Faced with a rapidly changing consumer, the biggest hoteliers are changing their approach. In doing so, however, they threaten to almost entirely alter the hotel industry.

The hotel industry is not usually one known for innovation. In the last 40 years, hoteliers have introduced only minor changes coming few and far apart: Holiday Inn debuted the Double Queen bed room, someone painted a white wall grey, and a few have finally managed to add Wi-Fi. But a new wave of guests, the oft-discussed millennial generation, is demanding a new type of hotel that poses to fundamentally alter the industry. Initially dismissed as outlandish, the boutique hotel model is entering the mainstream, falling into favour with the latte-and-laptop generation over the carbon copy boxes championed by brands like Hilton, InterContinental, and Marriott. But responding to these needs is more than a momentary race for market share. As the big hoteliers move into the boutique game hoping to recapture the modern-day traveller, they are altering the industry at its roots, and perhaps unknowingly, sowing the seeds for a whole new way of doing business in the hotel space.

Traditionally the major players in the hotel industry left innovation to avant-garde boutique hotels. These city-based concepts that rose to prominence in the 1980s were viewed largely as fads. Hotels like the Bedford in San Francisco and The Blakes Hotel in London catered to an insignificant group in search of a sophisticated, unique, and off-beat hotel experience. For these people the boutiques acted as a counterweight to the unchallenged standardisation of the bigger chains. As the New York Times’ David Brooks explains in the The Edamame Economy, “instead of offering familiarity, they offered difference. Instead of offering beige, they offered edginess, art, emotion and a dollop of pretension.”

Standing strong behind staggering economies of scale and multi-brand loyalty programs, the larger hotel groups did not consider the forward-thinking boutiques a threat. This belief was reinforced as they expanded globally throughout the 1980-90s. The chains employed a growth model that demanded the standardisation and commoditisation of their products, giving rise to what is now known as the ‘box hotel concept.’

All around the world, hoteliers adhere to cookie-cutter methods that centre on a number of familiar core products and capabilities. Standard Operating Procedures (SOPs) delineate exactly how hotel staff must behave to maintain the brand’s image. A 2010 Hilton manual outlines how a caller’s name must be used twice during a call. Housekeeping staff at Marriott famously follow a 66-point checklist for guest room servicing and ensure the sheets in Kuala Lumpur have same specified thread-count as those used in London.

While the consistency of these brands is a remarkable accomplishment, the ‘McDonaldisation’ of the hotel experience has made the experience what The Economist calls an “emotional failure.” Inherently, the model continues to see economic success due to its established reliability and worldwide network. After all, the familiar red Marriott logo remains one of the surest signs of comfort and a decent night’s sleep. Undeniably however, there is a  growing segment of travellers looking for more. Currently only serviced by boutique hotels, more and more big hoteliers are looking to tap into this market of affluent, trendsetting travellers.

The Modern Guest

As the larger hotels look to the boutiques for their pioneering insight, the greatest difference is surely the type of guest. The modern traveller, who is as likely to step out of a sleek black Uber wearing a tailored suit as arrive in a t-shirt and jeans after using the Tube, is one of the most significant changes in the hotel industry’s recent history.

“Guests used to come for one of two things: business or pleasure,” says Patrick Tan, a student at Cornell and front-office supervisor at the school’s esteemed Statler Hotel. “Now it’s a mix of work and play that involves everything from business meetings and art gallery visits to city tours to drinks at the city’s best bars”

Tan’s statement is supported by market research. A 2013 survey conducted by a Hilton Garden Inns saw 45% of respondents cite new experiences as the best part of business travel. For 65% of the survey-takers exploring a new city was the number one motivator to extend a business trip.

More than ever before, the hotel guest has transcended the confines of their hotel. Keen to explore, curious, social, and often combining work and weekend trips, the modern traveller and guest no longer looks for the uniformity offered by the larger business chains.

“People are seeking unique experiences. They are seeking hotels that are distinctive from others in style, design and service.” writes Veronica Waltdhausen in a study for leading Hospitality Consultants HVS.

In the golden age of hotels, people came to be pampered and surrounded themselves with luxury. It was under this model that the star system, where the number of stars equates to higher price point, came into being. But the modern-day traveller is no longer looking for a money-driven experience. Instead of status symbols they seek experiences.

“Do they really want a Nespresso machine in their room (the proud new addition to most hotel rooms),” Waldthousen asks. “Wouldn’t a guest be much more likely to relax in a bar in the hotel’s lobby lounge and drink a coffee surrounded by other people?”

This movement away from the tangible product to an experiential one is complemented by a change in what millennial consumers look for in hotels. Rooms at CitizenM, the contemporary Dutch hotelier that was one of the first players to act on these new demands, feature plush beds, high-powered rain-showers, and free WiFi and movies. Advertisements for the hotel, however, centre on the actual guest experience, highlighting “a great night’s sleep” and “a love for free movies on demand.”

The company’s mantra – affordable luxury for the people – does away with unnecessary luxuries over which many hotels compete. The hotel’s lobby swapped out doormen and luggage carts, favouring automated check-in kiosks that set room temperature and mood lighting to a personalised preference upon a guest’s arrival. A buzzing bar and eatery is complemented by sharp but inviting italian furniture, contemporary art and books, as well as dynamic meeting spaces right off the lobby-floor.

