Silicon Valley Corporate Innovation Outlook 2015
Startups are transforming every aspect of what it means to do business. In this report, Partnered takes a look back at how startups influenced corporate strategy in 2014, and what these changes suggest for the coming year.
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In 2014, “innovation” moved from buzzword status to a clear and present management imperative. The shift reflects a growing recognition from boardrooms around the world that the consumer experience — from what media people consume to how they shop, to how they communicate and influence their contacts based on those purchases, to the values they demand the companies they engage with reflect — is being transformed at an ever increasing rate.
The response is profound. 80% of corporate executives surveyed by NineSigma and Harris Poll said they plan to increase spending on innovation in the coming year. A Forbes Insights survey produced in collaboration with KPMG found that 47% of the largest corporations had active innovation processes, with 72% of all companies actively planning an innovation process. 75% meanwhile, said they were in the midst of major business model transformation.
But what do we actually mean when we talk about corporate innovation?
Today, a variety of activities from corporate venture capital to M&A to partnerships all bring corporations into contact with the startup companies transforming their industries and the way their teams do business. Working with emerging technology companies isn’t the only way that corporations innovate, but startups begin to hyper specialize and perfect highly specific business functions, company-to-company relationships are increasingly central not only to innovation but business as a whole.
Partnered is a platform for corporate innovation that helps companies understand trends and activate startup partnerships to transform their models and processes.
In this Outlook Report, we reflect on the technology trends, startups, and deals that shaped corporate innovation in 2014, with an eye to what they suggest about the upcoming year.
Section 1: What’s Changing In The General Consumer Landscape
This morning, Jeff woke up at 7:37 on the dot, a time determined by the monitor left under his pillow that was tracking his movement and sleep cycles to determine the best time to wake him. He took a Lyft to work, finding it cheaper than owning a car in his city. At work, he set up a short vacation for himself and some friends at an Airbnb rental in Tahoe, and then ordered his week’s grocery’s from Whole Foods using Instacart, setting them to be delivered right after he got home. Virtually every part of his work day employed technology tools — from communicating with coworkers to lead tracking for business development to sending a package with Shyp to managing his health insurance. Upon returning home to his apartment, Jeff ordered dinner with Sprig, finding a hot, fully prepared meal delivered in less than a half hour, and then proceeded to watch a new movie with Netflix, using The Take app to buy a shirt he liked on an actor in a particular scene and all the while Snapchatting with friends.
The imperative for corporate innovation is a direct result of a consumer experience that is shifting dramatically as technology transforms our lives.
For a decade or more, brands have been seeing the implications of these changes in marketing. The internet as a force has fragmented media, diversifying both the type of channels and nature of the messages it takes to reach today’s consumers.
In 2014, however, a number of trends matured in a way that helped brands grasp how fully and fundamentally technology was infiltrating far more aspects of the consumer experience than what media they consumed.
As 2014 drew to a close, Uber made news by raising more than a billion dollars at the staggering valuation of $40 billion, making it one of the highest valued private companies in the world. That lofty valuation reflects a business that has already decimated the taxi industry in cities like San Francisco (where peak taxi traffic is off 65% since before Uber and Uber is already operating at a higher multiple than total taxi traffic before it existed), has expanded to more than 200 cities around the world, and built a massive logistics infrastructure and expertise that could be deployed for far more than personal transportation.
What Uber represents is a new, on-demand economy, where nearly any good or service can be ordered to your exact geographic location via mobile phone. On-demand represents ease, convenience, and personalization, and in 2014 came to dozens of industries. In business services, companies like Shyp allowed consumers or businesses to simply take a picture of goods to be shipped and enter the destination to have the company pick up, package and select the best provider. In prepared foods, companies like Munchery and Spoonrocket created a new option between restaurant take out and home preparation where hot, freshly prepared meals would be delivered within minutes. And then there is Instacart. Instacart deploys personal shoppers to leading grocery stores and delivers people’s orders within hours. Its rapid growth over 2014 led to a just announced $210 million dollar investment round, valuing the company at over $2 billion dollars.
Brands are recognizing that, taken together, these developments are leading modern consumers to expect to be able to get exactly what they want, when they want it, with just a few clicks.
The Sharing Economy & Harnessing Underutilized Resources
Many of the on-demand business models working so well today look, at first glance, like modern updates of failed businesses from the dotcom crash. The difference, however, between a company like early grocery delivery company Webvan and Instacart is their approach to overhead. Webvan build a massive factory and employee infrastructure which simply cost too much to early to let them develop a scalable business. Instacart on the other hand, taps into existing grocery stores (meaning no need to carry their own inventory) and utilizes the excess time of a network of personal contractors to do the actual shopping and delivery.
The underutilized resource of time in the contractor economy powers many of today’s leading companies — from Lyft and Uber, both of who’s products are driven by a network of drivers who chose their own hours and use their own vehicles to TaskRabbit and beyond.
Time is only one of the underutilized resources that today’s startups are tapping to transform the consumer landscape, however. Airbnb is perhaps the most famous company in what some have referred to as the sharing economy. Letting people rent out spare rooms in their homes or their whole homes for short periods of time, the company has created an entirely new scaled competitor to hotels. While the company has not undermined the hotel industry to the extent that Uber has to the taxi industry, the number of available global listings is doubling every year and the company has attracted investment at a $10b valuation. Perhaps even more importantly, it has created a new option and a new framework for thinking about housing while traveling.
For brands, these companies represent a number of important considerations. For one, they represent business model disruption and a new way that workers and potential employees think about and organize their time. They also represent shifts in how consumers think about ownership as a whole.
Personalization based on data
Never has more been data collected. Data about what we do, where we go, what we’re interested, who we like, who we engage with. Data that is then piped back in to the mass customization and personalization of the world. Consumers increasingly expect brands to be sophisticated about their preferences even before they’ve developed a relationship with that company. They want experiences that seem to connect directly to their interests and preferences and don’t treat them just like everyone else.
Brands are still adjusting to this data-intensive, personalization paradigm. The challenge, however, is going to get nothing but more important, as wearable devices and the connected devices that make up the so-called “Internet Of Things” create entirely new troves of data that go beyond anything we’ve seen to date.
Agencies, Consultants, Internal Programs: How Brands Are Responding To The Innovation Imperative
These consumer transformations make up the context in which innovation has become enshrined as a major focus inside the modern corporation.
In a study produced jointly by KPMG and Forbes Insights, 59% of CEOs reported being worried about having their business model disrupted by a new entrant into their industry.
One response has been that brands have turned to their creative agencies to keep them more closely connected to disruptive technology companies. Specifically, they’ve turned to those companies to make sure that their marketing strategies have adapted to a new media landscape in which new digital platforms outstrip traditional distribution channels, and in which social media has actually become the dominant media, exemplified by the surprising but true fact that YouTuber creators are today more influential with teens than movie stars.
Industry-leading agencies have adapted quickly to develop new digital capacities. What’s more, a wave of new agencies have arisen using this specialization as a central and differentiating capacity. VaynerMedia has grown rapidly to 400+ headcount, three location shop, and even launched a sister agency, Grapestory, specifically to connect brands with Vine, Instagram, and Snapchat influencers. Group SJR meanwhile, has carved a niche creating comprehensive editorial content as a new approach to marketing.
Yet these efforts that start in marketing don’t stay in marketing long, as the shifts in consumer behavior that underlie marketing changes tend to have implications for more general strategy. To take an example, the rise of Snapchat isn’t just a new marketing channel, but represents a signficant shift for how young people think about their relationships with one another and how they wish to experience the world that could change how brands think about product development. If that weren’t enough, as Snapchat integrates payment features like its new share money featured, commerce and retail professionals are going to have to start paying attention as well.
As agencies have found themselves increasingly involved in these broader strategic conversations, the large management consultancies have begun to build competing digital practices. Deloitte and Accenture have been two of the most active, both creating industry leading digital consultancies that help management strategies for marketing and beyond take into account the changes of new media and new technology.
Yet if these external actors have transformed their practices to adapt to the new era of corporate technology transformation, the newest and most important actor are the dedicated innovation departments and initiatives within corporations themselves.
The Rise Of The Innovation Department
In the same KPMG/Forbes study mentioned about, 47% of CEOs of the largest companies (those with $10b in annual revenue or more) indicated that they had already launched dedicated innovation initiatives to help their companies do what it takes to transform their models for a new era. A full 72% of company CEOs suggest that they’ve either started or plan to start a similar program.
