No. 315: The Digitally Natives

Native

Aggregation defined an era. The aggregation throughout media, retail, and service platforms determined the economic viability of many in the vendor-class throughout the modern digital economy. Uber began as a luxury black car service. Spotify streamed music. Youtube published silly videos. Amazon began by selling books. And Netflix rented films by DVD. Imagine a world without these companies as aggregators. Companies grew market share by adding products and services, rendering their analog competitors incapable.  Like the inevitability of westward expansion, the aggregation theory continues to move certain platforms towards critical mass.

The theory is akin to the digital version of Manifest Destiny. For a time – platforms maintained an advantage, much like physical retailers possessed an early advantage over e-tailers. In the traditional retail model, individual product brands were less important than the shelves that they were marketed on. Consumers came for product selection, ease, and the universal checkout process. The one stop shop was the draw; product loyalty was a secondary feature.  In this way – content publishers, product brands, and services were merely value-additives for existing platforms. Few learned this hard lesson like popular musicians at the beginning of the streaming era. Podcasts seemed to have learned from those difficult lessons.

Gaining leverage is the mission.

The market-making opportunities that began with early digitally vertical native brands (DNVBs) began to influence adjacent industries as that sales model had its success. For decades, it was nearly impossible to achieve critical mass in retail without partnering with a brick and mortar retailer or a department store. To defend against what seemed (for a time) to be physical retail’s Manifest Destiny, digitally natives circumvented the infrastructure and went direct to consumer (DTC). This meant that they had access to increased margins, efficient customer acquisition, access to data, and stronger relationships with the consumer.

With little access to mainstream consumer channels, physical brands launched native channels with the help of platforms like Shopify and BigCommerce. It’s unclear whether or not the intent of the DTC industry was their indefinite independence from big box retail. I’d argue that it wasn’t the goal. But, regardless, the result of the last ten years has been palpable: product brands have never possessed more leverage than they do right now. Even if that leverage is temporary.

As newer platforms go to market, vertical brands are beginning to notice a shift in leverage from platform to the vertical. This is an untimely shift in momentum for platform companies, businesses that once had the leverage to act indiscriminately.

DNVB-speak in digital media

In early April, comedian Russell Brand was interviewed by the host of the Joe Rogan Experience (JRE), a wildly popular podcast that covers everything from combat sports and geopolitics to archaeology and sociology. It’s important to note that JRE is consistently ranked in the top five of the most downloaded podcasts. Toward the end of the discussion between the two men, Rogan prompted Brand to promote his business interests. And though it was a subtle promotion, this is where things became interesting.

Luminary is the premium audio publisher and content aggregator that has set out to become the Netflix of podcasting. Founded in 2018 by Lauren Sacks, the company raised $100 million from New Enterprise Associates. The funding equipped Sacks and team to recruit several sizable podcast networks and high visibility media personalities to include: The Ringer, Guy Raz, Trevor Noah, and Wondery Media. Wondery is the last remaining podcast network known for its original programming and Ringer, a successful podcast network in its own right, is still in search of Barstool Sports-level network effects. In hindsight, Spotify’s acquisition of Gimlet and Parcast were as defensive as they were offensive developments.

In the episode – Russell Brand promoted his latest venture, a podcast with Luminary. The elevator pitch had somewhat of a dual purpose: (1) use one of the most influential platforms in audio to promote a business interests and (2) recruit Rogan into the fold of the Luminary-faithful. The second part did not work, the jury is still out on the first proposition. But the effects of that conversation were immediate. Within 72 hours, JRE was pulled from Luminary’s catalogue. From Hotpod News: 

The [JRE] team explicitly cites licensing issues as the reason behind the intent to withdraw. “There was not a license agreement or permission for Luminary to have The Joe Rogan Experience on their platform,” a representative from the team told me last night. “His reps were surprised to see the show there today and requested it be removed.”