“The lobby is more like a living room than anything else,” says Noreen Chadha, CitizenM’s Commercial Director. “The room is the place to sleep and relax while the lobby is the perfect place to work, meet, eat, and drink.”

As Chadha explains, the physical boundaries that once distinguished hotel lobbies, bars, and restaurants are blending together. The open-space lobbies of hotels like CitizenM or the Ace Hotel simultaneously entertain an array of work meetings, lunch dates, happy hours, and even musical performances. For the hotels, the lobby’s transformation works to bring in both guests and city residents. Whereas the typical hotel bar and restaurant sits mostly empty, these venues hum and buzz, drawing in both the hotel guests and local crowds. For these kinds of hotels, the restaurant can move from being a money-losing nicety to a key asset. According to a Business Journals report, hotels that share their vision and values with restaurants can see up to 20% of revenues coming from food and beverage operations.

The hotels also benefit by being able to generate more revenue per square foot. While the larger corporate hotels may have higher occupancy levels and even feature several restaurants, a comparably-priced boutique hotel that optimises its space and plays host to more guests and visitors in its bar, restaurant, or lobby will have greater revenue per square footage. So while it is difficult to make an apples-to-apples comparison, the boutique model almost certainly presents a better deal.

Historically, the big hoteliers looked on passively on from the sidelines. Business guests and foreign tourists built work trips and holidays around the reliable and consistent nature of the big chains. From Caracas to Mumbai, a Hilton was a Hilton.

But as the millennial generation approaches its peak, a new type of guest is emerging. No longer impressed by turn-down service and trouser presses, they seek unique experiences and interactions. Generation X and Y already make up more than 50% of hotel bookings. And with the boutique industry expected to increase at 6.5% annual rate between 2014 and 2019 according to an IBIS World report, each of the major chains is now keen to capitalise on this growing industry.

Bringing in the Big Boys

With the hospitality industry continuing its post-recession recovery, the large hoteliers are looking to diversify their portfolios. Though boutique hotels took a 12.7% hit in 2009 with revenue per available room (RevPAR) falling as much as 30%, the segment typically yields high profit margins. During times of economic upswing, boutique hotels are more attractive than ever. Generally low-cost investments, they attract an affluent customer and offer an exciting opportunity for brand building. Among the hotel industry’s largest operators, these projects are being fast-tracked by forecasts about the vastly different needs of the rapidly expanding millennial segment.

Besides the substantial research pointing to the millennial opportunity, one of the industry’s largest players, Starwood, is already knee-deep in the boutique world. The company, whose 10-brand portfolio demands about 12% market share in the boutique industry according to IBIS World, owns some of the industry’s leading names. Its W, Aloft, and Element hotels and franchises have proved to be  “game-changing” for the company and continue to lead and “disrupt” their respective industries, according to Starwood’s 2012 report. In each market, these Specialty Select Brands (SSBs) continue to drive growth*. In Canada, the hotelier’s Element brand debuted just last year but has already overtaken its competitors on the popular comparison website TripAdvisor.

Given Starwood’s demonstrated track-record, more and more of the major players are launching brands into the space. Next year, Marriott will debut its Moxy brand in partnership with the Swedish design giant, IKEA. Despite it being the world’s largest hotelier’s first foray into the millennial space, the hotels feature a now-familiar model of design, approachability, and affordability. By a similar token, the parent of the normally no-frills Radisson brand plans to spend $140 million building or acquiring the first five properties of its new, daring Radisson Red brand. The hotel, which channels the concrete, loft-like feel of a modern art gallery joins Starwood’s Aloft, Hyatt’s Andaz, and InterContinental’s Hotel Indigo brands .

It goes without saying that the entry of the larger players has dramatically increased the size of the boutique industry. As explained by IBIS World, the industry is “on its way up to the penthouse,” with industry growth expected to surpass pre-recession levels before 2019. Fielding heightened demand from a 3.1% and 2.7% annualised increase in the number of international arrivals and domestic trips respectively, hotel operators will see a surge in demand in both domestic as well as foreign markets.

A Boutique Bubble?

While the numbers point to a triumphant ‘go,’ questions remain about the viability of this new model. For one it seems as though both boutique and big brands occasionally lose sight of the purpose of this modernisation. From a literal standpoint, critics of Marriott’s upcoming Moxy brand claim the brand’s fast-paced rollout – which hopes to build 150 Moxy hotels in Europe over the next 10 years – may be too ambitious. Others cite the location of its first property next to Milan’s Malpensa airport as too far removed for the economically-minded millennial.

In a 2007 article for The Wall Street Journal, Darren Everson highlights some of the industry’s more fundamental issues. Everson sketches the stay of a University of Southern California graduate student staying at the W Chicago City Center hotel, citing confusion and discomfort.

“There is a backlash brewing against boutique hotels,” Everson writes. “[While] W’s are still thriving, the…segment is finding that some customers – even once loyal ones – are getting tired of their tragically hip ways.”