What it means to create a dedicated department for innovation varies from company to company. Yet 2014 undeniably saw some trends:
1. Focus on relationship with startups (and often based in Silicon Valley)
Innovation initiatives are almost always tasked with keeping track of trends and building relationships within startup communities. Large companies today have a more significant appreciation for both the threat that startups represent and the potential to bring their innovations in house through partnership or acquisition than they had in the past. These relationships tend to follow one of a few different paths, articulated in more detail below. Because of this imperative to connect with startups, many of these new innovation initiatives have built their base in Silicon Valley.
2. Have both educational & operational functions
In general, innovation initiatives have varying degrees of operational function. For some — like those organized under marketing — it is to create pilot partnerships that help the larger entity experiment with relationships with tech startups. For others, it’s more direct investment or scouting for acquisition opportunity. Without fail, these initiatives also have a responsibility for internal education in order to help parts of the corporation that are more removed from the day-to-day of the technology industry understand relevant trends.
3. Role overlaps with corporate venture capital and corporate development
In general, the emerging innovation departments are not just offshoots of existing corporate venture capital and corporate development/M&A function. That said, many of the brands putting resources into business model transformation are experimenting with new types of venture investment as a part of their strategy. In particular, the last several years have seen a significant uptick in the number of corporate accelerators that run mentorship and capital programs for young companies. Corporate innovation offices and corporate venture initiatives tend to share information and both be sources of insight for operational and executive decision makers.
4. Often based inside of marketing, but not always
Marketing is the area where most non-technology corporations felt the first pinch of digital disruption, as channels fragmented and social media created totally new norms and expectations of what customer communication meant. For this reason, many corporate innovation programs have been organized under the marketing department. That said, a whole new generation of disruptions — from wearable devices to connected home platforms to virtual reality to mobile to on-demand service — are impacting the day-to-day reality of people’s experience that sets the context . As a result, more and more innovation programs are being designed to work between departments, with the ability and the mandate to translate technology disruptions to the various management disciplines that they impact.
5. There is a correlation between how close the innovation team is to executive leadership and how innovative the company is perceived
Innovation can happen at any level of seniority, but when it comes to significant business model transformations, things eventually have to go through the C-suite. The companies that today are perceived as the most forward thinking — companies like GE, for example — tend to have innovation functions that report directly to C-level officers, or at least have clear and consistent access.
How Corporations Work With Startups
In the remainder of this report, we organize trends in corporate innovation based on the main strategies corporations use to engage with startups.
The three strategies are:
Venture investment — taking a minority ownership stake in startups
Acquisitions — acquiring or taking a majority ownership stake in startups
Partnerships — operational relationships with startups
These aren’t perfect descriptions, but they do effectively sum up the three key engagements corporates have with emerging tech.
Innovation is not just a mindset, but an active discipline. Within the context of specific departments, the lifeblood of that discipline are the experimental partnerships through which managers explore new approaches to business enabled by new technologies.
One of the key functions of most of today’s innovation initiatives is surfacing and vetting prospective partners for pilot engagements. In some cases, these partnerships go nowhere. In others, such as programmatic buying of media and ad placement, they usher in new ways of doing business that become the norm.
To date, most innovation programs have been organized around marketing, sales, and retail functions. Below we look at some of the areas that have characterized innovation in the last year.
What’s Changing In Marketing
Advertising is ultimately about getting the right message in front of the right audience. While getting the message right retains a good bit of art, getting messages in front of the right audiences is increasingly pure science.
The last generation of advertising was characterized by radical channel fragmentation. Twenty years ago, if you wanted to reach music fans you went to MTV and Rolling Stone. Today, there are literally thousands of channels — music blogs, YouTube networks, artist social media presences, music streaming services — to reach the same audience.
This, of course, represents a major challenge for advertisers: how to figure out where to put resources with so much fragmentation. Luckily, in the digital era, there aren’t just more channels — there’s more data. Even the smaller of these digital channels offers advertisers a wealth of data about who is viewing and what they’re viewing and for how long that old media never could.
This enabled the advent of programmatic buying, which basically means allowing algorithms to buy advertising across a variety of channels, often in real time.
Programmatic has been a buzzy topic of discussion for a number of years, but in 2014, it came into its own. At the annual Cannes Lions advertising festival, Mondelez’ B. Bonin Bough said that he didn’t see why brands wouldn’t eventually go to 100% programmatic buying in the future.
At the same time, there were challenges. One of the major topics of discussion was fraud. According to some sources, up to 50% of reported views were bots rather than real viewers. This is especially problematic with video, which commands higher CPMS and so costs brands even more. In total, fraud could cost brands more than $6 billion in 2015.
Programmatic is on a one-way trajectory for the mainstream. While companies may never fully reach the 100% programmatic buying advocated by people like Bonin, the fast majority of media spend is going to be through this strategy that simply offers more efficiency, data, and targeting precision than old strategies. This transition will only be amplified as new technology becomes available for programmatic buying for premium campaigns like page takeovers and cross-platform campaigns.
Social Media Marketing
For nearly a decade, corporations have been unlearning old ways of communication to adapt to the social media era. At a fundamental level, social media changes the relationship between company and customer by making it easier than ever for them to actually talk to one another directly, in real time. Because that conversation happens in public, when things go bad (or when they go well), the impact is amplified like never before.
Because of this, the first emphasis of successful corporate social media isn’t marketing — exactly — it’s a new version of customer service and engagement. Of course, the line between the two gets blurry. When a corporation is able to deliver quick information or answers to questions through a medium like Twitter, it becomes its own form of marketing as the company builds a brand for being helpful, savvy and engaged.
Trend 1: Organic to paid
For the first part of their lives, the major social media networks operated using venture capital. Following the VC playbook, they focused on user growth over revenue. At that stage in their lives, the main value that corporations brought to their communities was in the form of distribution and engagement with users. Networks like Twitter and Facebook encouraged brands to build organic followings that allowed them to talk directly with their followers without having to pay.
The last year (really, the last few years since Facebook went public) have seen a sea change as those social media networks have jumped out of “startup” stage into the realm of publicly traded companies, with all the constraints of quarterly earnings reports, activists investors, and financial expectations.
Subsequently, those networks are now looking at corporations as their main source of revenue, and slowly but surely changing the experience of being a brand on their networks to focus on maximizing advertising revenue. Facebook has continuously modified its algorithms of what content users see in a way that brands have a harder and harder time actually reaching the people who follow them.
In December of 2013, Facebook announced a change in the Newsfeed that quickly lead to a 44% decrease in organic reach and a 35% decrease in engagement. Social@Ogilvy found that the percentage of fans that an average brand’s posts reached dropped from 12.05% in October 2013 to 6.15% in February 2014. Facebook has also decreased the overall inventory of ads (a 56% decline between Q32013 and Q32014), leading to an increase in ad price during that same period.
Twitter hasn’t made sweeping changes yet, but in the coming year is moving to a different model for what content users see. Historically, Twitter has offers a feed of linear content in which users saw every tweet from every account they followed. Next year, the company will move to a more Facebook-like system of algorithmically determining which content is likely to be most interesting for that user based on their personal preferences. In that paradigm, it will be much easier for brand content to get buried and go unseen. Instagram, too, has been placing more and more emphasis on its paid advertising product, although its position inside Facebook gives it more freedom to develop and perfect its ad offerings at its own pace.
While this has created much consternation for social media officers who have to change their strategies, it’s not all bad news. As organic reach has decreased, the sophistication of advertising products has increased, allowing for more precise targeting, direct commerce, and other features never before available. Still, the shift requires a reimagining of the role of social media inside the larger marketing strategy.
Get ready. The shift from organic to paid is inexorable and only going to continue. The savviest thing to do now is to get ahead of the curve. It’s important to note that there is still earned value for being the first to try new paid advertising products. There is a world of publications like Digiday who still excitedly report the first deals between brands and social platforms.
Trend 2: The Continued Visualization Of The World
Facebook was the first startup to show the power of network effects in a truly scaled social platform. The company has such a high percentage of people (in America and increasingly around the world) using its service that there is an extremely high social cost to not being there in terms of the knowledge and information missed out on.
Why then was Mark Zuckerberg so scared of Instagram? So scared that he quietly and personally negotiated an at the time billion dollar acquisition for a company with only 19 employees?
The dominant mode of communication is moving from words to images. The old adage that a picture is worth a thousand words becomes more true than ever when we’re communicating in a globally interconnected, noisy, multi-lingual word.
