.” As GM of the service, his market (the dense triangle of Houston, Dallas, and Austin) launched shortly after the test in Elmira, New York. At 14 years old, I watched his group tweak, market, and launch a product that would shape Texas’ future and then the nation’s. That broadband service, the first of its kind for the general public, would disrupt his company’s core business forever. Or so I thought.

I understood why the streaming industry took off but in the end, those consumers will yearn for simplicity of the good ole’ cable days. We sold a good product.

With the advent and widespread adoption of broadband internet, services like Youtube launched in 2005. And then, like a hurricane hitting an unsuspecting island of plywood homes, Netflix pivoted to streaming service in 2007. That did change everything.

Companies like Comcast, Time Warner, and Cox Communications began to innovate by introducing on-demand options and, eventually, the ability to login to Netflix or Hulu accounts to their OTT devices. But it didn’t end there. Each of the aforementioned properties were disrupted. First, by the Netflix approach to marketplace growth – an innovation that provided millions of cable, Dish, and DirecTV subscribers the incentive to “cut the cord.”

This is an example of a consumer household in 1995:

  • broadcast television: cable or satellite provider
  • basic: cable or satellite provider
  • premium services: cable or satellite provider

This is an example of a consumer household in 2012: 

  • broadcast television: cable or satellite provider
  • basic: cable or satellite provider
  • premium services: Netflix, iTunes

This is an example of a consumer household in 2020:

  • broadcast television: antenna, Hulu+, Sling, DirecTV Now, CBS All Access
  • basic: Philo, Sling, YouTubeTV, Playstation VUE, Netflix, Roku, iTunes
  • premium services: Netflix, Showtime (streaming), HBO Now, Prime Video, Vudu, Disney+

Between 2007 and 2018, Netflix worked to build a proverbial “mall” of properties by purchasing, licensing, or manufacturing intellectual property. It resembled elements of traditional cable but it emphasized the program, not the channel. Netflix Originals were purchased from independent filmmakers and marketed as Netflix’s own. Broadcast television properties like “Friends” and “The Office” were licensed for tens of millions of dollars per year. Hollywood A-listers and top directors were granted $300 million budgets for films meant to rival big studio releases. Yet, Netflix is currently trading at six month lows after news of: historic subscription losses, a small revolt after a $2 price increase, and the loss of two major properties. Industry analyst Andy Meek [1] on the matter:

Netflix lost 126,000 subscribers during the quarter, the first time that’s happened since the streamer actually started producing original content. Yikes. And then when you couple that fact, plus the quarter’s lack of new hit content and the imminent loss of shows like “Friends” and “The Office” with the forthcoming launch of rival streamers from Apple, Disney, and HBO’s parent company, among others — it’s a recipe for disaster and whatever the Streaming War’s version of hand-to-hand combat is, with everyone taking a piece out of Netflix, right?

As Netflix’s value erupted, an inverse relationship manifested: Netflix’s success and the commodification of the studios. The streaming industry increased their leverage by providing more consumer optionality and negotiation-by-wallet power to end users. In the process, cord cutting began to hurt studios as well. Not only are their cable contracts diminishing in value, their streaming payouts aren’t making up for the lost revenue.

Coupled with changes in consumer behavior, contract fallouts between studios and streaming channels, and the continued proliferation of speedier data services – you have the basis for the continued fracturing of the industry.

2PM Data: The Macroeconomics of Streaming

Subscriber losses for selected cable companies in the U.S. 2018 | Source: Leichtman Research Group
Pay TV penetration rate in the United States from 2010 to 2018 | Source: Leichtman Research Group
TV services used as substitute by cord-cutters in the U.S. 2017, by viewer type | Source: Nielsen
Monthly time spent watching OTT services in the U.S. | Source: comScore

The final graph is, perhaps, the most interesting. Disney-owned Hulu has begun to close the gap between their offering and Netflix. With Disney’s properties growing in popularity, analysts anticipate Hulu will continue narrowing Netflix’s lead.

Netflix planned to be the modern consumer’s iteration of cable television – a model that depended on a critical mass of content and viewership. That critical mass had to remain greater than the sum of all potential streaming competitors. For a time, the Reed Hastings-run media company had enough of what America needed: great classics, go-to films, syndicated sitcoms, game-changing originals. And then the ecosystem began to fracture. Properties like “Friends” left for WarnerMedia’s streaming service while “The Office” prepared to depart Netflix’s content menus for NBC’s streaming equivalent. Becca Blaznek on why “The Office” has left Netflix [2]:

Among them is NBCUniversal, which owns the rights to The Office. On June 25, 2019, the company released a statement that they will not be renewing their deal with Netflix, instead bringing the “rare gem” to their platform beginning in 2021. According to the Hollywood Reporter, this will not affect international viewers for the time being.