Indeed, as the industry giants skip from baby steps to a full-steam sprint, they risk alienating their newest customer before they even arrive at the hotel’s doorstep. In the age of cut-throat competition and review sites like Hotels.com and TripAdvisor, just a few negative reviews can result in being crossed permanently off the list.

So, while the millennial guest has almost certainly swapped room service and bidets for contemporary design and free Wi-Fi, certain elements remain, and are perhaps more relevant than ever. Though veterans of the old-model, consistency, loyalty incentives, and good service remain at the top of the list for many consumers. The form follows function principle continues to reign supreme (as this author found out when water from his shower spread cooly across the entire bathroom floor at The Standard Hotel).

For the boutique industry, the entry of everyone from Hyatt to Hilton ushers in an unprecedented era of competition. For the full-line producers however, the move into the boutique space may be the first step to fundamental change the hotel industry as a whole. While currently still limited to one or two brands in the portfolio, the tenets driving the change: change in the core customer, promises to revolutionise the field.

As Jeffrey Catrett points out in his article for Hotel Business Review, similar changes to the retail and other service sectors have forced industry-wide overhaul. For the standardised hotel industry, the costs of changing thousands of properties around the world seems almost unimaginable. The ageing core products of these hotels – behemoth conference spaces, spas, and other amenities – may soon be more or less obsolete. While the luxury segment, particularly resorts, will be sure to carve its own niche, the mainstream hotels may soon face something of a crisis. Indeed, changing consumer trends sometimes stirs trouble. For the hotel industry and the biggest players in particular, however, they just might change the way they do business entirely.

*Starwood’s Annual report does not provide a financial breakdown of each brand, making it difficult to quantify how much each contributes to the company’s overall profitability and growth.

Uber is a technology company based in San Francisco that provides customers with private car services on demand with its smartphone app. Basically, with only one tap on its smartphone app, Uber will connect a customer with a Uber driver, and the customer can enjoy a reliable and safe ride experience. Everything is done through the app, so it’s totally cashless and convenient. Since its founding in 2009, Uber service has expanded to over 70 major cities around the world. While its revenues had grown more than 10 times in 2013, Uber continues to seek out for larger markets. And recently, in February 2014, Uber officially launched in China. As China has the largest population as well as the largest smartphone market in the world, Uber considers its expansion into China as a greatest opportunity for the company ever in terms of the size of the market and potential customers, but maybe it should be prepared to face its toughest challenge while performing in China.

Hiring local staffs will be a starting point for Uber’s localization. Uber needs to hire the right team in China in order to succeed in the country as a foreign company. For example, one of Groupon’s biggest mistakes which led to its failure for expansion in China is that it failed to hire local staffs for the right management positions. Right now, Uber is still actively hiring management roles in China, as well as drivers in major cities like Beijing, Shanghai and Guangzhou, to join its ride-sharing community. Besides this, Uber has made some important decisions in terms of localization, including creating its Chinese name “You Bu” to target local customers and build up its brand image, and supporting online payments via Alipay, which is one of the most popular e-payment services in China. And instead of owning all its cars in China, Uber forms partnership with local car rental companies to rent the cars.

One existing opportunity for Uber to grow in China is that many Chinese people in major cities have already accepted the idea of giving rides to strangers, so it won’t be difficult for Uber to fit in the culture with its ride-sharing app. As a consequence of the increasing number of middle class in China who can now afford taxis as their daily transportation options as well as the fact that the number of taxis in urban centers hasn’t kept pace with the increasing demand, it now has become extremely hard to get a taxi in major cities like Beijing and Shanghai, not to mention the time during holidays and rush hours. Thus, as a result of the high demand of taxi services and the lack of enough supplies of taxis especially in major cities, there have been a growing number of “black cabs” in the cities. Black cabs refer to those private cars that the drivers make money on their own by providing rides to people in need of cabs, without any proper taxi licenses. It’s an illegal service, but somehow becomes acceptable in China due to the high demand by customers and as it’s hard to regulate by the government as well.

It’s quite normal for people in major cities to hop into a black cab when they fail to catch a taxi but in need of a ride. I personally do the same thing. Sometimes I need to get to somewhere in hurry, and I can never make it if I take the bus or subway as it takes too much time. But I just cannot catch a taxi nearby. When I call the taxi company to ask for a cab, they usually tell me “There’s no available taxi around your place. Please wait for a few minutes and try again.” It’s really frustrating. However, the good thing is that there are always a couple of black cabs waiting near our neighborhood. When the black cab drivers assume that you are trying to get a cab, they will approach you and ask where you are heading to. If you accept the price based on the distance, deal! It’s usually cheaper than a taxi and much more convenient to get one especially during rush hours or holidays, so such illegal service is somehow quite popular in China. Of course, safety will be a concern, just like people’s concern for Uber’s safety control when it just launched in the U.S. as a ride-sharing app connecting drivers with customers. But many of the people in China actually accept such ride-sharing concept, which creates the potential for Uber to expand in China.