Instagram was the first network to fully capture the visual opportunity that smartphones enabled. Not only were the cameras in phones better than regular point and shoots, but a small handful of simple filters could make even mundane images look artistic. Importantly, Instagram’s filters weren’t just about making things look cool — they were a new visual canvas for conveying emotions. A faded filter like Rise made a shot moody, muted, and calm, whereas something Lo-Fi or X-Pro II brought out big rich colors that made a shot feel vibrant and celebratory.
Since being acquired by Facebook, Instagram has continued to grow, recently hitting 300 million users, surpassing the user base of Twitter. But its not the only company showing that the world is moving visual. Pinterest (covered more below in the social commerce section ) is still radically under appreciated compared to its peers and is basically a way to make visual lists.
What’s more, for young people, the most important network is increasingly Snapchat — another network that Mark Zuckerberg tried (unsuccessfully this time) to buy. The network is closing in on 200 million monthly active users. Whisper, the network where people anonymously post their feelings on top of creative imagery, has more than 6 billion page views per month.
For marketers understanding the shifts in visual communication isn’t just about recognizing a growing channel, but about understanding shifts in how consumers communicate with one another.
Perhaps the defining social media trend of 2014 was the selfie. Selfies were at the heart of some of the most discussed branded content, such as Ellen’s mega-celebrity selfie at the Oscars, which netted Samsung more than 3.3 million retweets and 2 million favorites, making it the most popular tweet ever. Today, 50% of men and 52% of women have taken a selfie, while selfies make up 30% of taken by 18–24 year olds.
Selfies represent more than our increased ego-centricity. They are a strategy for quickly and visually sharing what experiences mean to us that doesn’t even require the viewer to speak the same language.
Dozens of startups are working to expand the selfie experience. CamMe uses a clever gesture system to take selfies on a timed delay, allowing people more creativity of self-expression. The company won an award for being the most innovative at the 2014 Mobile World Commerce. Frontback is a fast growing network that pairs a front facing photo of an environment with a back facing selfie to more explicitly show how an experience is making one feel.
Video selfies are also on the rise. Looksery is a video selfie app that creates a 3D model of the face to allow radical real time modification — from changing the color of ones eyes to the shape of ones face — and brands are already swooping in to experiment with how the app could be used for everything from virtual try ons of make up to customer service. Dubsmash is another video selfie app that allows users to record a video to play over any soundclip — allowing them to act out their favorite scenes in movies, for example. Launched in November 2014, the app has already reached number 1 on the iTunes store in 29 countries.
Communication is going to continue to become more visual. This is especially true in a world where national and linguistic barriers get more permeable all the time. For brands, visual communication needs to be considered its own discipline as important (or frankly, more important) than great copywriting. New mediums and trends, even that seem frivolous or self-involved, need to be experimented with and understood.
Trend 3: Identity Fatigue
Social media isn’t just a communication channel but a sociological force that has had implications for people’s psyches. When it introduced the “Like,” Facebook made the feedback loop for people’s content explicit, giving people a precise ability to judge just how popular their ideas or images are with people they, theoretically, care about.
Of course, whether intended or not, this sort of explicit affirmation creates an incentive for people to create content that they think will generate positive feedback. What’s more, it creates an incentive to craft an image of one’s life that is unfailingly happy, successful and leaves behind messy emotions like anxiety, fear, jealousy, failure that are just as much a part of the human experience.
The pressure to constantly shape an image of one’s life has left some burnt out — especially young people for whom the rise of social networks as a cultural force coincides with a period of their live that is by definition messy and confusing.
Some have termed this new force “Identity Fatigue.” And, of course, there has been a backlash in the market. Specifically, two new types of communication channels have arisen that seem to be a direct answer to identity fatigue — ephermeral or expiring media and anonymous networks.
Ephemeral media is content that expires once it has been viewed, like the James Bond mission messages of old. Snapchat is, of course, the leader in this arena. Snapchat allows users to send photos (some with text or illustrations on top) to each other that expire after ten seconds. They can also add snaps together into a “story” that lasts for 24 hours. Either way, before long the content is gone.
The network’s popularity is undeniable. The network reported 100m monthly active users sharing more than 700 million snaps and 1 billion stories per day, and TechCrunch has reported that today, the number of MAUs stands closer to 200. The people who’ve invested in or tried to acquire Snapchat (like Facebook’s Mark Zuckerberg) understand that these numbers represent an actual shift in culture.
Snapchat is already a huge focus for brand marketers. Today the network is still in the venture backed phase of its life, and much brand engagement has been in understanding how to build organic followings.
It’s clear, however, that as the network grows, raising money at ever higher valuations, it is thinking about how to convert that organic brand usage to paid customers. In 2014, the company stole Emily White away from Instagram to be its revenue lead. And in November, it ran its first actual advertisement, a video preview for the movie Ouija.
Anonymous networks represent a different answer to the same question of identity fatigue. The last two years has seen the founding of dozens of companies that allow users to post content anonymously. The breakouts to date are Whisper and Yik Yak.
Whisper is a visual network in which users post a short message on top of an image. The content is location tagged, but otherwise anonymous. Much of the content is more revealing and racier than content on other social networks. To many, its clear, participating in the network is a captivating and liberating experience. The less than two year old company receives more than 6 billion pageviews per month.
Brands have started to experiment. The company has run experiments allowing brands to pay to ensure that the images that come up when a user is trying to create a Whisper post that relates to the brand are actually vetted and approved images. It also allows companies to pay to select a background image to appear automatically behind posts that relate to that brand in some way.
Yik Yak is even younger than Whisper, but growing just as explosively. The app is effectively an anonymous bulletin board, where users post thoughts about anything and then others within a certain geographic range can see what others posted. Like the early days of Facebook, the company has built its base around college campuses — more than 1000 of which now have strong active communities. With $62 million in new venture backing in the warchest, Yik Yak is sure to be a force in 2015.
For any brands actively looking to reach teens and twenty-somethings, Snapchat is going to emerge as an as or, franky, more important channel than Facebook and Instagram. It is arguably the core network of the post-Millennial generation, and brands need to start getting savvy with both organic and paid usage of the network stat. Anonymous apps are a bit harder to put a finger on. Their growth is undeniable, and the sociological need they represent in the liberation from other types of social media is real. But anonymity is plagued with challenges of cruelty and bullying. Whisper and Yik Yak have reached a scale where they can’t be ignored, and the smartest brands will be those that work actively with the companies to create content that helps the best aspects of the networks come out.
Facebook is now more than a decade old. YouTube is coming up on its decile anniversary, as well. Instagram and Twitter are both over five, and even Snapchat and Vine are in their 2’s and 3’s.
Each of these networks allows for a new form of micro-expression, where individuals can create and share content and build an audience of people who self-select to pay attention.
Of course, some people are better at creating this type of content than others, and consequently, each of these networks has engendered a class of super users with devoted followings that can rival entire publications in their scale.
These influencers represent a new force for brand marketers. They are masters of new content mediums, but also distribution channels that have a relationship with their followers that tends to be more authentic and personal than other media outlets.
2014 was the year that influencer marketing came into the mainstream of brand strategy.
On Instagram, it has become normal to incorporate paid posts as a part of broader media campaigns. This is particularly the case when campaigns happen to include themes that are particularly photographable — like travel.
Vine has had a fascinating financial relationship with advertisers. Acquired by Twitter since even before it was fully launched and available to the public, Vine has had the ability to stay financially viable without a traditional advertising product. At the same time, however, its 6-second looping videos were almost immediately identified by brands as an extremely appealing new opportunity. They started working with Vine celebrities very early in a type of engagement that is somewhere between organic and paid advertising; brand is paying to create content in conjunction with influencers, but not paying the network for placement.
On Snapchat, as well, influencers have represented this bridge between fully organic usage and paid advertising. Wet Seal made headlines early last year, for example, when it hired 16-year old Meghan Hughes to run its Snapchat channel for the weekend before Christmas, significantly increasing its follower count in the process.
As this type of engagement has moved from fully experimental to a core part of many digital campaigns, a new crop of agencies has arisen to help brands connect with influencers.
One of today’s leading influencer agencies is Grapestory. The company was co-founded by leading digital media thinker and strategist Gary Vaynerchuk and Snapchat and Vine influencer Jerome Jarre. The combination of skills has been powerful and Grapestory has helped its larger sister agency Vaynermedia grow into a 400+ headcount, three-location force. Other influencer agencies like the Instagram-focused TinkerMobile and Pinterest focused HelloSociety have also found success.
