Control content, control data, control the world – the AT&T buyout of Time Warner

AT&T’s takeover of Time Warner makes strategic sense for the shareholders of AT&T. The only surprise is that early rumours of Apple buying over Time Warner did not come to pass.

AT&T are primarily a telecommunications company. They already control the data flows and analytics and understand all the little things that make people/customers tick. However, what they’ve not had is the content that their customers require and monetise the flow of content to the people who need it most.

Through the acquisition of Time Warner, it reduces AT&T’s transaction cost of providing the content to customers which is supported by superior data.

It’s akin to an infrastructure company laying pipes to bring water to households actually now providing the water along with the pipes they already have rather than have a separate company providing the water.

Why content matters

You have data on the information and content your customers require. However, you cannot act on the data yourself if you do not control the development of the content and intellectual property (IP). You can either try and create the content on your own or simply buy the largest available content provider available for sale.

This is what AT&T have done and it allows them to suddenly use the data and deliver even larger profitability to their shareholders by giving their customers the data they seek.

HBO (think Game of Thrones, Curb Your Enthusiasm, The Sopranos, etc), CNN, DC Comics (Superman, Batman, and the new UN ambassador, Wonder Woman), Hulu (Netflix’s rivals) are all now going to be under AT&T’s control.

This will allow them to control the entire spectrum of services they provide to customers and create an ecosystem (of both infrastructure and content) that may be difficult or unfeasible to leave for any customer.

Big data just gotten bigger

You know HOW your customers access information. You now know WHAT information your customers seek. Bring the two together and you create superior propositions for customers which rivals are unable to match.

The advertising potential also has now grown exponentially as AT&T monetise the data analytics and provide superior insight to advertisers.

Bringing the fight to the competition

The moment Google and Facebook moved from being search engines or networking platforms to becoming media and content companies with their own telecommunications infrastructure, the fight was on.

Facebook and Google are already providing Internet and call facilities. They also started buying or developing content facilities (Youtube acquisition by Google or Facebook Video/live).

This mean either existing telecommunications companies get into the business of content development or acquisition or they themselves get acquired. I suspect this was a major impetus for AT&T in their decision to buy Time Warner.

What next?

It’s always easy to bite, but it’s important to be able to chew and swallow. It remains to be seen how well the merger itself works. Most mergers are fraught with complications, from realising business benefits to cultural differences.

It will be interesting to examine Apple and Google’s next reactions. Google have developed their own hardware (Pixel) and Apple have long wanted to get into the business of content and IP.

Perhaps a takeover of Netflix by Apple in the offing?

Can this be Apple’s future roadmap?

In a world where the lines between sovereign nationhood and corporations are increasingly being blurred (roughly half of the top 50 economies in the world belong to that of corporations!), I was keen to thinking about the future of the world where Apple is concerned.

Apple have remained the foremost innovators and designers, creating that ultimate blend of functionality, art, design and user experience that has allowed for a far greater take up of technology than previously envisaged. The ease of use of Apple products has democratised the usage of technology by people, of all backgrounds, ages and capabilities.

I started considering where Apple may be heading over the next decade and half and thinking about how Apple, both as a company and as a global corporate citizen of the world, may evolve.

The image below best describes my own thoughts on where I think Apple will head towards. I have also provided a brief narrative to provide greater context.

A possible roadmap of where Apple may be headed towards
A possible roadmap of where Apple may be headed towards

Some additional context

Apple started the creation of their wider ecosystem with the development of OS X in 2000. The iPod, iPhone and iPad (along with associated products such as the iPod Touch, etc) relied on the iOS, which formed part of the greater ecosystem for Apple users.

Apple’s launch of the Apple Watch was the start of Apple’s foray into wearable technology (following at least two years of speculation).

Apple have also introduced Apple Pay, Apple HealthKit, and Apple Music (which nicely ties in with their multi billion acquisition of Beats) over the past few months.

2016 – the year of maturing of new initiatives

My view is that in 2016, Apple will support the development of additional personal and wearable technology (including iRing, Apple Glasses, etc) and we will see further launch of similar products (alongside newly launched products such as the new Apple TV). We will also see a further maturing of the Apple Pay system and greater application development for Apple HealthKit, utilising the Apple Watch and other related wearable technology.

2020 – The Apple Car zooms in

In about five years, we can expect to see the launch of the Apple Car. Possibly a completely electric car, with both driving and driverless functions, it will seek to revolutionise traffic control and movement. We can also expect to see financial aspects of the car, including insurance, leasing or hire purchase, supported by Apple Pay (or through connected bank accounts).

There could also be a potentially different model where Apple directly manage and maintain a fleet of driverless Apple cars, and passengers who seek transport can get in and by pre-booking through their Apple phones and/or other Apple products, can pay directly to Apple using Apple Pay (and taking on uber in the process).