Like the consumer categories that went vertical to compete in a new economy, so have the studio brands competing for the mindshare of cord-cutting consumers. This had an unintended effect however. While modern consumers prefered streaming over traditional broadcast or service providers, the traditional consumer still prefers their traditional television over other devices for streaming media.

The DTC Evolution

Sales of OTT devices | Source: Strategy Analytics

As media fracturing continues, contract negotiations between studios and existing streaming services will only intensify. This will result in added subscription costs for consumers. The promise of the cord-cutting age was two-fold: (1) improved household economics and (2) accountability. Consumers wanted to avoid the pages of unused television programming that went neglected. Today, it’s typical for a cord-cutter to maintain subscriptions to 5-10 monthly media services to accomplish the same consumer tendency: availability irregardless of usage rate.

Today’s consumer is submitting to this dizzying dance of “subscription / login / password recall / and idle subscription” but without the convenience that consumers found with traditional cable providers.

As such, the disruptor is due for disruption. And in this way, an earlier inference may have been mistaken and my dad could end up right. With cable and data providers like Comcast, Cox, and AT&T controlling the pipeline and studios increasingly at odds with new-age streaming services, the momentum is tipping in the favor of tradition. While OTT boxes like Roku and Apple TV have made subscriptions and programming search infinitely easier, the 1:1 connections between consumers and streaming agents continues to subvert the innovation’s original intent: ease, consistency, and value.

It’s likely that the traditional media consumer has reached their limit. Cord cutting was an economically-driven phenomenon. Foregoing the streaming economy in exchange for returning to traditional cable is a question of programming availability and ease of access (try logging into Netflix on a relative’s cable box).

Streaming services will be bundled. It’s likely that we’re near the point of OTT carriers marketing the opportunity for consumers to purchase pre-negotiated, economically-friendly bundles of streaming services packaged. With no-login, one collective price, and less of a fear of missing out – the past has become the present. Disney’s streaming offering may be the sole victor here; their value and reach may outlast a shift back consolidation. For all others, the fracturing market of streaming video on demand (SVOD) has begun to cannibalize the direct to consumer opportunity that was the initial appeal.

In this manner, there is similarity between retail’s DTC cost-elasticity and SVOD’s elasticity. For online retailers, CAC has risen as digitally native brands flooded the market (performance advertising inventory remained constant). For streaming media companies like Netflix, CAC has risen as studios flooded the streaming market and costs to feature their properties became prohibitive. While Facebook and Google’s ad inventory’s limitations have resulted in price elasticity, the SVOD parallel is slightly different. The streaming consumer’s spend is nearing its point of elasticity. And the end game may be consolidation, a result of the yearning for good old cable days.

Read the No. 325 curation here.

Research and Report by Web Smith | About 2PM

Additional reading: (1) Member Brief: The Netflix Report (2) Monday Letter: The Hundred Year Titan (3) This wonderful thread by Nate Poulin that further contextualizes this report.

No. 324: Own The Audience

On the hidden costs of social platform innovation in retail. Where, how, and what we buy is constantly changing. A scenario where a consumer relies on their Amazon Alexa to order “the dress that Emma Hill wore on her Instagram post from Wednesday” is just as probable as buying that same dress, directly from Emma Hill’s Instagram account. The tools of the trade evolve, the funnel shortens and widens, commerce becomes linear. There’s no better example of this than on Instagram, where the lines between brand, promotion, and commerce continue to blur.

Instagram’s native cart is part of an industry shift shift towards linear commerce. Chinese superapps, like Little Red Book and WeChat’s Good Product Circle have already turned the Chinese consumer’s collective review power into an integral part of their shopping experience. And, with American platforms’ ad models being under attack from regulators, adding social commerce capability is a hedge that will become increasingly common throughout audience-driven platforms. Stateside, platforms like Verishop include native promotional posts from Instagram and Snapchat influencers throughout the user experience. 

No. 314: Law of Linear Commerce

The digital economy rewards the companies that work along the line that separates traditional digital media and traditional eCommerce.A great product needs an organic and impassioned audience. Captive audiences will need products and services tailored to their tastes. Linear commerce is the understanding that digital media and traditional online retail will eventually meet at the center – along the line – the most efficient path for growth. Brands will develop publishing as a core competency and publishers will develop retail operations as a core competency.