If these media creators have been influential however, in no medium has this new form of influence been clearer than video.
2014 was undeniably the year that the world came to recognize the power of YouTube influencers. Multi-channel networks that represented large artists were one of the hottest acquisition targets on the year, with Disney acquiring Maker Studios for nearly a billion dollars, and Otter Media — a joint venture between AT&T and the Chernin Group scooping competitor Fullscreen for somewhere near $300 million.
If the economic activity around the space wasn’t clear enough of the shift in power, a Variety study released in August made the point clearly. YouTube celebs are officially more influential among teens than movie stars. We explore the full implications of this in the larger context of the rise of video in the next section.
2015 Trends & Implications For Brands
Simply put, influencers need to be considered a central part of marketing plans. They represent where media and creative come together, and their importance can hardly be overstated.
In 2015, we believe there will be three key trends with influencers:
The YouTube space has already demonstrated the trajectory of professionalization that happens as influencer channels mature. Indeed, in many ways, at the top end of the spectrum, YouTube influencers have been co-opted into exactly the same film and TV power system that preceded them, if still retaining a bit more personal brand power and clout than some of their traditional peers. Already, the top influencers represented by HelloSociety are making $250,000+ per year. As it becomes the norm for brands to incorporate influencers into campaigns, more and more influencers will chose to make their living from their social media content. Intermediaries will arise who can negotiate between the two sides, and a new system will emerge.
Long-tail opportunity through marketplaces
There will be a countervailing force, however. While many top influencers will chose to be brought into a traditional system of talent representation and middlemen, others will not. What’s more, as the overall scale of these networks continues to increase, there will be many influencers with followings large enough to be interesting to brands, but not large enough to command the biggest premiums. More marketplaces like Famebit will spring up to allow brands to self-serve and create campaigns across influencers. Instead of working with just a few mega influencers, brands will be able to easily spread their resources across dozens of partners.
At least one of these networks will try to consolidate influencers as an actual core part of their business model
Given how much economic activity is flowing around influencers, its interesting that none of the major networks have tried to fully consolidate them into the core of their business model. YouTube is the closest, with explicit revenue splits between creators and the network for advertising that flows through their content, but it wouldn’t surprise us if a network like Snapchat at least experimented with organizing influencers as a primary financial driver.
The Rise Of Video
In the section on Social Media Marketing, we discussed that the world is moving to visual communication. Part of that shift is an ever increasing emphasis on video as a core communication medium.
The New Influencers
In August, Variety published a study about celebrity influence on teens. Specifically, it looked at who the most known and influential celebrities were. Surprisingly to some, perhaps, the top 5 on the survey were all YouTube celebrities. Of the total list, 10 were from Youtube and 10 were traditional film and TV stars.
While it might seem surprising at first, it is the natural consequence of a media landscape that priorities stories that seem real. In the same way that reality TV became extremely popular as people could imagine themselves as the real people on television, YouTubers are literally just like their audience. There is an extraordinary intimacy in speaking into a camera from one’s bedroom that reflects the cultural moment and an exposed media age. The people creating the videos feel somewhere between a celebrity and a friend, creating an intoxicating combination.
Taken together, their power is clear. Top YouTubers like Bethany Mota and PewDiePie have significantly more subscribers than most TV channels and their content is seen more than all but the most popular programs.
Brands are adapting rapidly, signing content production deals (and in some cases, as in Bethany Mota’s line for Aeropostale, product deals) that help them reach new audiences and also learn how to play in a new content paradigm that priorities short, snackable, fun, intimate, quirky content over the highly produced.
YouTube isn’t the only player in the video space. As smartphones become the core way that people around the world access the internet, and as network speeds and bandwidths increase, video has shrunk to adapt to a different medium.
Vine was perhaps the first leading innovator of the short video movement. Vine users create looping 6-second videos that have provided an incredible realm for brand creativity. One of the major trends has been creativity around stop motion.
Seeing the popularity of Vine and reading the tea leaves about video more broadly, 2013 also saw Instagram introduce video, (while 2014 saw the introduction of video ads) although the core of the network continues to be photos.
Snapchat stories has also provided incredibly fertile ground for creativity with short form videos. Stories are collections of snaps which can be up to ten second long videos. When users string together a set of these videos, they can tell the story of an entire day or experience. In 2014, Stories became the most popular feature of Snapchat, with stories being viewed more than a billion times each day.
Interestingly, perhaps the most important new player in the video space is Facebook. In October of 2013, Facebook introduced autoplay on videos, meaning that they started playing as soon as a user rolled over them in their feed. Last summer, the company tweaked its algorithms to bump popular videos higher in the feed, and between May and June, video views grew more than 200%.
Brands have responded accordingly, shifting more and more of their resources into pushing videos straight to Facebook, bypassing YouTube entirely. In December 2014, Apple’s Christmas ad was viewed 20 million times on Facebook vs. 6 million times on YouTube. Regional airline WestJet’s annual Christmas video, meanwhile, showed the difference in the power of video engagement on Facebook, racking up 77,000 likes and 45,000 shares on Facebook (where they have just 1.1m followers) versus 8,000 likes and 10,000 shares on Youtube, where they have 2.9m followers.
In the same way that brands need to develop sophistication around communicating with photos, in the new media landscape video is a must-have not nice-to-have capacity. In 2015, we’ll see:
Snackable content becomes the norm
Neither the half-an-hour episode nor the :30 second ad are going to be the default formats of the new video era. Instead, short snackable, episodic videos of 2–5 minutes are going to be the default creative story telling format, and 6–15 second high impact spots are going to be the norm for advertising. In 2015, brands will increasingly live embrace and work to improve their capacity in those formats.
It’s going to be the norm to partner with influencers on video content. Sometimes this will be commissioning them to fully create their own brand-themed content, but other times it will be creative collaborations that help brands adjust to new norms more quickly.
Startups continue to experiment with short, mobile, video
While networks like Vine and Snapchat show the beginning of short form mobile video, there are literally hundreds of startups experimenting with new approaches. As opposed to photos, which is point and shoot, there is still a slightly higher creative burden on making user generated video interesting. As companies experiment to figure out what the video equivalent of Instagram’s filters that made everyone look like a great photographer, brands are well served to dedicate resources to creative experimentation with early stage companies.
Shift to Facebook
Facebook seems poised to continue to grow as a destination for video content. As that happens, brands will shift more resources to maximizing the impact of videos in the medium.
What’s Changing In Retail & Commerce
In the old media paradigm, marketing and commerce were separate functions. Advertisements in magazines or on TV help build brand awareness and let people know about specific products — but to actually acquire those goods required going to a store, or a website separate from where the advertisement was seen.
Today, that barrier is breaking down, and marketing and commerce are being threaded ever closer together. Hundreds of startups are working to minimize the time between the moment of consumer purchase intent to the actual moment of purchase.
Part of the shift wrought by social media was a shift in how consumers find out about and make decisions about what to buy. People are more influenced by their friends and family than advertisements, and in a world where everyone is connected through social media, it becomes easier than ever to actually see what products people are buying and enjoying.
Given this, its unsurprising that many startups are working to allow people to buy directly from the networks and channels through which they discover products.
Soldsie is a startup that allows people to buy simply by leaving a comment in a post about products on Facebook and Twitter. Like To Know.it partners with publishers to sell products via their Instagram feed. Users who like posts on Instagram that relate to a specific product of interest are emailed after with a link where they can buy.
The network channels themselves are thinking about social commerce as well. In 2014, both Twitter and Facebook introduced “Buy Buttons” that allow users to buy products directly from posts inside the network. For Facebook, the Buy Button is part of the advertising product, so brands buying Facebook ads can select to allow users to purchase directly without leaving the network.
Twitter rolled out its buy button with a group of early testers that included musicians, events, and brands. Like Facebook, the Twitter buy feature allowed brands to embed a purchasable product in a Twitter card that users could buy without leaving the network.
Even Snapchat is starting to experiment with financial integrations, although their first stab isn’t about people buying things, but sharing money with each others. Users can now send each other money with a snap thanks to an integration with Square. It’s not hard to imagine how similar functionality could eventually be used to allow users to purchase goods shown in a Snap.
Perhaps the most interesting mainstream network for social commerce integration today, however, isn’t Twitter or Facebook but Pinterest.