The Joe Rogan Experience wasn’t the only big name in podcasting that removed content from the platform. Spotify denied Luminary access to their shows and the New York Times pulled The Daily. PodcastOne, Barstool Sports, Endeavor Audio, and many others followed suit. From No. 304: In-app audiences:

The pending acquisition of Gimlet Media is about more than building a direct-to-consumer podcasting powerhouse, it’s about monetizing DTC audio in new ways. Spotify doesn’t own the music that millions of us listen to, they license the rights from three music labels: Universal Music Group, Sony Music Entertainment Group and Warner Music Group. With Gimlet’s pending acquisition, Spotify is positioning themselves squarely as the Netflix of audio. And Gimlet’s portfolio of audio properties could be another tool that Spotify uses to convert casual subscribers to premium, paid users.

And here’s Luminary CoFounder and CEO Matt Sacks:

We want to become synonymous with podcasting in the same way Netflix has become synonymous with streaming. I know how ambitious that sounds. We think it can be done, and some of the top creators in the space agree.

Spotify and Netflix were exclusively aggregators before they began to pursue their modern subscription growth strategy. By acquiring popular properties (like Gimlet and Parcast Network) or by investing in the development of  the native properties that Netflix is now known for, both companies moved further away from aggregation and closer to becoming digital natives. For Netflix, this was timely. Media companies like Disney have begun to pull their properties to develop their own digitally native businesses. Another sign of aggregation theory’s diminished role for newer companies.

Perhaps, the age of aggregation is nearing its maturity. According 2017’s Defining Aggregators by Ben Thompson:

Aggregation Theory describes how platforms (i.e. aggregators) come to dominate the industries in which they compete in a systematic and predictable way. Aggregation Theory should serve as a guidebook for aspiring platform companies, a warning for industries predicated on controlling distribution, and a primer for regulators addressing the inevitable antitrust concerns that are the endgame of Aggregation Theory.

Two years later, we’re witnessing a war over proverbial land rights. As platforms have begun to lose leverage over specific verticals, they’ve heavily invested into the development of their own properties (private labels / native brands / native media projects). In some cases, like Spotify’s acquisitions – they chose to acquire the properties to move consumers along the content-to-subscription funnel. For Luminary Media and their Head of Partnerships / Business Development Meaghan Quindlen, the stakes are much higher than they would have been 3-5 years ago.

She has an unenviable job; she must convince alienated podcasts to work with them by communicating her vision, by employing a new licensing compensation structure, or a combination of both. Even Spotify and Apple Music had their own similar episodes. But with $100 million in funding and grandiose aspirations – Luminary will have to out-Spotify Spotify on its way to becoming the Netflix of podcasts – a title that the first audio platform to achieve 100 million paid subscribers wants all to itself.

Who is to say whether digital media properties returns to the types of  platforms that were once required for growth; there is now a dueling loyalty between independence and potential reach. This contradiction didn’t exist a few years prior.

Digitally native retailers are open to working with big box retailers (the original aggregators) as long as they can maintain a unique in-store appearance with access to some form of consumer data.  In this way, DTC retail is a decent enough analog for what’s happening in podcasting today. Product and media brands now hold the levers – they’re the draw. Consumers walk through the door, proverbial or otherwise, for their beloved brands. Aggregators must learn to operate in a world where the leverage exists with digitally natives. At the very least, aggregators need to learn to develop real symbiosis.

Luminary may need to raise more money.

Report by Web Smith | Join the Executive Membership

No. 314: On Linear Commerce

onlinearcommerce.jpg

I’d never seen anything like it. It was my first time at Augusta National and I wasn’t just a casual observer of the craze – I was a willing participant. Within two hours of being at Augusta, I’d convinced my father to join me in observing one of the event’s grand traditions. The average attendee will spend over $700 on merchandise.

The shop’s guests were mostly affluent and leisurely people; the audience at Berckmans Place took that affluence up a notch or two. Reports suggested that the average order value (AOV) of a Masters patron surpassed $750. And within 48 hours, at-home viewers will find these products on Ebay for 2x-5x of their suggested retail prices. And those resold products flew off of the product pages, as well. But despite the availability of the souvenirs and memorabilia, it didn’t seem like a money grab for the golf tournament. The prices were reasonable. And within 15 minutes of the Tiger Woods’ fist pump, the pro shops were closed to the public.