Apple Insurance

We can also expect to see Apple providing direct insurance services to their consumers and users. Apple HealthKit can detect the health readings of an individual user and in the process price an appropriate insurance premium.

An individuals driving patterns can also provide data to help Apple price an appropriate auto/car insurance premium.

There could be a further maturing and take up of Apple Pay and related financing and banking products

2022 – Apple iBank is established

In the wake of the additional banking and insurance facilities provided directly by Apple, we can expect the iBank to be established which will allow for Apple to develop additional banking and finance capabilities, whilst also making better use of their cash hoard.

The iBank becomes the investment arm for Apple as Apple expands its product range into mortgages and fund management.

As Apple increasingly expands its portfolio of products, they start contemplating the development of Apple homes and flat

2025 – Apple the property developers and managers of societies

Apple starts producing smart iNtelligent homes to support increasing government demands for affordable, smart housing to meet the growing population demand.

The Apple Home becomes an all-encompassing home that is fitted with Apple sensors, that demands Apple usage by the users/residents and incorporates all other elements including mortgage, insurance, and electronics/appliances which syncs itself automatically with the user needs and demands.

Having a smoke at home – expect the Apple sensors to pick this up and send you an add-on to top up your health insurance with, for which you can make payment through Apple Pay – connected to your Apple iBank account.

Your fridge stacked with fizzy drinks, sugar-laden donuts and you are consistently frying food? Expect to receive a notification that your health insurance premium may be compromised and that you may need to top up!

2026 – Apple starts funding governments

As Apple Bank expands further, we can expect to see Apple Bank participating directly in funding campaigns led by the IMF, the AIIB (Asian Infrastructure Investment Bank) and the World Bank, amongst other multilateral agencies. This participation may allow for Apple to obtain additional concessions to sell their products or services.

We can also expect to see Apple participating in various UN and international conferences to support their aims and ambitions

2030 – All hail the Apple Nation

In 2030, the first Apple Citizen is naturalised. The Apple Citizen received an Apple passport, which allows him to travel to a large number of countries (all of the visa requirements are pre-met through Apple’s existing data). Apple’s virtual citizenship is supported by a comprehensive and robust Apple foreign policy backed by a deep monetary policy (exercised by Apple’s iBank) which also means the launch of the iDollar (Apple’s virtual currency backed by the Apple Central Bank).

Apple’s predictive AI (artificial intelligence) also can predict individuals who may be about to engage in subversive activities and detains them for their own benefit and reduce crime and a state of lawlessness. It also forces health lifestyle habits.

Apple starts running lives and tells people how to dream and what to dream.

The era of Apple

This could be the era of Apple. Some may welcome it as it could lead to a more efficient world. Others will resist. The resistance will be led by the men and women wearing old school Casios and using Nokias!

Of BlackBerries, Apples and Nokia…

Now that some of the initial brouhaha over the Nokia takeover by Microsoft and the slow and painful end of BlackBerry (the company formerly known as RIM!) has eased off, it may be instructive for us to consider some of the lessons learnt from the demise (?) of what were once the world’s leaders in mobile phones.

Nokia, a 148-year old company, at its peak in 2008 had 40% of the world’s mobile phone market, was worth over US$120 billion and contributed to almost 4% of Finland’s gross domestic product. BlackBery on the other hand, in 2008 at its peak was worth over US$80 billon but were bought out a few weeks back for just under US$ 6 billion.

The easy explanation for what happened to Nokia and BlackBerry was that, like so many other companies, it got run over by the juggernaut that was Apple Inc.

However there was a more fundamental problem. The world of technology and social behaviour and patterns changed and BlackBerry and Nokia both did not keep up. Nokia spent their time, effort and resorces primarily around competing against competitors in their immediate space, such as Sony, Ericcson, Motorola, Alcatel, etc. Both Nokia and BlackBerry focused on the enterprise sector and ensured that they remained dominant through supporting business needs more than they did personal consumer needs.

The changing consumer behaviour and tastes also were not picked up on by both companies. Nokia tried to gently enter the era of touchscreen (and there were plenty of engineers and experts within Nokia who claimed that touch-screen was merely a fad that would not take off – the same people who also claimed that the iPad was going to be another technological failure – like the Apple Newton!). They also failed to spot that even within the business world, people were not merely adopting the technology which their companies wanted them to use and the era of BYOD or Bring Your Own Device soon ushered in and enterprises allowed their employees to use their own devices within the business. Businesses and companies have adapted to their employee needs (especially since Apple and Android both improved their security features for enterprises).