Pinterest has quietly built a digital commerce juggernaut. Pinterest is, in effect, a collection of curated visual lists. One of the major user cases for the sites more than 70 million users is posting things that they’d like to buy. Today, 25% of traffic referred to retailers by social networks comes from Pinterest. Overall, Pinterest drives more referral traffic than any network but Facebook. What’s more, it’s 126% more successful at driving sales than Facebook, and produces an average order of $123.50 versus $54.65 for the social network giant.
In 2014, startups took notice of the success of Pinterest and tried to go even farther in using product and purchasing decisions as a basis for a network of conversations.
Wanelo is one of the most successful examples of this. Wanelo allows people to curate collections of the clothing and accessories they find most interesting and exciting and share them with friends and followers. Wanelo organizes the items shared around brand collections, giving brands organic followings with purchase ready fans. Urban Outfitters, for example, has more than 3 million followers even though the brand hasn’t claimed its profile.
Spring is a mobile shopping network launched by David Tisch, the founder of BoxGroup investments. The company is attempting to be an Instagram explicitly for shopping, sharing only the most interesting and curated products.
Other startups are taking on social commerce by making it easier for people to find the products they’re most interested in when they don’t know the maker or manufacturer. TheTake is a startup that lets users shop for the outfits worn by movie stars in their favorite movies. People can search by scene or actor. The Hunt is a community that crowdsources fashion item discovery when someone has a picture of the outfit they like, but no additional information.
Brands are going to become ever more sophisticated in their approaches to social commerce as the lines between marketing and sales become more blurry than ever. In 2015, this will happen inside the context of a few forces:
More social commerce emphasis from the networks
The major social networks are going to feel pressure to diversify revenue from traditional forms of display advertising and will continue to offer more options for direct commerce inside their networks.
More startups designed around purchasing behavior
Shopping is a core human behavior, which means that startups are going to continue to experiment with ways to make it easier and more fun for people to shop together in the digital realm.
In Store Experience
Between sophisticated mobile e-commerce solutions and the new rise of same day delivery, there is less reason than ever before for users to go to physical stores.
In response, top retailers today are totally re-imagining the experience of being in the store to create a new experience. The goal is not simply to match the convenience of shopping online and home delivery, but to provide something totally different that has its own value and excitement.
2014 was the year that beacon technology hit its stride.
Beacons are small bluetooth devices that can send and receive signals to users mobile phones. This location aware technology allows for a new type of communication between stores and browsers.
One of the obvious opportunities is personalized discounts and offers. Hillshire Brands ran an experiment in June in which they sent customers in a set of major grocery chains a special offer for sausage. They found a 36% increase in brand awareness and a 20% increase in purchase intent.
Macy’s has been one of the leaders in experimenting with beacons. After a number of successful experiments, the company announced in September that they would be rolling out 4,000 of the devices as their stores across North America. Their implementation partner is Shopkick, whose founder Cyriac Roeding says that users of the company’s beacon solutions spend 50–100% more than regular customers. Shopkick was acquired this year for $200m by Korean tech giant SK Telecom.
As brands increasingly adopt and install beacons, startups are rapidly innovating what beacons can actually do.
One of the most interesting innovations from the past year came from Y-Combinator backed Estimote. In August, the company launched Beacon stickers, which are smaller and simpler to install, opening up totally new types of engagements. Beacons are also being used to help with indoor location, allowing users to communicate to find what they’re looking for more simply.
Beacons are not a panacea however. One of the challenges for the usefulness of the medium is that each different beacon systems requires consumers to have a specific proprietary app installed and in use to actually communicate with the store via their mobile phone. Even when users do have the right app installed, stores that send too many or uninteresting offers risk upsetting consumers who can be extremely fickle about what applications they allow to send them push notifications.
While there may be challenges, it seems clear that 2015 will see even more widespread adoption of in-store beacon technology. Business Insider reported that 50% of the top 100 retailers in America actively ran beacon experiments in 2014. The research company also suggested that by 2018, 4.5m beacons would be installed, of which 3.5m would be used by retailers.
One of the more antiquated parts of the in-store experience is waiting in a line to hand a piece of plastic or paper to someone to buy items.
Perhaps unsurprisingly then, mobile payments is one of the main areas of focus for today’s financial service startups.
Some companies, like Square and Revel, have created totally new approaches to point of sale systems that improve the consumer experience through better interfaces, as well as supplying the retailer with better data about their customers, allowing for analysis and insights that can improve business.
Other companies are trying to change the check out process altogether. The biggest news of 2014 in this realm was the introduction of Apple Pay, a Near Field Communication (NFC)-based technology that uses Apples thumbprint technology to automatically authorize payment in a matter of seconds.
Many commenters think that Apple Pay has the ability to drive mobile payments mainstream for a couple reasons. The first is that the technology integrates with the NFC readers already installed in some 220,000 stores around the USA. The second is that, with more than 800 million credit cards on file, Apple offers retailers an extremely attractive audience to try to access.
The Full Store Experience
As interesting as they are, beacons and mobile payments are interesting updates rather than whole sale re-imaginations of the in-store experience.
In 2014, however, a few prototypes showed just how different the stores of the future may be.
Notably, Rebecca Minkoff partnered with eBay to design their new flagship store in SoHo in New York City. At the center of the store is an interactive mirror that allows users to browse all available items and build a shopping cart. When they’re ready, a personal shopper sets up a dressing room with all of the items requested. The dressing room also features an interactive mirror, through which users can adjust the lighting to match different types of environments they might be in, request different sizes, or check out when they’re ready.
2014 might just be remembered as the year Bitcoin jumped from largely theoretical project of a handful of hobbyists to full-fledged global financial movement.
Bitcoin is a decentralized digital currency that allows users to exchange monetary value completely outside of today’s banking and currency systems. While it has been characterized as outside the mainstream by those who focus on early use cases for the purchase and sale of illegal goods, the reality is that it offers merchants and consumers some significant advantages over traditional currency systems.
The first is that it doesn’t cost anything (or barely anything) to transfer. For as interesting as things like Apple Pay and Square are, they are still backed by credit card companies that take transaction fees with every payment. Credit card processing costs merchants trillions of dollars each year, so its not hard to understand why a free alternative would be appealing.
Second, as privacy becomes a larger issue and people become concerned with how the digital breadcrumbs they leave through browsing and purchasing could be used against them, they may begin to prize a system where exchange happens anonymously.
In 2014, two companies in particular were extremely active in getting merchants set up to accept Bitcoin. Between them, Coinbase and Bitpay — both of which have raised tens of millions in venture capital, have enabled more than 80,000 merchants to accept Bitcoin.
The central challenge for retailers to accept Bitcoin today is price volatility. In 2014, for example, the exchange rate of bitcoin to dollars ranged from a low of $300 to a high of over $1000. These merchant services allow them to accept Bitcoin by effectively acting as a real time exchange. Whatever the price of the good is in dollars is converted to bitcoin, which the user exchanges to buy the item. The startups then immediately buy those bitcoins back from the business at the same rate, ensuring that they get the full dollar value.
Bitcoin isn’t going to replace the dollar any time soon, but a variety of global pressures could push the community of users could grow more rapidly than most would expect. What’s more, merchants have a strong incentive to push for wider adoption of the currency. Given this, it’s likely that in 2015, we’ll see more and more merchants not just accepting bitcoin, but actively promoting the currency among users.
Corporate Venture Capital
Venture capital is the lifeblood of technology innovation, and so it is perhaps no surprise that as corporations have become more focused on innovating and transforming their businesses, there has been attendant increased in corporate VC.
In this section, we look at why corporates do VC, the different models for VC, and the dynamics shaping the landscape going into 2015.
Why Corporate VC
The main job of corporations is to make more money selling whatever it is that they sell, so why would they take the time and resources to make risky bets on emerging technology companies? While there are as many distinct answers as there are corporations, there are a few key aspects that define most corporate VC strategies:
1. Financial return
Part of the motivation for any corporate VC is financial return. For some firms, such as Google Ventures, financial return on investment is the sole metric for success. These corporate venture arms are the closest in approach to independent firms.
2. Strategic return
One area where some corporate VCs differ from independent venture firms is that they have a strategic imperative to invest in companies that relate somehow to the larger company’s business. The strategic relationship could be anything from a supply chain partner for which investment could lead to beneficial terms, or it could be a hedge against a future competitor. The common thread is that investment ROI is judged against not just financial but strategic objectives. Most corporate VCs involve some aspect of strategic return as well as financial.