Perhaps golf’s most prestigious event, the audience was captive to say the least. I observed more than engagement, I observed a giddiness, an unnatural cordiality, and a sense of overwhelming joy by most on the property. Maybe it was the lack of phones (they were to be left at the entrance). But there was a particular effect that I cannot quite articulate. It’s an effect that brands only hope to emulate. It’s when the experience indexes so positively that consumers have no choice but to return the value by giving brands more money. Here’s an anecdote from a 2018 article in GQ:

The line to get in doubles as a Masters museum, and post-checkout, customers are given the option to ship their purchases home directly from the store. But what’s most interesting isn’t the fact that you can buy so much Masters gear in one place, and do so efficiently. No, it’s that this— one shop in Augusta, Georgia — is the only place in the entire world that you can buy it. Because of this, Masters merch has taken on a cult-like following, spawning obsessives and even a large resale market. To put it another way: Officially branded Masters products are basically Supreme for dads.

Sure, part of it is “I went and I want to show you that I went.” That’s the rational trigger that influences a great deal of modern retail. But sometimes, it’s a little more than that. An event, an experience, a streaming media property, or even a widely read blog can evoke an emotion that influences consumerism. These expressions can almost guarantee a baseline of organic sales. But it’s rare to see brands use these principles for their own growth. For the longest time, I searched for a physical manifestation of what I called linear commerce. I found it in Augusta.

The Masters was one of few physical examples of what happens when a curated and eager audience meets sales opportunity. A conservative estimate suggested that 2018’s Masters tournament generated $60 – 70 million in sales in its week. With an estimated 160,000 visitors over the four-day tournament, the Masters out-earned the yearly revenue of the 40th percentile of all digitally native brands in less than a week’s time.

On Linear Commerce

The digital economy rewards the entities that exist at the intersection of 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.

Law of Linear Commerce: the lines of demarcation between media and commerce are fading. For the brands that are most suited to the modern retail economy: media and commerce operations work to optimize for audience and sales conversion. This is the efficient path for sustained growth, retention, and profitability.

Brands will develop publishing as a core competency, and publishers will develop retail operations as a core competency. Below, you’ll find a visual representation of the launch strategies often found in the direct to consumer space.

The five basic stages of DTC linear commerce.

While versions (1) and (2) are the most predictable paths taken by venture-backed DTC brands, we’re beginning to see more of version (4) being implemented. Founder of Recess, Ben Witte launched “IRL.” A form of repurposed physical retail space, the location is designed to develop the consumer’s understanding of the Recess brand and his product pipeline. The space is designed to give the drink a purpose. At IRL, Witte schedules educational events to enrich and inspire the CPG brand’s target demographic.

Meanwhile at Away, “Here” magazine provides a tether between Steph Korey and Jen Rubio’s first market (North America) and their international growth. In this way, “Here” is a blend of versions (4) and (5). While many of Away‘s North American target consumers are aware that Away exists, “Here” has served, abroad, as an introduction to the brand. Nearly 12% of the publication’s traffic is derived internationally through WhatsApp, a sign that the approach to educating international consumers is tangible.

While version (5) is rare, chief marketers are beginning to understand its value. The best practical example of the Version 5 launch plan was Emily Weiss’ go-to-market strategy. Into the Gloss began as the primary sales driver for Glossier’s line of makeup and accessories. A newly-minted unicorn, Glossier.com‘s 2.6 million monthly visitors now arrive from a sustainable blend of customer acquisition methods: organic traffic through Into The Gloss and Instagram, paid search, Facebook / Instagram advertising, and a quiet affiliate deal with BuzzFeed. Here is Emily Weiss on Glossier’s growth:

We are building an entirely new kind of beauty company: one that owns the distribution channel and makes customers our stakeholders. By connecting directly with consumers, Glossier has access to endless inspiration for new products.

A Version Five in the making

Curating an 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. In this way, several digital publishers are ahead of the curve. 2PM recently spoke with Front Office Sports on Erika Nardini’s plans at Barstool Sports. Nardini on her recent product launch:

Golf is appealing because we love golf, and we have young fans who love golf the way we do. We try to have fun with everything we do and to approach stuff in a way that’s easy-going and approachable. The Barstool Classic is a great example of that.

