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Services, Sovereignty and de-Risking Exposure
Orange, Canal+ and Netflix going toe to toe
Sometimes these newsletters virtually write themselves. Other times it’s a struggle because the topic is so big or so complicated that I can only hope to scratch at the surface, doing a poor job at that.
I’ll let you guess which type this one is 😢
On to the update.
China, Venezuela and The Cloud
With the recent kerfuffle between China and the NBA, China and the Trump administration and then Apple (or more precisely the App Store and China), I thought it would be interesting to analyse a little of what is happening and how companies are starting to do rewind years of work entering China.
Firstly, some background. The Houston Rockets General Manager, Daryl Storey, tweeted and quickly deleted, in support of the protests that had been raging in the former British colony of Hong Kong since the proposal for extraditions from Hong Kong to mainland China was introduced.
The fact that the Rockets Chief’s tweet solicited such reaction is due in part to the drafting of Yao Ming in 2002. He’s become a legendary figure in the Houston Rockets and the NBA as a whole. Yao Ming is a Chinese national and has single-handedly popularised the sport in China to the degree that the country boasts more fans of the sport than the home nation, the U.S.A. The NBA additionally marketed itself to the market to take advantage of the opportunity.
The backlash in China meant that pre-season games went played un-televised, a first for China. It had an immediate effect on the advertising and rights revenues of the NBA. Estimates put it at around 500 million Chinese that have watched at least one NBA game last season, that’s many eyes to market products and services.
Cutting a long story short, it became clear that China’s power and influence were starting to have an effect on internal affairs and attitudes within the United States and elsewhere around the globe. Some even called for boycotts of Chinese products, with the affair enabling political heavyweights to dive into condemning the superpower. A Democratic candidate tweeted that the U.S.
“must lead with our values and speak out for pro-democracy protesters in Hong Kong, and not allow American citizens to be bullied by an authoritarian government.” - Julián Castro:
Apple’s involvement was more pedestrian and garnered criticism only because Apple did something, pulled back, then did something again. All in a short space of time and with a particularly lousy explanation of their indecisiveness. The issue surrounded their denial-approval-denial of an app that was used to help people understand where protests were happening in Hong Kong (see above).
In another example of the difficulty of internationally offering services, Adobe — or more crucially the users of Adobe’s services — fell victim to the U.S. Government’s sanctions in Venezuela. Users suddenly found themselves without access to the Creative Cloud Suite (Photoshop, Lightroom, amongst others) from today. Adobe has offered refunds for services paid for but unconsumed only after an outcry from users that had the rug pulled from underneath them. However, in a blog post earlier this week, Adobe says they have reached an agreement with the U.S. Administration to keep serving its Venezuelan customers, effective immediately.
If you run a business like that the generates a meaningful part of your income, or you rely on services of this nature to get your professional work done, then this is not a comfort at all and has highlighted the risks of the cloud computing model. The wind (read: political) direction can suddenly change, leaving you without revenue or the tools of your trade. That is a business risk that is possibly too much to bear for some. It is the genesis of why some businesses are starting to devise ways of protecting their revenue and even providing better value-add. However, as for any business, adversity is often an opportunity well disguised.
Microsoft’s sovereignty and de-risking problem
If we look at Microsoft and their pivot from selling desktop and server software that was licensed on a perpetual basis — installed on computers and servers located in the companies who signed agreements with Microsoft — to what is basically renting software installed and maintained in Microsoft’s own Datacenters , we see that Microsoft's initial idea revolved around mutualising as much data as possible in one datacenter. The idea obviously, to lower COGS that directly affect profit margin.
Microsoft started with a couple of what it calls regions — datacenter located in a specific geographic location that serves one or more countries locally, think Europe, with Datacenters in London and Dublin serving France, Belgium, Germany, and others —, and has expanded rapidly over the years from market pressure and sovereignty issues. In Europe, Germany was one of the first countries to mandate that data relating to its citizens reside within the confines of the country. Something that forced Microsoft to build out a new region in Germany, for Germans. At great expense, I might add. Other countries followed suit, France, Switzerland and of course, China.
Not only did this have the effect of complying with the sovereignty requests of some European and Eastern regulations, but it has the added benefit of reducing outage risks when a Datacenter failure only affects the particular region. In the case of Germany, a failure in its region only affects German customers and those who rely on the German Datacenter. Albeit at enormous cost, but a cost that can only be described as the cost of doing business in that region. It also had a side benefit of allowing Microsoft to compete in highly sensitive Government projects tag would otherwise be out of reach for the American multi-national. Look at the recently awarded contract of 10 billion dollars for the Pentagon.
What we also know is that the potential for cloud computing is only just beginning. Potential in terms of what can be done, but the potential in pure market opportunity numbers. The low hanging fruit of the simple workloads has all but migrated to the cloud already — email, basic operations tasks, data warehousing, basic office computing and others. The next big opportunity is moving the integrated and intricate workloads of large and complex ERP systems and creating value by linking them to those already-migrated primary workloads. Microsoft was first in developing the hybrid model when AWS and others were “all-in” on the cloud paving nothing for existing local workloads. Microsoft’s efforts were basic and often complex, but offered the opportunity to not throw the baby out with the bathwater. Now Amazon and Google have understood this and are structuring their businesses to compete in this area.
The foreseeable future looks bright for the cloud business.
CANAL+ and Netflix’s (new) Maitresse
Hot on the heels of the announcement that Netflix had inked a deal to provide its content through (a paid-for extra) Canal+, Orange — the European telecoms giant — announced and advertised that it too could provide Netflix to its customers. The deal was initially signed in 2014, yes five years ago, and was resigned in 2017 to reinforce the offer of programming "originally" created by Netflix and distributed to its worldwide customer base, with particular focus on Europe and Africa.
However, this has just changed, and it seems, in direct response to the Canal+ offering. Previously Orange downplayed the fact they were distributing Netflix Originals, only publicising the program and film titles, now the full Netflix subscription is available directly on the set-top box. Nothing new and extraordinary for Netflix, as they have been bundling their player software on televisions and set-top boxes for many years. What is interesting is that Orange had to react immediately to the Netflix threat (not from Netflix but Canal+) and did so quickly and simply by activating a Netflix player app on their set-top box, which incidentally accepts existing Netflix accounts and subscriptions. Now they too, "have Netflix".
The takeaway from this is that Canal+ thought it was in a stronger position than Netflix when Netflix entered the market through Orange. It was up until that point practically the only distributor of original content (aside from terrestrial television)1, something that differentiated it from Orange and others in the market. It was, however, a miscalculation because people don’t want to see a program or a film because it is from one distributor or another, they want to see great content regardless of where it originates. That is what Netflix already understood, and is reason why Netflix continues to invest in “Original" programming to the tune of a few billion dollars a year. Netflix was always going to have leverage because it is an aggregate and has zero marginal costs relative to Canal+. Boutiques, boxes and after-sales service cost much money; and despite Netflix having increasing COGS, but they are nowhere near what Canal+ would require for the same investments in original content. Canal+ was doomed to open the door to Netflix. It was just a matter of time.
Oh, how disruption makes even the mightiest dance around to the tune of the disrupter, or should I say, Aggregator?
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