Mary Meeker's 2018 Internet Trends Report

Mary Meekers annual report on Internet Trends is out (this started in 1995). Recode has the report, a very top-line summary, and the video of Meeker presenting slides (which, as she says, are meant to be read vs. presented). You can also download the deck directly from Slideshare.

While there aren't many surprises for industry professionals, there is a ton of data and seemingly endless fuel for thought and follow-up. The insights are less about what is happening, and more about how, why, and where it is happening. The report can be first digested in whole, then broken down by topic and applied to your particular issues.

At first glance topics I am struck by and will dig deeper into are: artificial intelligence, uses and privacy issues in Data in 2018, the scale and growth of continued professional learning and its critical importance of advancing careers, the continuing rise of China in the overall Internet economy, the evolution of the "on-demand" economy and changes in work in general, and the evolution of e-commerce.

Why Would Netflix Buy a Billboard Company?

Image from Dailybillboardblog.com

According to Reuters Netflix has bid $300 million to buy an outdoor advertising company (L.A. based Regency Outdoor Advertising). The report makes it clear there are other bidders and a deal is far from done. Who else should buy Regency? Moviepass and Fandango would be excellent fits.

Netflix has only made one previous acquisition. In Summer 2017 it purchased a comic book publisher (Millarworld).

While outdoor advertising may be a profitable business, how does it fit into Netflix’s focused plan? Why is a 21st century company making a 20th century move? Is it green flag or a red flag?

A couple of facts and some thought make it clear that the buy would be an inspired move:

• Regency’s billboards blanket the L.A. market including the airport, the Sunset Strip, and other key Hollywood industry relevant spots;

• This is key real estate that is highly visible (in fact unavoidable) to key players in Hollywood including everyone in the value chain from actors and agents to writers, producers, directors and studio heads; visible when commuting to and from work, going out to dinner and meetings, and when travelling in and out of town;

• Netflix is stepping up its marketing spend (to $2B in 2018) and has spent money with Regency;

• Of all of the traditional advertising options, Billboards have, and should, maintain their value for clear reasons (“audience” is consistent and measurable, physical real estate is finite, and technology is/will continue to add value).

So let’s get a little business nerdier here and look at the acquisition through Porter’s Five Forces model as applied to the OTT streaming subscription industry. The Five Forces are a framework that helps us analyze industry structure by making profits/profit potential more visible, and highlighting points of vulnerability and leverage for competitors.

The Five Forces surround Rivalry within an industry. Rivalry is driven by the intensity and type of competition among rivals. Netflix has been able to skyrocket to 117M+ global subscribers in part because it had few serious direct competitors until fairly recently and has done a superior job “competing to be unique” (another Porter concept).

The forces surrounding rivalry include the “Threat of New Entrants” (high — not a ton of barriers to launch an OTT service), Threat of Substitute Products and Services (fairly low — consumer video time is consistent and shifting to OTT), Bargaining Power of Buyers (high and getting higher as OTT options grow), and the Bargaining Power of Suppliers (most relevant and interesting here). All of these forces impacting rivals affect the costs and revenues/prices within an industry and determine profit potential.

Let’s focus on Suppliers. The suppliers in the OTT industry include any firm that Netflix negotiates with and buys from. These costs broadly include the external costs of content (for licensing and original productions), marketing, and technology. Of all the forces, this is the area where Netflix has the most room to maneuver for leverage.

The Millarworld acquisition and Netflix’s willingness to invest heavily in original content are prime examples of actions that make Netflix less dependent on third party licensors, trading risk for leverage and making global expansion easier.

If Netflix can land Regency Outdoor, it will lower its marketing costs by recycling the profits on its own now internal marketing spend, and own a key asset that rivals, and current licensors (i.e. movie studios) will now have to negotiate to buy from them.

It is important to note that visible billboards around Hollywood/L.A. are a must buy for studios. They are public, but communicate within the industry as much as they do externally. On a films opening weekend, actors, agents, producers, directors and everyone in the value chain of a film is looking for visible marketing support and validation in their community.

These billboards have big impact literally and figuratively and so are culturally central to the Hollywood ecosystem. Disney can launch a rival service and balk at licensing content to Netflix, but it will keep looking to buy advertising on these billboards.

Would the buy be a one-off, or the beginning of Netflix looking to diversify revenue into advertising? Too early to tell, but, at even as a one-off, it is a relatively low-cost, low-risk way for Netflix to generate cash, stay front and center in the Hollywood creative and business community, and generate some leverage among a group of suppliers.