3. Education & Insight
Corporations often use their venture arms as internal education and insight sources to keep execs and managers appraised of trends and future transformations of the business landscape. In this case, the due diligence process through which investors determine whether to invest in a company and/or which company in a particular space to invest in doubles as an act of corporate research.
4. Thought Leadership & Perception Value
For some companies, there is distinct value in not just being innovative but being seen to be innovative. Venture capital is one of the sexier financial fields, and getting involved in young, unpolished upstarts brings with a marketable PR value.
Corporations haven’t always been preferred investors for young companies. In fact, inside mainstream entrepreneurial circles, there is often a stigma against corporate investors. There are a few reasons for this.
First, rightly or wrongly there is a perception that corporate money is less intelligent because of its mixed financial and strategic objectives. Second, entrepreneurs worry about signaling problems to customers who may be competitive with the corporation that is investing. For example, if an advertising technology company takes money from WPP Ventures, it may worry that that investment will make it harder to do business with WPP’s competitors like Publicis and Omnicom.
What Happened In 2014
2014 was an extremely active year for corporate VC. Corporate investments in venture rounds reached their highest levels since the immediate post Dotcom era, and show no signs of slowing down. Indeed, in addition to existing corporate venture arms getting even more active, 2014 also saw a number of new funds (particularly early stage accelerators, as explored below) established. Overall, corporate venture grew 38% between 2010 and 2013. In hot areas like digital health and the internet of things, the numbers were even more significant. Corporate investment in digital health in 2014 grew by 89% from 2012 and 183% from 2011.
So, what’s driving this increase in activity?
The larger innovation imperative
Corporate venture isn’t the only way that companies are trying to be innovative (as the rest of this document demonstrates), but it is an essential part of many innovation strategies. Consequently, the increase in focus on business model transformation among corporate actors is driving more resources and attention towards all of the ways a company innovates, including this one.
Nature of forthcoming innovations
Many of today’s investment opportunities are in categories that seem likely to fundamentally and irrevocably shift the entire consumer and business landscape. Financial services is a prime example. In that space alone, you have fundamental shifts in the way that people access money in the form of peer-to-peer lending, changes in how people pay for goods and transfer money to each other, and even an entirely new digital currency infrastructure in bitcoin. These are not small changes, but transformations that will impact literally every business on the planet. For corporates thinking about how to compete for decades to come, it feels more important than ever to understand and be involved in these companies as early as possible.
The business landscape is more global than ever before. As particularly Asia grows as a global business force, with technology companies that rival US-based companies in scope and influence, there is a new actor in the venture landscape. Many large international companies feel as though, although they may be able to operate more efficiently and cost-effectively, the US and specifically Silicon Valley remain the hub of actual model and technology innovation. This is driving many of the largest global companies such as Alibaba, Tencent, and Softbank to set up investment arms based in the US.
Moving Earlier: The Rise Of The Corporate Accelerator
Historically, corporate investment has focused on later stage startups that have already been through a few rounds of financing. One of the more interesting trends in corporate venture in 2014, then, was the rise of the corporate accelerator.
Accelerators are a particular type of early stage venture capital that tends to combine financial support with mentorship and other resources. The platonic image of today’s accelerators was set by Y Combinator (one of our investors) which was founded in 2006 and has since become one of the most influential institutions in the startup landscape, being the earliest backer of breakout companies such as Dropbox, Airbnb, and Instacart.
Corporate accelerators, for their part, often have an explicit industry focus, such as the Barclay’s Accelerator which focuses on financial services. Many of today’s corporate accelerators are run as partnerships with TechStars, a company that started as a single, Boulder, CO-based accelerator and has since grown into a platform of dozens of co-branded and co-run programs for early stage companies. Other companies, like Target and McDonalds, have set up their versions of accelerators as physical laboratories for innovation in hubs like Silicon Valley.
For corporations, accelerators offer earlier exposure to entire categories of companies. Indeed, in many ways, accelerators offer a more explicit structure for education and learning objectives that may be motivations for corporate VC than traditional investment, which looks at opportunities one-off.
Critics of corporate accelerators have pointed out that there may be a negative selection bias based on the signaling problem of having a cozy relationship to a single corporation. In other words, a financial services company that joins the Wells Fargo accelerator may find it difficult to work with other banks afterwards, so why would they join that particular accelerator unless they couldn’t get into the others?
Whether that’s a fair critique or not, corporate accelerators are on the rise. Inevitably, normalization will decrease any signaling bias there may be, so they may simply be part of the startup landscape.
In short, there are good reasons to think that the increase of corporate participation in venture capital is going to continue to increase. A few trends we anticipate:
More corporations start dedicated funds
The innovation imperative isn’t going anywhere. In fact, the rate of change is only increasing, and the scope of the business implications for the changes represented by emerging startups is increasing. Given that, the pressure to get out ahead of those transformations and engage the startups bringing them is going to increase. What’s more, the more corporations that start funds, the more competitors will feel pressure to follow on to keep parity.
More multi-corporate funds
Venture capital is a type of investment that requires experience and pattern recognition about company dynamics and entrepreneurial characteristics in the absence of strong, clear data that accompanies early companies. This is why the strongest returns tend to be concentrated in a small handful of industry-leading firms. Given this, for some corporates, it may make sense to invest in venture professionals, rather than trying to bring the capacity entirely in house. In the next year, we’ll see some funds that specifically positions themselves to be venture partners for corporations, providing more of the strategic and value add educational services than other firms, but retaining autonomy and independence and the ability to take investment from other corporates as well.
Major Global Dynamics
Internet companies from Asia and other parts of the world are going to become an ever more powerful force. It’s highly likely that their footprint in the venture capital world will expand in 2015, as well, as they seek out and try to allay proprietary advantage with the most interesting technology and consumer companies coming out of US startup hubs.
Should your brand start an investment arm?
For us, the short answer is corporations have to have active, engaged, ongoing innovation strategies that deploy real resources towards understanding and getting ahead of technology-wrought changes in the consumer landscape.
Being involved in VC is a great way to do that. For many corporations, the best option is going to be working closely with one of the middle-path funds described above. This emerging class of funds offers much of the financial and educational opportunity of starting a new fund, with less of the risk and less time to get up and running.
For companies that have very specific strategic objectives however, starting a fund may make the most sense. For these companies, there are a few lessons:
1. Executive buy-in and a 10-year commitment
This is not a strategy that relates to short-term objectives, but is about navigating long-term transformations of the business landscape. When Yahoo invested in Alibaba, it had no idea that the value of those shares would help sustain it through a dark period a decade later. That’s the sort of outlook needed to do corporate VC well.
2. Find ways to accelerate legitimacy
An essential part of the job of being a venture capitalist is building a network of respected referrers who bring the best deals to the table, which in turn builds a track record of wins (real or perceived), which creates a virtuous cycle. The challenge for a new firm — especially without partners who are deeply entrenched in the valley is that this reputation building is a multi-year cycle. To compete effectively for the best deals, corporates starting their own funds need to find ways to accelerate their legitimacy. This can be through who they hire to run the fund, partnerships with organizations, proactive community building and value addition with startups outside of funding, etc.
3. Build clear systems for deriving learning value (that don’t disrupt the investment professionals)
Corporate venture professionals are vital as educators of the larger organization and translators of the newest technology trends. But this role is, ultimately, different than their role as investors in the best startups. Smart corporate funds will design systems that maximize their learning from their venture arms while minimizing the time and disruption to their investment professionals in transmitting that knowledge.
Mergers & Acquisitions As Innovation
Acquiring companies has always been a path to innovation for today’s incumbents, and 2014 demonstrated clearly how today’s leaders were using M&A to both hedge against and co-opt new market forces, as well as make entrees into new markets.
Entertainment & Media
The media landscape is shifting rapidly. Never has so much power to create and distribute content been so widely shared, as social media has created a totally new path to audience and influence.
The traditional entertainment power structures have been extremely active in acquiring companies that help them work in this new market. This has been particularly the case in the realm of YouTube.
Multi-channel networks are collections of leading YouTube channels that ally together to command better premiums for branded content and advertising and have more leverage for interesting deals. 2014 saw a spate of activity around the MCNs.
In 2013, Dreamworks Animation bought AwesomenessTV for approximately $33 million. Then, in July of 2014, Disney bought the largest MCN, Maker Studios, for $500m in up front cash and another $450 million in earn outs based on performance objectives. Fullscreen, Maker’s largest competitor, went to an ATT-Chernin joint venture a few months later for a reported $200 — $300 million.