Besides the opportunity, there will also be competitions, accordingly. The biggest challenge for Uber will be the fierce competition in the Chinese market. Interestingly, even though Uber has benefited greatly from its innovative and successful ride-sharing model, its presence in China doesn’t seem to disrupt the taxi cabs industry in the country. Actually, according to Quartz, “the market for taxi services has never been bigger in China”, especially in major cities like Beijing and Shanghai. I interviewed a taxi driver, Hailin Wu, in Shanghai, and from his perspectives, he didn’t even take Uber as a competitor. “There had been competition over the past few years, when it was quite easy for people to catch a taxi and we as drivers needed to compete for customers.” Wu said, “But now, the demand for taxis is always higher than the actual number of taxis available in the city.” Wu shares his taxi with his friend and does one shift per day (for approximately 10 hours), and he usually has customers from the start to the end of his shift. He barely has the time to grab a meal during work. According to Wu, there are some apps doing the same thing as Uber, but they don’t seem to affect the business for taxi drivers. In cities like Shanghai, there is always more demand than supply in the market. So for taxi drivers like Wu, there will always be enough people looking for taxis, even when there are those black cabs all the time, as well as those emerging apps. It’s even usual for drivers to “select” their customers in these major cities. For example, if the distance to your destination is not far enough or the route to the destination is with heavy traffic, it’s very likely that a driver will refuse to provide the service to you.

Thus, from Wu’s point of view, Uber’s major competitors should be those similar apps in the market which already have their customer bases as well as large amount of drivers. Uber’s biggest competitor as a smartphone app should be Didi Dache. It has been the most popular ride-sharing app in China since its launch in 2012. Users can use voice messages to contact drivers nearby and can even pay a small fee to let the drivers wait for them for a while. At the end of February 2013, Didi announced to have 600,000 subscribers and 12,000 drivers in Beijing only, not to mention the number of drivers it has around the country. Other competitors include Dudu Jiaoche, Yaoyao Dache, Kuaidi Dache, and Dache Xiaomi. All these apps provide services in a similar manner. But compared to Uber, they already have a steady and even growing user base to maintain stable revenues. More importantly, many of these apps have seen growing investments from outside. For example, the E-commerce giant Alibaba has invested nearly $1 million in Kuaidi Dache in April 2013. As a result, when expanding into China, Uber really needs to find out its competitive advantage in order to attract customers and succeed in the market.

Moreover, how to maintain a competitive price is also a question. Initially, Uber positioned itself as a premium or even luxurious riding option in China, in order to differentiate itself from the so-called “crazy cheap” taxi market in the country. However, there isn’t such high demand for riding services that come with a premium price. Those who can afford such services on a daily basis usually already have their private drivers. And the competition still exists. For example, Yongche is a famous web-connected car rental company in China, offering limo rides with drivers at a competitive price. Yongche’s price is 300 RMB for driving you in an Audi A6 from central Shanghai to Shanghai Pudong International airport, while Uber charges approximately 350 RMB for mid-range to high-end cars for the same distance. In order to be more competitive, Uber has adjusted its position and strategy. Now the base fare to use Uber service in Shanghai has dropped to 30 RMB, compared to double the price (around 60-70 RMB) when it started its test run in the city in summer 2013. However, the price is still not quite competitive in the market, especially when you take into consideration all the similar apps, black cabs, and the already affordable taxis. After all, a price war won’t help Uber succeed in the Chinese market.

I consulted Uber’s issue with Carl Cai, a senior consultant at PwC Beijing. He told me that Uber approached a famous consulting company in the industry to take care of its localization in China. However, according to Carl, “Whether Uber can succeed or not in China fully depends on how soon it can figure out its competitive advantage in the market.” Now Uber has its Chinese name, convenient payment options tailored to Chinese customers, and it is actively building up a outstanding management team as well as a welcoming community for both its drivers and its customers. But this is not enough. They still haven’t figured out their “fit” strategy to perform in the competitive market in China, and to differentiate itself from competitions. Uber should take a close look at itself, take approaches to performing that are suitable to the given situation in China, and build on their strengths based on their success in the United States. For example, instead of lowing the price and starting a price war, maybe build on their innovative idea not just as a ride-sharing app, but as a ride-sharing community, which is a fairly new and unique concept in China.

It’s difficult to judge Uber’s performance right now as it has just launched officially in China for few months, and the company didn’t want to mention the actual numbers of its performance in China so far. Yet, Uber is still optimistic toward its expansion in China despite all the challenges. Actually, Wall Street Journal reported based on the interview with Allen Penn, Uber’s head of Asia, that the number of trips booked in Shanghai through the Uber app since the test run in August 2013 even exceeded the number of trips made in San Francisco or New York during each of their first half year. “The company prides itself on being a premium service and, perhaps crucially, a “safe” option that includes a high level of customer service.” said by Sam Gellman, head of Asia expansion at Uber, “Our focus is on delivering a great experience, and numbers so far have shown great initial results and we just want to keep building it up.” Maybe we just need to wait a few more months to see Uber’s results in the following periods, and to find out whether its future in China is as promising as it has expected.