Powered by Instagram’s native checkout, social commerce has narrowed the line between promotion and consumption. We are just as influenced by the peers that we follow, than we are by mass marketed influencers, brand models, and marketing campaigns. Linear Commerce on social platforms like Instagram, Snapchat, and Pinterest represent the ultimate merger of consumption and influence. It moves the business of consumerism into creative pursuit, where the brands that are best rewarded are often the most creative. Today, social media has become, both, a driver of economic value and a canvas for artistic expression.

Retail tacticians are quick to celebrate wonders of the convergence between inspiration and the checkout funnel. As performance marketing continues to increase in cost as it’s value flattens, this form of influence-driven sales has emerged as a more cost effective alternative.

A great product needs an organic and impassioned audience. Captive audiences will need products and services tailored to their tastes

Platforms like Instagram have successfully monetized our attention. They are in the process of commercializing our network. This will increase the platforms’ power as gatekeepers, a strategy that we’ve seen before. 

Member Brief: A Familiar Strategy

In 2010, the ten most popular brand pages on Facebook looked something like this: Pringles, Converse, Victoria’s Secret, Converse All-Star, Red Bull, Skittles, Disney, Oreo, and Starbucks, and the top brand: Coca-Cola. With over 22 million fans and Facebook’s once-famed organic reach at its peak, brands’ investments into growing their audience was a lucrative practice. Fast-forward nine years and Coca-Cola’s page is now at 107 million. A recent post received just 1,500 likes. That’s right, just .0014% of Coca-Cola’s audience “liked” the post.

Strategically, there will be consequences suffered by brands who rely upon external social platforms to amplify commerce. Curating an independent audience is an involved process with long tail benefits and short-term headaches; marketing executives have long underestimated the value of this approach to community development and marketing. But while we extol the virtues of platform-driven linear commerce, it has an expiration date. The optimal path forward for brands is an independent one.

On Platform-driven Retail concerns:

Contributor: Member of Forbes’ CMO Next, Ana Andjelic has earned her doctorate in Sociology.

Products > Brands. Platform-driven linear commerce emphasizes individual moments over brands. Consumers are purchasing a look, not a particular brand. In this way, the brand equity of a product can be secondary to its part within a whole. In this way, the mechanics of social platforms have emerged as product seeders. This product-focused model does little for brand equity. It could also have a detrimental effect on sales in the longer term. 

Taste Bubbles. If you read enough reporting on the issue, Instagram has replaced the mall. The difference is that, your typical, suburban mall isn’t partitioned by pre-set preferences. Consumers have little no control over the shoppability of these platforms. Rather, they serve as recommendation bubbles. The dangers of content bubbles have already been copiously documented. Consumers are served content that they already approve of, creating biases that can quickly entrench a person’s concept of quality, availability, or preference. Now imagine a taste bubble, where consumers are served products of which they’ve already shown an interest. Here is a great example of an algo-driven interpretation of an understanding that was previously deemed subjective. 

Longer Product Life cycles. If online retail influenced consumers away from physical malls, social platforms discouraged ownership. The total resale market is expected to double in value to $51 billion in the next five years,according to ThredUp. Traditional retail operates on product innovation and seasonality. In what could be another detriment to brands, social platforms may extend product life cycles. The same products can be marketed and remarketed as long as its component of an influential capsule or influencer outfit. Consider retail influence app, Depop. In the “about us” section: 

After realizing that Depop needed a selling function, Simon re-envisioned the app as a global marketplace — a mobile space where you can see what your friends and the people you’re inspired by are liking, buying, and selling.

In turn, your friends and creative influencers all over the world can see the things you like, buy, and sell, and are inspired by you. This ecosystem has supported Depop becoming a global conduit of connection, not only in m-commerce, but culture, design, and creative communities around the world.

Shortened zeitgeist cycles combined with extended product life my impact retail operations, production, distribution, and merchandising strategies. These areas of the retail business have had to evolve to respond to real-time ebbs and flows of product preferences and tastes.

The rise and demise of brand dependence on social platforms will mirror media’s former dependence on these same platforms.

Today’s trends are the result of buying decisions made outside of direct influences of brands or advertising. Social platform investments were emphasized by retailers hoping to amplify word of mouth influence. However, retail growth may be stunted by these efforts – in the long term. Products are increasingly character-driven, not brand driven. Look no farther than Lady Gaga’s launch of Haus, covered here by Lightspeed Venture Partners.