With a long history of direct to consumer merchandise, their amateur version of pay-per-view sports, and a successful subscription membership under their belts, the edgy media company launched their third commerce offering – and another way to monetize the nearly nine million monthly visitors and hundreds of thousands of daily listeners who’ve propelled several Barstool podcasts to top ten sports charts. Barstool Classics is the media brand’s first foray into high dollar events, and it begins where this report started – with golf.

As media and commerce continue to meet along the line, the primary KPI is similar for both industries: do the visitors transact? At $600 per ticket, Barstool’s marketing team is betting that: a) they understand their audience and b) the audience will eagerly pay Barstool to express their support. In this way, DTC linear commerce concepts are akin to those fabled pro shops at Augusta National. And for challenger brands looking toward sustainability, there is a lot to learn from these examples. Audience-driven businesses have figured out how to monetize their visitors by providing value that captures attention. The alternative is paying the audience to show up at your party – a cost that is rising by the year.

Read the No. 314 curation here.

Report by Web Smith | About 2PM

No. 313: The Secret Sauce

 

On McDonald’s, Uber Eats, and the effort to systemize last mile commerce in food retail. On a Wednesday night at home, I was looking to repeat order a frequent order at a local restaurant. For years, it’s been my go-to for a healthy dinner. Ohio’s Northstar Cafe is a fixture within the community, the food is great and trustworthy. It’s the rare meal that tastes great when delivered. But on that day, it was no longer present within the Postmates app. Neither were my second and third choices. A Postmates faithful, I chose to walk to a local restaurant instead. There is something interesting happening in the food delivery space. Vendor fragmentation is increasing and companies like Postmates and DoorDash seem to be positioning for their own eventual exits. Let me explain.

A four or five star hotel would prefer that you booked through their own channels rather than booking through HotelTonight. After polling 72 hotels that use HotelTonight, 2PM found that only nine viewed the partnership as “very positive”, the majority characterized the partnership as “fair.” The order communications between HotelTonight (now Airbnb) and the hotel venue is still analog and far from instantaneous (some hotels receive confirmation via fax). HotelTonight receives a margin of the sale that many hotels don’t believe should go to the booking app. This is also how many restaurants view food delivery apps. And rather than cooperate with Postmates, GrubHub, DoorDash or others – these restaurants often ask removal from the app or close their businesses to internet orders. Uber has found multiple solutions for this supply and demand issue. From No. 293:

By building digitally vertical restaurants, Uber has gained the ability to engineer product loyalty that competing platforms cannot yet compete against. Uber Eats’ explosive growth between 2017 and 2018 is a result of the logistics company incentivizing its regular drivers to become delivery hands and also by incentivizing Uber users to become Uber Eats users. By increasing supply and demand-side economics, Uber Eats has leverage to that Postmates cannot yet manufacture. This is essential when approaching existing restaurants and offering them a private label product opportunity.

This is just one of two recent developments in Uber’s competition for delivery market share. The partnership between McDonald’s and Uber may be one of the consequential deals in all of eCommerce by the end of 2019. Uber will provide the logistics to help McDonald’s build an efficient and sustainable direct-to-consumer sales business. This is a sales effort that both companies will need. Uber’s deal with McDonald’s will lay the groundwork for, what I believe will be the race to land exclusive restaurant deals. Here is a wonderful deep dive into Uber’s unit economics by Aswath Damodaran. A standout excerpt:

The first is that Uber is not a pure ride sharing company, since it derives revenues from its food delivery service (Uber Eats) and an assortment of other smaller bets (like Uber Freight). It is worth noting this table while suggests that while some of Uber’s more ambitious reaches into logistics have not borne fruit, its foray into food delivery seems to be picking up steam. Uber Eats has expanded from 2.68% of Uber’s net revenues to 13.12%.

Often characterized as the largest IPO of the year, Uber will go public in May to fanfare and, potentially, that glorious day one pop that will solidify gigantic returns for early and preferred investors. Like any public offering, there will be an initial discomfort on behalf of the retail investors when Uber’s stock settles. But this conversation isn’t about the IPO, or Uber’s uphill battle to achieve profitability (at the expense of public transportation – according to critics). This is about the long-term potential of its delivery business. With the $100 million raise that may allow the $90-100 billion brand to further invest in long-term partnerships like the one with McDonald’s. Uber’s market performance will be tied to the value proposition of Uber Eats. And for companies like Postmates, though it has raised nearly $700 million, Uber’s post-IPO advantages will be a concern within their San Francisco boardroom.