 

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References

 

http://thenextweb.com/asia/2013/08/07/uber-china/

http://www.techinasia.com/4-mistakes-behind-groupons-failure-in-china/

http://qz.com/70123/chinas-versions-of-uber-could-fix-city-cab-shortages/\

http://www.techinasia.com/uber-picks-chinese-officially-launches-china/

http://thenextweb.com/asia/2014/02/13/uber-is-bullish-about-its-potential-in-china-but-it-wont-discuss-rivals-or-reveal-figures/

http://online.wsj.com/news/articles/SB10001424052702304703804579379884010342724

 

Interview with Hailin Wu, taxi driver in Shanghai

Interview with Carl Cai, senior consultant at PwC, Beijing.

 

The cable television industry’s costs are increasing while its user base is simultaneously vanishing. “2013 marked the first year in which the paid TV industry actually shrank,” reports USA Today. More and more people are looking to a cable-less future, flagshipped by a trend dubbed “cord-cutting”, while the current generation of millennials will probably exist as something more along the line of “cord-nevers”. However, multichannel video programming distributors (MVPDs), including cable television/pay-TV operators like Comcast, satellite operators like DirecTV, and telco companies like Verizon, all rely on the current model and won’t give it up without a fight…a fight finally unified under the banner of: ‘TV Everywhere’.

America easily made the transition from a broadcast- to a cable-nation. An endless array of channels featuring a smorgasbord of programming perfectly suited our appetite for consumption, while also fixing some of the technological issues found with (free) antenna-based broadcasts. In 1996, the Telecommunications Act created the cable industry as we know it by “relaxing regulation on media cross-ownership…to foster competition…[and allow] telephone companies to offer TV service and cable operators to deliver phone service.” This also opened the door to FCC-approved mergers between the big boys of the media industry, resulting in the monopolistic fact that all content creators are controlled by a few major companies: Comcast/GE, Walt Disney, Viacom, CBS, News Corp. [that recently spit out other giant 21st Century Fox], and Time Warner Inc. Several of these companies own local TV stations in key media markets. Comcast is also the largest cable provider in the country, even more so if their attempted acquisition of Time Warner Cable (a separate entity than Time Warner Inc.) is allowed.

As online distribution continues to rise, consumers wouldn’t be faulted in wondering why content creators still kowtow to the Man. The answer will in no way surprise you: money A.K.A big bucks in the form of affiliate fees. Every year, $32 billion flows from the cable companies to content creators in order to grease the machine. “Estimates suggest that the annual affiliate fee revenue at companies like Viacom and Disney is around $1.5 billion and $2.0 billion respectively.” So for content creators, the strategy becomes entirely focused around “profit maximization.” Find a couple hit shows, while keeping the rest of the lineup relatively inexpensive to curb programming costs. “The ‘hits’ make you a ‘must have’ for any cable or satellite carrier – granting you the right to ask for fees.” Content creators want channels balanced at just the right point between costs high enough to give a few shows the production-cost/marketing edge they need, while still keeping the overall schedule cheap enough to reap the benefits of affiliate fees. Why are there so many sports channels? Remember the mantra: “If you own exclusive content, you might as well build a channel around it.” In this way, even with online distribution an option for the content creators, the cable companies still have them hooked on precious affiliate fees.

The case of Hulu is a great example. With stakeholders including Fox, Disney, and NBC Universal, the service was initially a consumer-friendly (read: free) way of streaming their favorite shows whenever they so desired. Nicely personified by Bill Gurley of Above the Crowd, pay-TV distributors smiled nicely at the content creators, while through gritted teeth said, “[w]e pay you an affiliate fee to distribute your content to the homes we serve. We understand you have multiple distribution partners. What we don’t understand is why you would give content to some of them for free, and still expect us to pay our fees…” And like that, Hulu became a subscription-model service itself.  Join us or die, says Pay-TV…

Now the rebellion seems to have moved to a grassroots level. The cable bigwigs created the pay-TV model by charging customers a subscription price in exchange for a cable package of channels. Once-reasonable prices have grown with the scope of television, driven by our increasingly cinematic desires. Like the DVD boom fueled the booming budgets of Hollywood, TV scale has increased to the point where millions and millions of dollars can be spent on a single episode of Lost or Game of Thrones. Spectacle is where the eyes drift. Cable companies have also reduced spending in the customer service department, leading to an immense decline in consumer satisfaction, with jokes about Comcast’s lack of reliability just as relatable as the age-old classics like “what’s the deal with airplane food?” While $86 on average in 2011, cable bills are expected to climb as high as $123 by 2015. Addicts, and by that I mean television viewers, have realized they might be taking a ride they wouldn’t actually have to pay such exorbitant costs for elsewhere. So, they cut the cord, and end their subscription to cable. The age of “cord-cutters” and “cord-nevers” began.

Eyes opened when Netflix emerged as an instant streaming titan, alongside video purchase and rental systems like those present on iTunes and Amazon Prime. Combine such services with products like the AppleTV, the Roku, or the new Amazon FireTV, and a hassle-free solution to cable company headaches became clear to a lot of people. Instead of a high cable bill, a one-time purchase of a streaming device opened the door to a still-immense quantity of content. With many cable customers already in possession of a Netflix account, Amazon Prime login, or iTunes videos, it seems the costs ended there, with no messy dealings with Comcast needed. This ‘a la carte’ or ‘over-the-top (OTT)’ model of content consumption already had a popular infrastructure in place, and now quality products popped up to streamline the process further.