Roku Q4 Post-Mortem: Beauty remains in the Eye of the Beholder

Numbers reflected strong growth, with the exception of hardware revenue. Guidance reveals little, and the bull and bear cases remain unchanged. This is a follow-up on a previous post anticipating Roku’s Q4 2017 earnings.

Like any young tech stock, Roku has it’s Bulls and Bears. More on that soon…

First, here are the key Q4 2017 numbers:

• Active Accounts: Up 15.6% from 16.7M to 19.3M (up 44% for the year);

• Revenue: Up 51% from Q3’s $124.78M to $188.3M (up 29% y/y);

• Revenue per User: From Up 30.7% from Q3’s $7.47/active user to $9.76/active user ($188.3M/19.3M). (note Roku counts ARPU on a TTM user basis and reports a Q4 ARPU of $14.78 which is up 48% YoY)

• Streamed hours: 10.5 B for first 9 months of 2017; Q4 was 4.3B (up from 2.8B in Q4 2016) for a total of 14.9B for 2017; The secular shift from linear to OTT is clearly reflected here.

• % of Player revenue (low margin) vs. Platform revenue (high margin): Player revenue represented 57% of total revenue through first nine months and Platform 43%; for Q4, platform increased to 45% of the mix. Roku expects Platform revenue to comprise 50%+ in 2019.

Roku’s shareholder letter contains the company’s public articulation of strategy. The pillars are:

1. Build active accounts — scale is a race (less concern about the economics on the player side);

2. Focus on OEM distribution to grow active accounts and become the dominant Smart TV OS (this is a big part of achieving #1);

3. Move into the home network market leveraging its position in TV OS; Roku highlighted software for controlling audio integrated into sound bars and other speakers (competing with Sonos, Apple, Amazon, Google), and upcoming voice capabilities;

4. Continue to improve the Roku ad framework and create alternatives for advertisers currently spending on linear TV ($70B market) with an ad product that matches the TV environment with added benefits of better targeting, measurement, and interactivity (i.e. Addressable Advertising).

Roku Bulls and Bears:

The bullish position is well articulated by Alan Wolk of TVRev who in: “Wall Street Mistakenly Gangs Up on Roku.” Wolk dismisses Roku’s 7% Q4 2017 downtick in hardware revenue (vs Q4 2016) as a savvy market share play (units were up 8% YoY). He keeps his eyes on the prize of $70B in linear TV ads ripe for the OTT shift and on Roku’s leadership position in connected TV interfaces. He sees Roku gaining critical mass reach with a fast growing addressable TV ad solution. In addition to selling boxes and sticks, Roku is aggressively integrating it’s TV OS with OEM’s and is now bundled with 20% of smart TV’s sold in the U.S..

The bears see Roku’s position in the OTT ecosystem as undifferentiated commodity. They see Roku’s hardware revenue downtick as an early cycle indicator that competition from the tech giants will limit market share, and therefore usage growth and platform opportunity.

The bearish point of view contends that the OTT interface will ultimately become just one aspect of a home network driven by voice control and our dominant media ecosystems. Amazon, Apple, and Google have sizable leads in this respect including voice, speaker hardware, OTT operating systems/interfaces, content ecosystems and media plays.

At this stage of the market there is little to no switching cost between connected TV interfaces (I’ve used all of them and could make the strongest argument on differentiation for AppleTV). Competition from tech giants usually ends in low margins and shrinking market share for upstarts.

On balance, I see the glass as a bit more than half-full. While acknowledging the challenges, huge upside potential remains. Based on account growth and stated strategy, I believe Roku is focused and putting their energy into facing their biggest challenges head-on including continually looking for ways to extend their differentiation and create leverage and consumer switching costs.

In short, for Roku to succeed, the 19.3M+ accounts must continue to have a reason to keep Roku as their TV OS vs. easily plugging in a competitor — just as I need a reason to keep paying Netflix each month amid the myriad of streaming options.

Amazon’s Alexa, Apples HomePod, and Google’s Home Assistant will each become increasingly well integrated with (if not bundled with) their TV OS. Roku sees this trifecta of speakers, voice, and TV interface coming (The Home Entertainment Network), and is addressing it in their product pipeline (see Roku’s shareholder letter , CES stories, and above in this post). But, again, beyond matching home network features, there must be content and user experience within the Roku ecosystem that keeps consumers from switching.

Links:

• Roku 2017 shareholder letter

• Transcript of earnings call