This has effectively brought the largest YouTube stars and channels inside the old media system. Indeed, even the MCNs that remain have close relationships with old media corporates through venture capital investment.
In the fast-changing realm of social media, Facebook is, at ten years old, already a grandaddy. Yet the company and its young CEO Mark Zuckerberg have made it abundantly clear that, where they can’t out-innovate with Facebook branded apps, they’ll be extremely aggressive about acquiring the companies changing the communication experience.
This aggressive M&A stance started with Instagram. As discussed elsewhere in this report, the company was arguably the first to show that Facebook as a social network was vulnerable to competitors who offered different types of experiences. At the time of the acquisition, many observers thought it seemed crazy to pay a billion dollars for a product run by just 13 people. Today, the company has more users than Twitter, which has a current market capitalization 25 times the acquisition price. Recent estimates by Citigroup suggest that the Instagram app today is worth $35 billion.
In 2014, Facebook followed a similar strategy with its acquisitions of WhatsApp and Oculus. WhatsApp is a wildly popular direct messaging app that had nearly a half-billion users around the world at the time of acquisition (and 700 million today). While Facebook’s own branded messenger product is very popular as well, WhatsApp represented a way to access the global base of mobile first users, many of whom weren’t Facebook users before. The company cost Facebook an eye-popping $19 billion.
The $2b acquisition of Oculus was even more forward looking. At the time of acquisition, Oculus had raised $2 million on Kickstarter for its virtual reality headset, but hadn’t released a consumer product — in fact, it still hasn’t. In his letter announcing the acquisition, Zuckerberg made it clear that Facebook believes that virtual reality is going to be a defining platform for consumer experiences in the future, from gaming to education and beyond.
The last notable Facebook acquisition of 2014 was the one that didn’t happen. The company reportedly tried to buy Snapchat but was rebuffed in a manner more than a little similar to Facebook’s own decline of Yahoo’s $1b acquisition offer in 2005. As Snapchat continues to grow in importance for today’s younger generations, the failure to bring the network under wing may come to haunt the social networking giant.
As discussed elsewhere in this report, retail is racing to create new types of experience that better fit consumer demand. In 2014, a number of high profile acquisitions demonstrated the areas large companies think is important.
In August news broke that Nordstrom had acquired men’s style startup TrunkClub for $350 million. TrunkClub is a subscription service through which a personal shopper sends men approximately 10 new clothing items each month to try on at home. They can send any or all of them back at no charge and only pay for the items they keep. For Nordstrom, the acquisition represented an avenue to the hard to reach male consumer, as well as a new channel for their branded products.
Shopkick is one of the leading providers of iBeacons, working with companies like Macy’s to offer customers in store personalized offers and other perks. In August, the company was bought by Korean telecom giant SK Telecom for $200 million.
Internet Of Things
One of the most exciting areas in technology is the so-called Internet of Things. IoT refers to the wiring of every device to track data and share information with one another, creating new opportunities for automation, energy savings, and more.
Today’s largest electronics and communications companies are gearing up for serious consumer battles in the area, particularly around which technology protocols and consumer platforms achieve dominance.
In 2014, a number of the giants made their opening IoT salvo through a large scale acquisition.
In January, Google announced that it was acquiring Nest, the company behind the smart learning thermostat of the same name, for $3.2 billion. Once brought inside, Nest was positioned as Google’s connected device arm under the leadership of Tony Fadell — inventor of the nest and the designer of the original iPod. Just a few months later, the Nest division made its first acquisition, scooping home security company Dropcam for $550 million.
Samsung’s first foray into the IoT realm also began with an acquisition. The company spent $200 million to acquire Smartthings, a connected home platform that had originally launched as a Kickstarter product. Smartthings provides a common platform and control center for connected devices from lights to locks.
Corporate development is likely to get more diverse in the coming years. As traditional roles like retail are expected to adapt to totally new consumer expectations, there will be situations where the fastest way to get a companies capacity up to parr will be through a well-timed acquisition.
In 2015, we expect to see increased M&A activity in a few areas:
Banking/Financial Services: From bitcoin to mobile point of sale to peer to peer lending, traditional financial institutions are being assailed from all sides. The fragmentation of the market creates an opportunity for today’s leaders to pick up companies that provide serious strategic value, but that haven’t yet hit scale where going public is the only option for exit.
Food/CPG: Prepped at home meals, hot meal delivery, online shopping, specialty food ordering, private chef marketplaces, and new healthy food alternatives are just a few of the categories where startups are innovating in the Food & CPG industry. As some companies break out and head toward the IPO trajectory, we expect there to be interesting M&A as large CPG brands re-orient their product line for a different generation of consumers.
What’s Coming In 2015
Innovative technology run along a continuum from early adopters to mainstream use. Each year, innovations that seemed brand new the year before become normalized.
In 2015, we see three big areas of innovation in the consumer experience that will impact a huge portion of today’s global corporations: Connected Environments, Wearables Data, and new Financial Technology.
Connected Environments Outside The Home
By definition, the first generation of connected devices available to consumers reflect brands best guess at what consumers might like rather than actually expressed demand.
In truth, many of the earliest Internet of Things products will come to look, in retrospect, like expensive novelties. Will consumers flock to get rid of their current refrigerators for a pricier version that allows them to make Evernote-connected grocery lists from the fridge? And what will the real impact of smarter technology like the Nest thermostat be on energy consumption?
The answer is that only time will tell. But as more time passes, more older devices reach the end of their life and more consumers are presented with the choice for connected options. More data about which categories of connected home device products are most in demand becomes available. And more companies spend more and more dollars building consumer awareness about IoT.
Still, its unlikely that 2015 will see mass consumer adoption of connected devices. Instead, we think that most consumers first full-fledged experiences with connected environments will come out in designed business environments like retail stores, airline waiting lounges, gyms, movie theaters, and other businesses where companies have an incentive to adopt new technology to drive consumer interest and ultimately, sales.
A couple areas where we thing corporations have the most to gain and lose by reinventing their experience to be fully digitally connected:
Restaurants: Never before have restaurants had so much competition. Startups that compete directly with restaurant options for food have raised hundreds of millions of dollars in 2014. These include pre-prepped at home ingredient companies like Plated and Blue Apron, meal delivery startups like Munchery, Sprig and Spoonrocket, private chef marketplaces like KitchIt and more. Who will be the first restaurant chain to experiment with new experience for ordering, customer service, payment, music and environment, and more?
Hotels: Before Uber, taxis never had a viable competitor for on-demand travel. Today, taxi rides have declined 65% from their pre-Uber peak. What’s more, Uber is already operating at a multiple higher than taxis ever did in the city.
Hotels aren’t feeling pressure at quite that same level, but the rise of Airbnb does represent a fundamentally new and different force in the travel landscape. As the site matures, it isn’t just made up of quirky people who want to share their houses with guests. An entire cohort of real estate entrepreneurs are putting short term rental options online through the site that are giving consumers unprecedented choice. The number of listings available are doubling annually, up to 550,000 today.
For the hotels, this means they’re no longer just competing with other hotels. A number of experiments from 2014 showed that some chains are taking this very seriously. Aloft Hotels, part of the Starwood Hotel Group, is currently experimenting with robot butlers from Savioke in their Cupertino location. The robots are able to fulfill basic errands like delivering extra towels, making for an even more private experience for guests.
Marriott, meanwhile, is experimenting with the next generation of consumer experiences by curating a virtual reality experience in their lobbies. Guests could walk into the installation and strap on an Oculus headset to be transported first to a majestic Marriott Greatroom Lobby. From there, they were taken to the sands of Maui and then to the top of a tower in London, where they were able to feel the wind on their face and experience incredible vistas.
Hilton, for its part, sponsored a startup challenge with the Digiday publication, searching for companies that could offer something interesting to change the modern hotel experience. They ultimately began working with Digital Genius, a custom artificial intelligence solution that allows customers to text questions to the hotel and have them automatically answered without needing to use staff resources.
Data From Wearables/Wearable Application Layer
Wearables had a breakout year in 2014.
If there have been three challenges to consumer adoption in this arena, however, it has been the fashionability of the devices, the price points, and the interestingness of the functionality.
One of the strategies for companies to address questions of style has been to partner with designers to create branded options. Google Glass was one of the earliest to experiment, releasing a Diane Von Furstenberg version of the augmented reality headset. This past year, Fitbit collaborated with Tory Birch to launch a line of accessories that fit the fitness tracker inside and offer alternatives to the standard athletic looking headband.