According to Jim Edwards of Business Insider, “1.3 million of [cable distributor] Charter Communications’ 5.5 million customers no longer want TV – only broadband [as of November 2013]…[p]eople are giving up on cable TV as a standalone product.” Fewer households are stocking televisions as a part of their personal American Dream, content to consume media on technology like mobile devices, tablets, and laptops. Instead of plopping down on the couch in front of the tube after a hard day’s work, people instead boot up their electronics, Mom upstairs, Dad in the basement, the kids in their rooms…it’s come to be known as “vampire media,” coming out after dark and sucking away life as the pay-TV industry knew it.

Even antennas are making a comeback, able to offer the Netflix-enabled population sixty channels or so of free broadcast content, in better-than-cable HD, and, if new company Aereo has its way, the ability to record and rewatch free broadcast content on the device of their choosing. In this case, broadcasters claim theft, while Aereo responds it’s only supplying the equipment (“arrays of small antennas – one for every subscriber – to stream over-the-air television signals to its customers”) and not the content.

Many like Aereo have taken up the ‘cord-cutting’ mantle and proclaimed it the future, a weapon to use against the supposedly greedy and inept cable giants. Video for the people, made by the people, distributed by…well, here’s where it gets tricky. Returning to Aereo, the company has found itself before the Supreme Court, its business resting in their hands, while cable calls for blood. The Court finds itself in a tight spot. While it views Aereo’s business as unconstitutional, their ruling’s wording must be very carefully constructed in our digital age – they don’t want to accidentally outlaw the Cloud alongside Aereo. With such a thin line between legal and illegal a distinct possibility, how is cable to combat the rising threat of Silicon-Valley-fueled distribution while keeping consumers firmly in their (certainly not free) corner? Enter Jeff Bewkes, CEO of Time Warner, circa 2008.

Bewkes, who once headed HBO and led it to success, watched as cable’s cultural grasp slowly loosened. He also noticed how HBO was experimenting with an online streaming service, in select Wisconsin cities, where as long as viewers could login as an HBO subscriber (‘authenticate’ their account) they could stream all the HBO they wanted. Bewkes, along with Comcast CEO Brian Roberts, saw such a model could be viable for cable subscriptions as a whole. Thus, TV Everywhere was born.

Bred slowly through systems like Time Warner’s TWCTV and Comcast’s Xfinity TV, TV Everywhere has now been picked up by the Cable & Telecommunications Association for Marketing (CTAM), rebranded in trendy lowercase ‘tv everywhere’, and put forward as cable’s Netflix-generation killer app. CTAM is readying its member companies (including A&E, Discovery, Disney, Time Warner, Comcast, Viacom; 16 cable companies and 25 content providers in full) to advertise all of their diverse subscription/streaming services under the singular new banner in order to promote unity and simplicity. “’The cable industry has been very good at not jumping too early on a technology, and watching it play out first,’ says Colin Gounden of Grail Research, which advises companies on new products. ‘They have a knack for getting the time right.’” CTAM’s goals for the new year have been set in stone by the board of directors, made up of programmers and cable operators from across the spectrum of the partnered companies. The First Commandment of tv everywhere is for half of all cable subscribers to be aware of tv everywhere by the end of 2014, up from about twenty percent now. The Second is to make the half already aware into devoted users.

Bewkes illustrated such a possibility with his battle plan to use viewers’ familiarity with cable’s huge brands and turn their love of streaming against the new independents by restricting digital rights to popular shows. The goal of tv everywhere is “to keep subscribers happy by letting them access cable content wherever they might be. In practice, this means lots and lots of apps,” like HBO Go, FX Now, and Xfinity TV. Comcast’s new X1 box operates very much like a Roku, full of app offerings like Pandora and even video games, but with a full cable subscription stacked on top. CTAM is also betting on the remaining cable figures: 56 million people are still subscribers, on top of their cord-cutting-enabling devices. To Multichannel News, CTAM CEO John Lansing said, “Compared to an $8-per-month over-the-top service, offering past seasons of shows plus some new original series, TVE is ‘all-original, it’s all last night, it’s live streaming [like the recent Olympics and Oscars] and it doesn’t cost you another nickel.” TV Everywhere was ‘broadcasting’ 150 million videos per month as of the end of 2013.

There are those within the industry that criticize CTAM’s label, saying it could distract or confuse consumers when they’re presented with the veritable cornucopia of tv everywhere services, and that it would be more valuable to expend effort improving the content instead. Cord-cutting proponents point to recent contract renewals between cable companies and content, where cable has been forced to loosen up on digital rights to make the increasingly pricey programming costs digestible. That said, controlling distribution is the pump that keeps the affiliate money flowing to the content creators in the first place. Right now, Netflix is profiting from the content owners’ need to reach the eyeballs of America. However, according to USA Today, Disney’s cable expenses soared over $8 billion last year, and “$7.99-per-month Netflix subscriptions are never going to float a ship that big.”