The net result is that we had two mobile phone companies (Nokia and BlackBerry) made redundant and obsolete by two companies who were not even from the same sector or industry (Apple and Google who developed Android). Now Apple and Android based mobile devices control more than half the corporate mobile sector.

My (very brief and immediate) views on what went wrong for both Nokia and BlackBerry are as follows:

– they got complacent. Both Nokia and BlackBerry were initially great innovators who led the industry with fantastic technology innovation and progress (such as the Nokia Communicator or BlackBerry/RIM’s enterprise email servers) but became large and bureaucratic and started delaying product launches and did little to lead their industry or the market with innovative ideas and solutions, the way Apple or Google-led Android did; – they focused too much on their immediate competiton and had little long-range planning and scanning for other possible competitors from other sectors or spaces; – they were not responsive or reactive enough to their customers’ (consumers’) needs. The moment you forget your customers is the moment you have peaked and will be on the way down (and these include both internal and external customers). Both Nokia and BlackBery either did not understand shifting consumer patterns and behaviour or simply chose to (criminally) overlook them; – they both stopped taking risks. In the words of Thomas Zilliacus, previously the chief designer at Nokia, “I look back and I think Nokia was just a very big company that started to maintain its position more than innovate for new opportunities. All of the opportunities were in front of them and Nokia was working on them, but the key word is a sense of urgency. While things were in play there was a real sense of saying “we will get to that eventually. Nokia became more of a maintainer, more of an iterator, whereas innovation only comes in re-invention and Nokia waited too long to make the next big bold move.” The lesson here is simple, no risks = no returns = eventual decline. – Nokia thought even if they missed the high-end smartphone market, they still had the lion’s share of the low-cost market. However, what happened instead was that the likes of Huawei and Spice phones (from India) started capturing the low-cost market which Nokia previously were dominant. BlackBerry also thought enterprises would never give up the security functions which they could provide, but that changed the moment Android and iOS both could start coming close to the level of security which enterprises were comfortable with. – they became too bureaucratic and cumbersome – they lost the agility and speed to market which they initially had. Becoming successful has its potential pitfalls – and one of them is around becoming too large, slow and filled with management layers and red-tape. Empire building begins in some functions which is to the detriment of the entire organisation. Microsoft is going through similar pains at the moment too.

The above meant that both Nokia and BlackBerry started their startling and rapid descent into their current predicaments.

Who would have thought when watching Neo of the Matrix dialling into his hyper-cool Nokia back in 1999, that he may one day dial in and find himself stuck in a blue screen of death!

Apple and Steve Job’s first great revival

We often hear of the brilliance of Steve Jobs as he developed the iPod and then the iPhone and iPads, but little mention is made of his turnaround of Apple back in the late 90s. This coincided with the rise of the dominance of Windows.

Many commentators even suggested that Apple should allow themselves to be bought over by IBM, Motorola, Sony or HP!

In 1997, Apple was tottering down the path towards bankruptcy. This was when Steve Jobs took over as CEO again but investors were still bearish about Apple’s chances of any real transformation and were pressing for them to present themselves as attractive targets to IBM or Sony (in the event the IBM move had anti-competitive issues and challenges from the US regulators).

So what did Jobs do?

Secure immediate financing

The genius of Steve was to talk Bill Gates into providing US$150 million to pump some much needed liquidity back into Apple’s operations. He did this by showing Apple’s non-threatening position (at the time) to Microsoft and also explain to them how Apple’s survival will help Microsoft’s battles with the Department of Justice on an monopoly-charge.

Cut the product range and scale back Apple’s inventory

He removed the printer and peripherals department and also cut the number of desktop models (from fifteen to just one). He also reduced the scale of software development and engineering. He also shifted the manufacturing (of a much leaner product range and line) to Taiwan and cut inventory by 80%.

Control product distribution

He also cut over 80% of his existing national retailers and also focused on selling directly to customers through an enhanced website. He later did the same with applications and software through the App Store. The idea was simple – sell a simpler product range through a simpler range of outlets / retailers.

Take things one major leap at a time

Initially, all Jobs wanted to do was to ensure the survival (or going concern) of Apple. Sell a simplified product range through a limited range of sales outlets (both Apple’s Website and the limited retailers). He felt this would help apply pressure on the cash bleed that Apple was suffering from.

Once that was secured, he fixed his OS and had the Mac G3s. He waited before he decided to push on with the revolutionizing how people listened to music through the iPod and iTunes.

He then waited again before embarking on the iPhone and taking on the existing big boys of Nokia, BlackBerry, Sony, Motorola etc and redefined the phone industry.

Next came the iPad and the buttressing of the App Store. This redefined how people bought apps, both for portable devices as well as their laptops and desktops.

 

What did this mean for Apple and Steve Jobs?

