About a year ago I got the chance to speak at an event on digital transformation organized by Manetch in Santiago, Chile. Confidently, I spoke about the brilliance and achievements of our innovation in the digital content marketing process that we had completed in Clarín, one of the biggest newspapers in Buenos Aires, Argentina.
At that event, Rodrigo Orellana, Director of E-Business in Scotiabank, was invited to speak about the transformation underway at the Canadian financial institution. The director began talking about how we all want to transform our businesses, and he asked a question that left me thinking: “Why? Why do we look so emphatically to change processes, change solutions, and transform business models that historically have been working?” If nothing is more innovative than the analysis of giant quantities of data, but that according to Gartner Research, 60% of big data projects fail within two years, is the search for better performance really a sufficient reason to justify such a frequently unsuccessful investment?
The question, easy to respond to if we support our argument with the immense quantity of events related to innovation that exist, became a bit more interesting when Orellana proceeded to make the case for why Scotiabank needed to (or needs?) to transform itself. A specific data point he included in the presentation jumped out at me. According to a 2017 poll, 23 percent of consumers planned to change their banking application for a virtual wallet, which would be able to bring all of their forms of payment into one place. All of this paints an interesting picture for banks. But that wasn’t the whole story.
We are all familiar with the difficulties banks have in their fight against fintech. New, agile companies, born “digital first,” that move at a pace difficult for bigger financial institutions to keep up with. But Orellana made it clear that that wasn’t the biggest problem we should be preparing for. Next slide. A survey done by FinTech Connect found that 58% of banking professionals “agree” that Google, Apple, Facebook & Amazon (GAFA) will, in some form, replace banks in the next five years.
Silence. We have a problem.
I proceeded to investigate the potential problem a bit. Peru Consulting, an English consulting firm, found in a poll that 364 of the financial institutions and fintech companies they surveyed were concerned about the growing impact big tech could have in their sector. And there was more.
The GAFA threat exists not only because of the size and reach the tech giants would have if they entered the banking industry. Their brand, without regard to any concrete benefit they would offer, was attractive to some consumers.
That day, I arrived home content with how my presentation was received, sure that I was able to show some of the difficulties that we had encountered in our project, and was able to show some of the achievements that we had achieved. But one question kept repeating itself in my head — could we also compete against GAFA?
Throughout history, it’s difficult to find such a strong growth of companies within one industry. In this decade, the tech companies, consisting primarily of the big four, GAFA, have been a synonym of success. They have positioned themselves at the vanguard of innovation in various ways (organizational, business model, management of personnel, etc.), and have become an unprecedented source of wealth. In just 10 years, the most valuable companies in the world have went from being a diverse representation of various industries, to being a centralized team that makes all the rest of the companies look at the very least, obsolete.
I know what you’re thinking. “Rodrigo is exaggerating. Amazon doesn’t compete with me. The author didn’t even mention what all of this has to do with his own newspaper, Clarín.” I know, I thought the same thing. Until I began to dig a little deeper, and I found the investment portfolio of Jeff Bezos’ company… and among the companies, I found the Washington Post. The idea of competing against Amazon stopped being a concern, and became a reality. The hopeful message I brought to Chile about how our new business model at Clarín, which was based on digital subscriptions and our renowned paywall that allowed us to overcome geographical limits that traditionally restricted physical newspapers, stopped being an advantage and became a threat. If we were to break into their market, they would also break into ours. In the list of potential competitors, we now had to add Bezos. And the problem was not just Amazon.
Google’s arrival, pushed by its venture fund capital from GV, gave us a new perspective. The question to ask is not if one of the tech giants will enter our industry, but rather, when, and to try and arrive at that day as best prepared as possible.
It’s tough to find the recipe to success, specifically because it doesn’t exist. What we can do is begin to identify patterns or practices that have worked well for others that have had to confront tech giants and learn from them. In this sense, Nicolas Bouzou, President of Les Rencontres de l’Avenir, wrote a very interesting article about what might be the recipe to survive when facing GAFA. There, he identified three different practices that each company that hopes to survive should follow:
What’s more, we can add another point to the list:
That this brief analysis began with a reference to Scotiabank is not necessarily an accident. The financial services industry is experiencing an enormous disruption, first due to fintech companies, and second with relation to GAFA. A survey conducted by the European Financial Management Association (EFMA) at the beginning of last year on Open Banking and PSD2 identified the difficulties banks have when trying to survive with obsolete technology, and how the model of “banking as a platform” is becoming a key strategy to scale operations.
Financial services are supporting innovative projects as a response to threats. According to an analysis by Statista, 63 percent of banks analyzed had developed accelerators or startups based on investment funds. North American banks have invested $3.6 billion in 56 fintech startups. On the other hand, just 7 percent of banks have invested in creating their own branch of research and development geared toward creating new solutions.
Some might call “investing in the enemy” a Machiavellian gesture, but it also could be called “insufficient.” Despite all of the wealth and resources that banks have, depending on new companies to ignite innovation in their industry could be risky. Equally, accelerators are easy to set up, but as the data show, have varying degrees of success.
As can be observed in a very detailed article from TechCrunch, there are also many lessons to be learned from the experience of others in more traditional industries that exist, for example, retail.
Defeating Amazon is difficult due to it’s large size, reach and depth of its storage and fulfillment infrastructure, and vanguard automation. Meanwhile, the logistics of running a supply chain have become more complicated, with challenges ranging from the transportation of physical goods from the factory to other challenges that come in the last mile of delivering the product to the consumer. What’s more, the inherited technology retailers have struggles to provide processable information due to little transparency, an inefficient flow of information and limited automation. Newer tech companies that are well positioned to create lean and effective solutions for the industry are those that work to resolve specific pain points, including upgrades, visibility of the entire supply chain, delivery speed, and profitability with relation to storage and order fulfillment.