In 2019, Uber’s key partner will be McDonald’s. If successful, exclusive restaurant relationships will begin to place Uber Eat’s delivery competitors in regrettable positions.

More than two-thirds of McDonald’s business is earned through its drive-thru operations. And internal figures suggest that nearly ten percent of many franchisee’s 2018 sales were attributed to third-party deliveries from: Uber, Amazon, Delivery Hero, Zomato, Postmates, Deliveroo, Swiggy, DoorDash, and Grubhub. Of these services, Uber is best positioned to compete for the long game. To accomplish this, McDonald’s will:

  • streamline kiosk and drive thru order response and processing
  • cut hourly human capital in favor of kiosks and third-party delivery
  • and speed up delivery by using artificial intelligence to speed drive thru and kiosk orders.

With this context, McDonald’s acquisition of Dynamic Yield shouldn’t be a shock to those who’ve followed these developments. I’ll summarize why a bargain-driven fast food chain like McDonald’s would pay $300 million to acquire an artificial intelligence company. McDonald’s revolutionized the kitchen. With Uber’s partnership, McDonald’s is aiming to revolutionize the speed of order processing and delivery while shifting labor costs to Uber.

Dynamic Yield’s AI-powered omni-channel personalization engine helps businesses personalize every customer interaction to improve performance and overall customer satisfaction.

Dynamic Yield

To do this, store owners are on the hook for a redevelopment effort that will take time and trust between McDonald’s corporate and their franchisees.  McDonald’s is essentially building infrastructure for omnichannel excellence at scale. With net sales being affected by smaller margins typical of third-party delivery, McDonald’s management is positioning to offset those shrinking margins by equipping store owners with artificial intelligence and automation to cut their own payroll liabilities. This, while increasing third-party sales from 10% to 30% per store.

With McDonald’s prioritizing technological redevelopment at kiosks and the drive thru, it casts a new light on the potential of a McDonald’s partnership with Uber Eats. And Uber will mostly benefit by establishing a growth path that may be as lucrative as the app’s digitally vertical restaurants (DVR). For Uber, DVRs may earn the company a higher margin than what’s typical but Uber’s partnership with McDonald’s will drive critical market share.

2PM summary:

Key takeaway no. 1: McDonald’s Corp will partner exclusively with Uber. Other delivery apps will no longer be able to sell McDonald’s products within their apps.

Key takeaway no. 2: McDonald’s Corp will invest and promote Uber’s value. With institutional support from one of America’s greatest consumer brands, retail investors will be assured that Uber is a long-term value despite its glaring profitability concerns.

Key takeaway no. 3: Uber will negotiate for more national restaurants to agree to category exclusivity. This will increase pressure on DoorDash, Postmates, and GrubHub to do the same.

On the night of April 14, Postmates earned a bit of social media buzz with an easter egg promo for HBO’s “Game of Thrones.” Founder and CEO Basti Lehmann retweeted praise from droves of users who admired the savvy brand gamesmanship. To celebrate the premiere of HBO’s last season of Game of Thrones, Postmates added an illustration of a dragon flying over your in-app mapping experience. It was clever and it will likely earn major media for the effort. But flying dragons are not trademarked, so it’s not clear that HBO had any role in the marketing promotion.

In this way, we’re witnessing another contrast between Uber and Postmates. One company is solidifying exclusive, long-term relationships with strategic growth partners. The other is still shifting away from driving growth with flimsier marketing and logistical decisions like featuring restaurants without signed agreements in place. Postmates is growing up and I remain a frequent user but it’s hard to ignore the infrastructure that Uber Eats is building, in anticipation of its May IPO. By capturing the most well-known restaurants in America, Uber Eats is positioning to be the preferred food marketplace of middle America. And it just might work.

Read the no. 313 curation here.

Report by Web Smith | About 2PM