If tv everywhere, as a brand itself, is able to build enough of a reputation, USA Today suggests, “it may be just a matter of time before more of this content is kept in-house and Netflix finds itself stuck with whatever’s left.” Once tv everywhere, silly lowercase spelling or no, evolves into a more coherent form, and content creators settle down and move in, the disruption will end, most likely with a whimper. Remember, the cable companies know how to lie in wait, slowly absorbing technological advances, and then pouncing, armed with their special weapon: billions of dollars. Cord-cutters are right about one thing, at least. Get out your scissors, and cut that connection…but the cable companies have cut ties and migrated to the Clouds, too. The future of media is a big ol’ party, and everyone’s invited. Just remember there’s always got to be a cover charge, and the big guys like to collect. Personally.

 

 

Sources: Business Insider, Wall Street Journal, Forbes, New York Times, Above the Crowd by Bill Gurley, Businessweek, USA Today, CNN Money, Multichannel News, CTAM Official site

In a gasoline or diesel powered internal combustion engine, a piston is pushed through a cylinder by way of an explosive combustion of fuel. The piston’s force turns a crankshaft that then turns the wheels via a drive shaft, which gets you to where you want to go. We don’t care where the gasoline comes from, as long as the vehicle stops, starts and reverses. And we could care even less about the detrimental impacts traditional gas-powered vehicles have on the environment. The innovation of Tesla Motors (NASDAQ: TSLA) shines a bright light on the failures of other electric vehicle manufacturers. And though Tesla continues to grow at an exponential rate, what could be the dark forces that keep it from becoming the car company of the 21^st century?

Elon Musk, the CEO and Chief Product Architect of Tesla Motors, not only believes that electric cars are the future, but also that in 30 years, the majority of the cars made in the United States will be plug-in electric vehicles.  He argues that Tesla will be instrumental in forcing automakers to care about the impact they have on the environment. In addition, his commitment to creating vehicles powered by electricity and partnering and funding renewable energy sources will reduce industrialized and developing nations’ dependence on oil from foreign nations and the potential volatile oil prices that come with the dependence.

And he might be on to something. The Tesla Model S, the second installation in the Tesla product line, was the top selling vehicle in North America among comparably priced cars ($59,000 base). Tesla expects to deliver more than 35,000 Model S vehicles in 2014, a 55 percent increase from the year previous. In addition, Tesla plans to ramp up production and produce 1,000 cars per week, an increase from 600 cars per week.

Though Tesla produces and sells fewer vehicles than Toyota, General Motors or Honda, it continues to expand its reach globally.  Tesla, most recently, expanded its operations to China, the world’s biggest car market, which surpassed the United States in 2010. Tesla projects to sell at least 5,000 cars in China by the end of 2014.

By creating a network of solar-powered Supercharging Stations across the United States and Europe, Tesla solves a fundamental problem many consumers have when thinking about purchasing a Tesla or any other electric vehicle ­­– range anxiety. Range anxiety describes a suspicion that an electric vehicle will run out of charge before reaching its destination.

In the United States, Tesla owners can now take cross-country trips with the help of strategically placed charging stations. They can also drive up and down each coast. In Europe, Tesla owners can find six charging stations in Norway, four in Germany, two in the Netherlands and one each in Austria and Switzerland.

Not only are investors developing projections based on Tesla’s global growth in 2014, but many also see Tesla forcing prominent automotive manufacturers to commit or recommit to producing electric vehicles. Tesla is building at least one $5 billion “Gigafactory” that can produce more than 500,000 vehicle battery packs per year. Once operational, the Gigafactories will double the world’s output of batteries for electric automobiles.

With the help of the Gigafactory, Tesla plans to build a car that sells under $30,000 and target automobile buyers at the mass-market entry level. But the Gigafactories are innovative productions themselves. Spanning more than 1,000 acres, the factories will be powered by onsite wind and solar energy plants and could cost tens of millions of dollars, according to Ben Kallo, senior equity analyst with Robert W. Baird.

But many believe without the factories, Tesla won’t be able to meet demand, especially if Tesla sales continue to grow in China and Europe. With plans to have at least 500,000 electric cars on the road by 2020, a delay in investing in its infrastructure would stagnate Tesla’s growth. However, to finance the $5 billion project, Tesla might have a trick up its sleeve.

The primary difference between Tesla and other automobile manufacturers is that Tesla wants to sell cars itself, not through dealerships. Some states continue to be hostile to allowing Tesla to disrupt the system. To force the hand of state legislators, Tesla could choose to build a Gigafactory in a state like Texas (something all states would love to have) in order to gain leverage with a conservative legislature.

“The political issue around whether Tesla should have a direct sales model as opposed to selling through dealers is almost as big of an issue as the battery plant, and I don’t think the two are totally separable, “ said Charles Hill, professor of management at the University of Washington’s Foster School of Business.

The Criticisms 

The success of Tesla is both rooted in its product and customer service, but also the influx of positive messaging it has received from news media across the country. Recently, when we see other auto manufactures covered in major outlets, it’s primarily due to a failure on the manufacturers part.