In 2015, there will be more attention to the aesthetics of wearables than ever before. In the fitness device category, this will include not only more of the sort of collaborations undertaken by Fitbit and Google, but also entirely new form factors. Athos, for example, is embedding sensors directly in Under Armour-style fitness apparel like compressions shorts and shirts. As the sensors for various biometric signals become commoditized and more easily available, we expect that more fashion brands will take the creative lead on how the functionality of today’s wearables is integrated directly into the fashion items of the future.
One of the biggest challenges holding wearables back is also price. In a recent Nielsen survey, 72% of today’s wearables owners felt that the devices were too expensive. To respond, companies like Misfit introduced new versions of their devices available for just 50% of what their previously least expensive device had cost. We believe in 2015, the trend won’t necessarily be lots of cheaper options but a broadened spectrum of options, with premium devices that offer more functionality and more basic devices that provide introductions to the space. This would follow the pattern of leading companies like Apple’s iPhone and iPad line, and Amazon’s Kindle line, where the newest devices command a premium, allowing the companies to reduce the price for older but still supported versions.
Another force that will drive wearables prices down is the rise of competition from large global manufacturers. Xiaomi, for example, has stormed onto the scene in the smart phone arena, increasing its share of the global handset market 336% and moving into the top 5 manufacturers in just one year. The company’s ambitions extend to the larger world of connected hardware. The company’s business model involves partnering with hardware manufacturers like Misfit (in whom they just made a major strategic investment), getting those companies to sell a large volume of their devices at cost with Xiaomi’s software system integrated, and then use that software ecosystem to sell services, apps, and more. In short, they’re subsidizing the initial cost of hardware with the promise of future monetization by participation in their software ecosystem. With the scale they’re playing at, this could put price pressure on the industry as a whole.
Ultimately, widespread adoption of wearables will be driven by the appeal of their functionality. 2014 saw major advances in this domain. In the arena of fitness trackers — the most developed segment of the wearables market, devices started to be less like fancy pedometers and have begun to incorporate data on sleep cycle, heart rate, muscle exertion, and more.
Outside fitness trackers, whole new product categories are being explored, ranging from baby monitors that learn about sleeping patterns to help parents understand the best possible nap time to sophisticated motorcycle helmets which project directions for safer riding.
Then of course, there’s the Apple Watch, which will seemingly be one of the first real hybrids between a smartphone/tablet style application platform and a wearable device. Some analysts have suggested think that the introduction of the Apple Watch will serve to grow the wearables industry up to 600% from where it is today.
Implications for brands:
The most interesting aspect of the mainstreaming of wearables is going to be the mass availability of new types of data sets. As the industry matures, this data is going to represent a massive opportunity for branded experiences and applications that integrate with people’s lives.
The shift from the exclusive focus on wearables hardware to wearables software based on new data has begun. Fitbug began as a fitness device company — offering a tracker akin to a Fitbit or Nike Fuel band. In 2014, the company shifted some focus to create customized nutrition and workout plans for specific use cases such as pre- and post-natal health, branded as a new company “Kiqplan.” These plans integrate data from any mainstream fitness tracking device to offer better customization and personalization.
This is exactly the type of application layer product that brands could get involved with. What if food companies, grocery stores, health drink companies could access fitness data to offer consumers branded meal plans that integrate their products? What if travel companies could partner with the Skully motorcycle helmet to offered pre-loaded sightseeing routes the the best attractions inside a city?
For many if not most of today’s consumer brands, the advent of wearables will be about data, not hardware. We anticipate 2015 will be the first year where there is enough consumer adoption and data available and brand will to see some real, interesting native branded wearable experiences.
New Financial Landscape
Historically, there have been a relatively small number of actors that drive the financial landscape — banks for banking functions, payment processors through cards, etc.
Today, the financial landscape is facing massive and radical fragmentation as startups innovate and optimize around functions that used to be bundled with everything else.
In 2014, digital currency — specifically bitcoin — went from an interesting but relatively low profile exchange protocol for a set of passionate enthusiasts to a full-blown financial movement. The public became significantly more acquainted with the currency, as more startups that made it easier for people to use bitcoin came to prominence and more media attention was focused on it. Large e-commerce companies like Overstock.com drove consumer adoption for online purchases. Meanwhile, Bitcoin atms startup popping up in large cities around the world and startups like BitPay and Coinbase helped more than 80,000 retailers begin to accept the currency.
There are good reasons to think that bitcoin is more than a passing fad. Among them:
-Merchant fees. Retailers have had to deal with transaction fees for credit card processors for decades. Each year, these fees represent trillions of dollars in lost value. Bitcoin transfers have no or almost no fees, giving retailers a very good reason to drive consumer adoption.
-Privacy. With hacking scandal after hacking scandal entering our news cycles, people are going to think about privacy and confidentiality much differently. Bitcoin transactions are totally anonymized and don’t leave the same sort of paper trail that credit cards do, which could drive consumer interest.
-Global availability. Transferring money between countries remains one of the most expensive financial services available today. In a global economy, however, this is an incredibly important activity for everyone from multinational corporations to first generation migrants remitting payment back to family in their country of origin. There is likely to be huge interest in cheaper ways to make these transfers.
-Significant Venture Capital investment. VCs have put more than $400 million dollars into bitcoin startups in the last year. While venture backed companies can’t invent consumer demand, they can certainly accelerate it by attacking barriers like convenience and security.
-Changes in payment technology. As consumers get used to paying with applications on their phone or even wearable devices, the jump to paying with bitcoin will seem far less foreign than it does for many today.
Brands have a strong incentive to make paying for goods as easy as possible and 2014 was a breakout year for new types of mobile payments.
Certainly the most important advance was the introduction of Apple Pay, which connected hundreds of millions of iPhone users (and, consequently, saved credit card numbers) to the existing network of Near-Field Communications or NFC payment processing units at retailers around the world. The sheer size and influence of Apple gives more retailers than ever an incentive to adopt the technology, while the simple thumbprint system makes it less intimidating for consumers to try the technology out.
In store retailers are also experimenting with new types of mobile POS systems that change the check out experience from waiting in line and handing a cashier a credit card, to opening an app, scanning a product and leaving on your own terms.
Consumer networks are also getting in on the game, designing ways for people to more easily transfer money to one another as well as pay for goods directly from their channels. Facebook and Twitter both introduced “buy” buttons to allow brands to sell goods from their posts on the networks. Snapchat, meanwhile, partnered with Square to allow its users to send money to one another with a simple snap.
Even how people access capital is changing. From a business standpoint, crowdfunding has moved from novelty to mainstream opportunity. Today’s wearables movement, for example, is being fueled largely by sites like Indiegogo and Kickstarter that allow companies to assess consumer demand and take pre-orders before entering production. Some of today’s market leaders like Oculus (acquired by Facebook this past year for $2 billion) and SmartThings (acquired by Samsung this year for $200+ million) started on crowdfunding sites.
For brands, crowdfunding has also become a way to asses consumer demand and engage with consumers in new ways. Tilt’s white-label platform has made it signficantly easier for brands to run large scale crowdfunding and pre-order campaigns. Some, like custom clothier Taylor Stitch, have used this to try out new specialty products, while others have used it for corporate social responsibility initiatives. Dick’s Sporting Goods, for example, helped more than 200 youth sports teams around the country raise money simultaneously.
Crowdfunding has also become a resource for personal loans, with more and more companies like Lending Club offering crowdfunded alternatives to student loans, help with medical costs, home financing and more.
Implications for brands
Consumers are quickly developing a fundamentally different relationship with money. In this paradigm, they’re going to have more choice and flexibility than ever, and they’re going to demand top tier offerings that match the way they do things. As more and more products compete for consumer devotion, some power will shift away from the financial institutions towards the end users.
For brands, these shifts offer an opportunity to get ahead. Offering better in-store and online payment programs can build consumer devotion, and sync with loyalty programs that help build repeat business. Meanwhile, new lending options create opportunities to experiment with new products and even help consumers finance purchases of a brands products directly like never before.
Every day it gets harder to tell where the realm of “startups” ends and the arena of mature corporations begins.
The simple truth is that the consumer experience is changing faster than ever, demanding more creativity and adaptability from market leaders than even just a few years ago.
The trends in this report represent just a fraction of the innovation happening across the business landscape. Hopefully this small sample conveys just how much is at stake, and also how much opportunity remains for brands to get ahead and transform themselves to compete in a new world.
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