Jobs focused on the most pressing matters of the day when he took over: survival. Once Apple’s survival was guaranteed, he then reached out to a niche market of fashionable consumers who became his strongest brand advocates. From there, he launched one big thing after another. This transformed the world of computing and personal electronics.

This is meant to be a very brief overview of how Apple took the steps needed to first survive and then subsequently thrive and then flourish in the technology world! Hope it is helpful!

 

Restating the US economy to the tune of about US$400 billion (give or take a few billion).

Summary

Tomorrow (31 July 2013), the United States will be adding roughly US$400 billion (or the economy the size of South Africa) to its Gross Domestic Product (GDP) – (Singapore and Malaysia have GDPs of about US$250 billion and US$290 billion respectively).

This is only possible because the United States Bureau of Economic Analysis (BEA) will be restating both the size as well as the composition of GDP all the way back to 1929 when it was first recorded.

They will be doing by reclassifying and now including research and development (R&D) and intellectual property (IP) as an investment rather than as an expense which has been the way it has always historically been measured. Therefore the IP of films, books, television shows and music will now be treated as long-term assets.

What is happening?

Gross Domestic Product – GDP – is essentially a measure of performance of an economy and it is the total value of all the goods and services produced in an economy.

Previously, items such as research and development (R&D), intellectual property (IP) and royalties were treated as an expense.

Now with the treatment of the above items as an investment, it means that innovation is going to be measured and recorded. It is also hoped that this will spur further development and innovation in the country.

However, it is useful to note that other developmental items such as brand building, staff development and training, implementation of process improvements such as Six Sigma will still be considered an expense, despite the fact that the implications of these activities go beyond a financial year.

Why is this important?

By reclassifying R&D and IP, the economic value of knowledge that is embedded in various products and services will now form a component of GDP and it will also elevate the level of investment and national income in the process.

This also means that US joins Canada as part of the first group of countries that have adopted the new international standards to measuring GDP. It is expected that the EU will also adopt this new standard, The System of National Accounts 2008, next year in 2014.

What is the impact?

The BEA has not yet indicated what the total impact will be but estimates from a range of analysts including the Financial Times (FT analysis here) have indicated that the US GDP will increase by between 2.2% and 3% as a result of these different measurement criteria.

It is also estimated that under the new measurement base, historic growth of the US from between 1959 to 2007 will be 3.39% per annum compared to 3.32% using the previous measuring system.

Why is the US doing this?

The US generates a significant proportion of its wealth through research and development, patents, copy rights, intellectual property, trademarks and designs and the inclusion of these items in its GDP measurement base will better reflect the total contributions and value-add to the wider economy.

For instance, under the previous measurement base, Appel’s total long term assets (under traditional measurement methodology was only US$15 billion or less than 4% of its total market valuation of US$400 billion. Granted that this difference may not be entirely attributable to R&D or IP, it is still a vast difference and a significant portion of the difference can be linked back to the value the market places on Apple’s research and development, patents and copyrights.

The nitty-gritty

There still remains a level of confusion around how R&D, IP and other related intangibles will be amortised or depreciated.

The BEA has given some indication on the methodology they are likely to adopt:

Pharmaceutical R&D – they will depreciate this by 10%

Computer systems design – 36% depreciation rate

Movies – 9% depreciation

Music – 27% depreciation (essentially the BEA tacitly acknowledges that the value of music is depreciated three times faster than movies?)

Television shows – only longer term TV programmes such as sitcoms or dramas will be considered investments and included to the GDP but reality programmes, news segments or game shows will still be treated under the current methodology and expensed.

Though there remains a certain level of uncertainty, it should be acknowledged that the measurement of intangible investment is a first step towards the longer journey of truly understanding the value innovation delivers to an economy and how factors such as R&D and IP contribute to economic growth. The BEA’s current approach to the valuation seems to be around understanding and estimate the cost it took to create the intangible assets in the first place.

Key personalities and quotes:

Steve Landefeld, director of the Bureau of Economic Analysis, the Commerce Department unit that measures GDP. “We’ve been trying to understand the sources of growth in the GDP. One of the longstanding gaps in the numbers has been the contributions of intangibles — creations in the arts and entertainment, research and development, things like that — and what they contribute to GDP.”

Ben Bernanke – “We will be more likely to promote innovative activity if we are able to measure it more effectively and document its role in economic growth”

Joseph Schumpeter (1883 – 1950) – Schumpeter argued that the innovation and technological change of a nation come from the entrepreneurs, or wild spirits. He coined the word Unternehmergeist, German for entrepreneur-spirit. Mark II was developed when Schumpeter was a professor at Harvard. He asserted that the agents that drive innovation and the economy are large companies which have the resources and capital to invest in research and development.