The rise and demise of brand dependence on social platforms will mirror media’s former dependence on these same platforms. The only appropriate solution is ownership of the audience; the savviest brands are becoming their own publishers. 

The digital economy rewards the companies that operate along the line that separates independent media and independent retail. The line between the two industries is no longer a line of demarcation for brands. That line represents the pulls and influences of both disciplines. It has become the retail strategy for the brands that will endure.

Read the No. 324 curation here.

Report by Web Smith and Ana Andjelic, Ph.D. | About 2PM

No. 323: The Sociology of Brand

Zero to one, in the age of Moore’s Law, is an interesting phenomenon to observe. We see it in software and other forms of technology. It’s a common enough sight. Like Facebook’s 2004 explosion or Slack’s adoption growth in 2015, the hockey stick is so frequently observed that we expect other types of businesses to emulate the same trajectory. But fashion doesn’t work the same, the best ones take time and discernment. They pop after confluences of events or press mentions or the right person wearing something at the right time. It’s a brand’s foundation that should be the KPI, not it’s sales CRM.

It wasn’t until I recently spoke with the managing partner of a sizable family office that I learned just how little knowledge there is about what is required to build an enduring apparel brand. One that can IPO or stand on its own as a privately-held, profitable company.

Fashion retail is different than other product categories. In ways, it’s applied sociology. A DTC fashion founder can manipulate lifetime value (LTV) through product iteration, SKU variance, loyalty programs, and savvy ad retargeting. But fashion will never resemble the predictability or dependence often found in the consumption of cleaning products, dietary supplements, beauty components, or grooming necessities. Those products are needs more than wants. Apparel is often the opposite, it’s the embodiment of prioritizing our wants over our immediate needs. The DTC apparel space is irrational.

However unpopular the notion, venture capital is well suited for consumer packaged goods. Perhaps accessories and furniture, as well. Those are the types of one-off purchases that can be simplified to a simple ratio: $ = (MSRP – COGS) / CAC. The $500 luggage brand can spend $100 acquiring a customer and still net nearly $200 per sale (assuming a $200 cost of goods). Luggage is a need – even if it’s a fancy aluminum one that shines through the terminals of the world. But there’s never been a product with more substitutes than fashion and that’s why it’s becoming clear that digitally-native apparel brands may not be suited for traditional venture capital.

Whether or not there is a brand to suit that trend or idea is answered by studying the society, not an algorithm.

I’d argue that the vast majority of fashion-based digital-natives have better odds of developing profitability, scale, and potential exit without traditional venture capital. The growth horizon for fashion is closer to 10-15 years than it is 5-7 years. That 5-10 year difference allows for improved founder discernment, real consumer connection, and a shot at a longevity independent of the customer acquisition methods that venture firms are subsidizing today.

In a conversation with former Rebecca Minkoff CMO and Sociology Ph.D Ana Andjelic [1], she remarked on this issue.

Contributor: Ana Andjelic

Fashion is applied sociology. It is a recording mechanism of our time. It captures values that a society emphasizes at the moment and these values can live as a dress, a song, as a tweet, as a t-shirt or graffiti.

A couple of years ago, it was a time of rebellion and Vetements was at its peak with hoodies that made one look like they’d just smashed a Berlin wall. Some of their garments wore massive shoulders that seemed to signal “stay away.” But values unfold. What set Vetements or Off-White on a path for success, today, actually happened a decade or longer ago.

It was then when luxury fashion began to feel the generational shift – in brands, media, consumers, platforms.

The arc by which a fashion brand becomes popular is long. For example, everyone is talking today about Harry’s and Dollar Shave Club as new models of retail. That as may be, their rise started a decade earlier when men’s grooming habits started to shift. They were first to capitalize on the shift in the culture of modern masculinity.

Gwyneth Paltrow is often quoted saying that she was crucial in making yoga popular. That’s probably true. This idea symbolizes the American consumer’s fascination with Veblen brands [2] and the spread of trends from affluent to everyone. Again, the arc of adoption is long and has more to do with social influence and the evolving social currency than with a specific business model.

The biggest indicator that VCs should consider is whether a society is ready to embrace a new trend or an idea. Whether or not there is a brand to suit that trend or idea is answered by studying the society, not an algorithm.

The practice of reducing every product and brand decision to a figure on a Google dashboard is as pervasive as ever. In a recent conversation with an early stage apparel founder, he cited the need to maintain a consistent, non-promotional price point for his apparel concept. He pinpointed a specific, luxury customer and worked to develop messaging and content around a consumer that we called “Lucy.” A married mother of three, Lucy was an active, suburban resident with a household income of $320,000. Her neighborhood scratched the highest strata of the middle class. Her disposable income hovered between $3,000 and $3,500 per month.