The infrastructure inherited in the majority of employers have challenges ranging from being able to track or visualize existing inventory. Amazon’s announcement of improvements to same-day shipping is a precursor of the place where the industry is headed. According to Invesp, more than 65% of retailers surveyed hope to offer same day shipping in the next two years.
Just as Spotify and Netflix have conditioned consumers to expect a price of around $10, retailers and players involved in the last-mile delivery of products are doing the same with shipping. This limits the capacity of those involved in shipping to pass the cost on to consumers, which obliges sellers to look in other places to reduce costs.
Several new companies are springing up to solve the problems that companies who have inherited infrastructure are ill-equipped to solve on their own: allowing retailers to compete with Amazon by responding quicker to the needs of the market and contain growing costs.
Flexible storage on-demand has become a good option to reduce costs and expand a company’s footprint, just like AWS. Companies like FLEXE and Flowspace are connecting unused storage space with the capacity to serve customers that have dynamic requirement for storage and fulfillment, creating a market that’s more fluid and efficient, while at the same time increasing the visibility of assets. With respect to the trucks used for shipping products, companies like Convoy or Ontruck, are also ensuring shippers make better use of their capacity, to avoid empty trucks.
Just like those involved in transporting goods (including giants like Walmart), there is a similar effort to create a more profitable e-commerce operation; storage, distribution and fulfillment being key areas to watch in the coming years.
As if something else were missing to make the picture even more discouraging, the arrival of the pandemic gave a more favorable position to the tech giants. As Time Magazine published recently, “Many companies won’t survive the pandemic. Amazon will emerge stronger than ever.”
According to the financial firm Facteus, consumers have spent on Amazon, between May and July of 2020, sixty percent more than what they had consumed in the same period of 2019. On the other hand, UBS predicts that for 2025, e-commerce will represent a fourth of the total retail sales, and that 100,000 retail stores will close their doors. Throughout all of 2020, Amazon´s net profit was up 84% compared with 2019, with sales hitting $386 billion, according to Forbes. If we add to this the role that Amazon has, not only at the moment of making a purchase, but also on consumers when deciding whether to make a purchase or not, the future of its competitors grows darker still.
But Amazon doesn’t only make sure to be able they can deliver to their customer, they also try to maintain their presence with consumers. With the objective of assuring their operations during the pandemic, they have invested, according to Bezos himself in 2020, $4 billion in protection against the coronavirus, including protection for their workers, cleaning of storage facilities, and their own testing methods for workers. Scott Galloway has called this the first “vaccinated” supply chain.
As incredible as it may seem after such a detailed analysis, there also exists the possibility of a future where we don’t just compete against GAFA, or FAANG (if we also wanted to add Netflix to the list).
The conflict created by the antimonopoly investigations that the US government is doing could be more problematic for companies than it might originally seem, according to Linda Martin, analyst in Needham and Co. Facebook should be concerned because the Federal Trade Commission has a much bigger reach than the Department of Justice. That, in turn, could open the social media giant to a much larger and impactful investigation. Facebook and Google have been under more scrutiny recently because of their position as dominant internet companies.
There is another bigger worry about the coming battle between big tech companies against regulators in the world, and the impact that might have on growth.
“We believe FAANG growth rates are decelerating and they will increasingly enter each other’s business to drive growth,” Martin was quoted as saying in the article. “We believe that not all FAANG ‘s will survive this battle.”
Martin also advised that Facebook’s margins are falling as their costs grow to 50% annually. Despite the growing worries of regulators, and a year filled with errors with respect to user privacy, Facebook’s number of daily active users grew by 11 percent in 2020, when compared with 2019.
Another problem is the replication of business models, and surely there is no better example than what we are seeing with the phenomenon we could call “Streaming Wars.” While Peacock (a streaming service from NBCUniversal) joins Netflix, Hulu, Amazon Prime Video, HBO Max, and Disney +, the battle becomes even more intense.
Rolling Stone Magazine takes a more pessimistic posture, and considers that in the “Streaming Wars,” there will be just one big loser: the user. Although it’s possible that the user could cut their cable bill, to recreate the packet of cable subscriptions, they would need to subscribe to at least a half dozen streaming platforms, all of which represents an increased cost.
Peacock joins the ranks of the competition with a small difference: its business model is not based on subscription, but rather on commercials. Without costs directly to the user, thinking about the user’s experience becomes more relevant than ever.
As important as the content may be, long-term success will be determined by the experience viewers will have to discover and control content. The simplicity and user experience while in the application are fundamental to be able to offer an equation of price/value that is acceptable to consumers.
The reason I come back to Peacock is this: they are structuring their content in more than 30 “channels” in relation to their recognizable brands like The Office, Today Show, as well as their offering of news and sports. Their objective: create a new form of navigating channels that, according to the spectators in their earlier pilot done prior to launch, turned out to be an easier experience for discovering new content. For a broadcasting service with commercials, more time spent watching content and less time looking for it means more commercial space to sell. This also means that users will be more satisfied, and would be more likely to make Peacock their first stop to watch content, taking time away from Netflix and others.
In times in which the US Congress brings the CEOs of the largest companies before them to testify about the possibility of having violated antitrust laws, we have two options. We can take meaningful steps to respond to the “Why?” posed originally by Orellana in his presentation, or we can cross our fingers meanwhile looking at the sky and saying to ourselves “hopefully today isn’t the day.”