When Tesla is discussed in a negative way, the conversation focuses on one key component: How environmentally friendly are electric vehicles if we’re replacing one polluter (petroleum) with another (coal)?

According to Tesla, its cars cut in half the carbon dioxide emissions of its petroleum-burning rivals, despite the fact that more than half the electricity grid is powered by coal. But to quantify the environmental impact of Tesla, you’ll have to understand the composition of your state’s electric grid. According to Slate, if you drive a Tesla Model S in West Virginia — where the power mix is 96 percent coal — you’ll emit about 27 pounds of carbon dioxide during a regular 40-mile driving day, which is similar to the amount of carbon dioxide you would emit in a gasoline-powered Honda Accord. However, if your charging your Tesla in California, where natural gas supplies more than half the electricity, your per-mile emissions would be a fraction of that amount.

Several studies continue to cast doubt on the overall environmental benefits of electric cars. But when we look to the future of the national energy mix and the movement toward the reduction of coal and the increase of natural gas, electric cars will only get cleaner. And to argue that electric vehicles might not be as clean as we thought they were because of various nations’ reliance on coal is a rather faulty argument, one that, many argue, seems driven by the automotive industry and big oil.

To propel the environmental benefits, Tesla has partnered with SolarCity (where Musk is the Chairman) to help homeowners enjoy the benefits of clean, more affordable energy without having to pay a large down payment. Instead of purchasing solar panels, SolarCity allows consumers to pay for the power they use – just like a utility bill.

Why Others have Failed

Tesla is one of the most modern cars of our generation. It has the lowest drag coefficient (0.24) of any other vehicle in market allowing it to cut through wind and use less energy. A 17-inch LED display mounts on the front dash, giving drivers an opportunity to navigate using Google Maps and even browse websites. And it’s a commitment to being a technology company creating innovative products, rather than a stagnate automobile manufacturer, that differentiates Tesla.

Far too often, electric vehicles either looked 20 years old or like they belonged in an episode of “The Jetsons.” And they might be great for the environment, but they’re often slow and impractical and consumers weren’t lining up to buy them. What’s so different about the Tesla Model S is that it’s disrupted the business model of electrical vehicles flipping the equation entirely. The Model S is one of the fastest cars on the road, increasingly practical with the development of Supercharging Stations and what’s most interesting, Tesla continues to struggle to keep up with demand.

The electric powered Coda was on sale for about a year before the company filed for bankruptcy. Experts questioned the build quality and consumers didn’t like the styling. Even with its lousy performance and hand-me down platform, Codas sold for nearly $40,000.

But it’s not just Coda that’s failed. Electric automobile maker Fisker Automotive, which received $529 million in federal loans also struggled. It’s cars were beautifully designed rivaling the Model S, but terrible customer reviews, including one of the worst ever from Consumer Reports, a few fires and a recall later, Co-Founder Henrik Fisker decided to resign. By the end of 2013, Fisker Automotive had blown through its federal funding and $1.2 billion in private equity.

The now Chinese-owned Fisker plans to re-launch a supercar in 2015. But electric carmakers have often struggled with financing and profitability. It’s often difficult to develop new technology and achieve economies of scale. While companies like GM and Nissan can benefit from their massive production capacity, other similar automobile manufacturers continue to fail. In late 2012, Toyota decided its sub-compact iQ plug-in wasn’t a great idea and stopped production. Before Tesla’s late 2013 growth, it also had its fair share of hiccups reporting a fourth quarter loss in 2012. So what then differentiates Tesla in a market where big and small manufacturers continue to struggle or quit?

Is Tesla Here to Stay? 

Elon Musk’s goal is to design things that will have a positive impact on the world. But it’s not 1912 anymore and as Coda and Fisker Automotive show us, it’s hard to build a car company in 2014. The last successful car company startup was Jeep, which started building cars in 1941. Tesla’s success, however, is rooted in its proprietary technology, a technology big car companies don’t quite understand and a technology that Tesla wants to begin to sell.

In April 2014, Mercedes-Benz debuted its B-Class Electric Drive using a battery created by Tesla. Selling its technology to competing manufacturers is an intricate way to develop a new revenue stream. But Mercedes-Benz’s U.S. CEO Steve Cannon publicly questioned the long-term viability of Tesla when large auto manufacturers jump onto the electric car game. But many have jumped on the bandwagon before, and many continue to fail. If major automakers had the desire and political independence (from big oil) to pursue electric vehicles, don’t you think they would’ve already?

Tesla will be the car company of the 21^st century and continue its competitive advantage, by building cars that have real environmental impact, enticing consumers to invest in renewable energy, and disrupting the traditional distribution model by selling to consumers directly. If Tesla can begin to partner with other large automobile manufacturers, diversify its revenue streams and continue to grow and make profits, its impact on our transportation paradigm will be profound.

“Tesla wants to make millions of cars, and we have to make millions of cars to make a difference,” Musk said. “And to make millions of cars, we have to be profitable with each car along the way.”

Sources: Business Journal, Forbes, Marketplace, Slate, Tesla Motors, SolarCity, Energy Innovations, PBS