Within six weeks of launching the brand and with little sales traction, he gave up on Lucy. He exhausted his targeting budget. His strategy shifted to cheaper pricing and an altogether new target consumer: college students. He set aside three months of consumer and trend research because Google told him that sorority students were clicking through to his site at a larger proportion than “Lucy’s.”

This is a common refrain. Rather than patiently and diligently speaking to the consumer that the product was designed for, he chose to offload inventory at 40% of the intended product price. This led to lower sales projections, a high rate of product returns, logistical headaches, and a customer acquisition cost that was no longer economically viable. He didn’t make it to the next round of investment. By lacking patience and trust in clear market trends, this founder surrendered the potential for sustainability and the fruits of power laws.  He closed the doors to his company seven months later, writing off his own $90,000 investment. He cited “the data” throughout his short process from zero to zero.

Developing the foundation

Web Smith on Twitter

Investment thesis: seek out DTC brands that can achieve modern luxury KPI: 1/ upper-to-premium price point 2/ avoids promotions 3/ discerning / few wholesale partners 4/ low-to-no performance marketing 5/ polarizing 6/ brand-first 7/ can achieve 8-figure run rate by 18th mo.

But zero to one requires a longer horizon. And ironically, there are few greater analogs for this the development of the Walt Disney Company. Designed by Mr. Disney in 1957, the document below is a mapped promotional system of media, influence, merchandising, and experiential marketing that worked as a collection of nodes. These nodes interacted with the consumer in numerous ways with the intent of promoting a single entity: Disney’s creative talent.

Replace Disney’s emphasis on “Creative Talent” with the “Optimal Customer”, the types of consumers that market-moving fashion brands need to leap into the mainstream. It takes time to map a brand’s promotional system. Consider that Nike reaches consumers in several ways. Consider this week:

  • NBA team sponsorship
  • Social Media (see here)
  • NFL team sponsorship
  • USWMNT uniforms
  • Clever advertising
  • Resale sites like StockX and GOAT
  • NCAA sponsorship
  • Brand storytelling (see here)

Brands can adopt similar vision strategies to scale from niche to eight and nine figures in annual revenue. For apparel retailers: patience, discernment, and vision have never been more important. This is how traditional apparel brands were built. However, in the DTC era, it’s a method that has been set aside for early-stage growth hacks.

Consider Wone [3], the luxury leggings brand. By starting with a small “friends and family” round before taking a round of non-traditional venture capital from Kate McAndrew and Bolt Ventures, quick scale took a back seat to the right scale. This approach allowed founder Kristin Hildebrand to focus on exclusivity. As a result, retailers like Barney’s recognized that their clientele were drawn to the brand. Net-A-Porter and Equinox Hotel followed. From Kayleigh Moore’s Forbes article on her sales strategy:

For WONE founder Kristin Hildebrand, it was Paul Graham’s Y Combinator article “Do Things That Don’t Scale” that sparked the idea to use a limited access model. She decided to build a company that was focused on prioritizing its best customers rather than mass audiences and sales numbers.

To many observers, long-term growth potential in digitally-native fashion is often disguised as a lack of meaningful scale. The right kind of development takes much longer than the wrong kind. From No. 277’s The Power of 100:

Without a strong group of early adopters, you will not efficiently achieve the attention of the masses. The first 100 are the foundation. Without the support of the 100, the masses will not adopt. Made famous by Simon Sinek, heed the diffusion of innovation theory: the early majority will not try something until someone else tries it first. Brands are judged by this early majority.

The alternative to the right kind of growth is scaling exclusively by paid impressions. There can and will be multi-billion dollar apparel brands built in the DTC era but they may not be conventionally built or traditionally funded. While the technologies behind them may not be particularly innovative, the founder’s mentality must be.

Statistics is a regression-based form of math that is founded on the belief that what worked in the past will work in the future. But unlike software and technology, apparel brands cannot be built in a vacuum. Society and its influences are as a part of apparel products as the threads themselves. To build an enduring brand, there must be an accounting for the variables that you won’t find on a dashboard.

Identifying those brands that are capable of transcending online retail is more art than science. And that means that traditional metrics are deceiving. It also means that modern luxury is for the taking.

Read the No. 323 curation here.

Report by Web Smith | About 2PM

[1] You can follow Ana on Twitter here.

[2] More on Veblen brands here.

[3] A 2PM investment