Bits and bytes to blockchain: the far-reaching impact of an enigmatic technology

Metro-Goldwyn-Mayer

Metro-Goldwyn-Mayer

Pay no attention to the man behind the curtain.

Dorothy and her travel companions didn’t listen, of course, and peeked behind that curtain to find out that the great wizard was just a man with a machine. The financial industry is experiencing the inverse, as it examines a machine that is run by a “man” who does “his” best to avoid existing.

More than 30 of the largest banks in the world are digging into what has been one of the most vexing technological advances of the past decade—the emergence and rise of bitcoin, the world’s most famous (or infamous) cryptocurrency, which was created by an individual under the pseudonym Satoshi Nakamoto.

With an etymology tied to the Greek word “kruptos” which means “hidden,” it’s not surprising that outside of a handful of techies and economists, cryptocurrencies are not well understood. However, for the first time, mainstream finance is taking notice of cryptocurrencies and trying to harness their algorithmic backbone—known as blockchain technology—before it challenges the entire industry’s structure by completely disrupting payment and banking.

Background on bitcoin and cryptocurrency
The main questions here are:

  1. What, exactly, is it?
  2. Who uses it?
  3. Where did it come from?

What is bitcoin?
At its most basic form, a cryptocurrency is a digital medium of exchange that is regulated solely by computer coding. Algorithms determine both the creation of new units and the security of transactions made in the units already in circulation. The alpha of this virtual market, of course, is the anarchic, open-source, peer-to-peer (P2P) “currency” bitcoin, which came into existence under ambiguous circumstances—more on that in a second—in 2009.

Bitcoin operates by controlling supply. Its algorithm is set up to distribute 21 million units over the course of 10 years, so its value is determined solely by demand, which has grown over the first five years of its existence.  Its value peaked in late 2013, reaching a value of more than $1,100 amid a corresponding spike in the amount of compute power dedicated to “mining” for new units.

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New York Times

Of course, the cause of the demand and compute power spikes is an increasing number of people investing an obscene amount of money into unlocking new blocks of bitcoin, thereby pricing out much of the digital money’s previous user base of currency aficionados and hobbyists.

Who uses it now?
The second question of who uses bitcoin is where the story begins to get considerably more complicated. The short answer is that no one knows, exactly. Without a central regulator akin to the Federal Reserve or the International Monetary Fund, transactions are monitored by a distributed ledger, which is basically an algorithm that shares every proposed transaction with every node in the bitcoin network. The result is complete anonymity as transactions being placed into blocks that every bitcoin-capable machine can see and verify without shedding any light on the individuals or entities carrying out these transactions.

While transactions are secure in and of themselves, the lack of transparency into who is using this anonymous digital monetary system has made bitcoin a lightning rod in broader discussions about national/international security and criminal activity. Most notably, the anarchist founder of the online narcotics hub Silk Road was an early adopter and evangelist for bitcoin—not exactly an ideal advocate for a technology struggling to find mainstream success.

Nonetheless, illegal as Silk Road’s activities might have been, they were a huge source of bitcoin’s visibility and, thus, the primary driver of its demand-determined value.

When it comes to ambiguity, though, end users aren’t the only part of bitcoin that has been shrouded in mystery. The very source of the world’s preeminent cryptocurrency had been nothing more than a pseudonym—until last week.

Where did it come from?
From recent coverage in Wired and Gizmodo, it appears that the man behind the bitcoin curtain is a 44-year-old Australian named Craig Steven Wright, who “coincidentally” had his home and office raided by the Australian Taxation Office just this week. While authorities claim that the raid had nothing to do with the news that Wright was, in fact, the mysterious Nakamoto, the timing is certainly curious, and the fact that the bitcoin founder’s fortune is estimated by some to exceed $415 million certainly does not support that it is coincidental.

Regardless, the mystery appears to be solved, and no one seems to be debating the value of bitcoin now. In fact, a whole new set of stakeholders has emerged and is taking a good, hard look into its enabling technology—blockchain.

Taking blockchain mainstream
While they’re not interested in using bitcoin as is, 30 of the largest banks in the world are working as part of a collective evaluating whether or not its enabling blockchain technology and the distributed ledger it creates have wider-reaching uses within the financial services industry. This collective is operated by R3 CEV, a global financial tech company comprised of veteran financial professionals, technologists and tech entrepreneurs.

“This partnership signals a significant commitment by the banks to collaboratively evaluate and apply this emerging technology to the global financial system,” said David Rutter, CEO of R3. “Our bank partners recognize the promise of distributed ledger technologies and their potential to transform financial market technology platforms where standards must be secure, scalable and adaptable.”

In comparison to the other aspects of bitcoin, the blockchain and distributed ledger concept is fairly simple. When one user pays another in bitcoin, the transaction is known as a block and is announced to every node (compute device loaded with the appropriate software) on the bitcoin network. Every node then approves the block, which is added to a “chain” of other blocks, creating a running record of every transaction across the entire network. With every node in the network verifying every transaction, in real time, the entire system remains self-regulating.

basic blockchain

Financial Times

The collective takes it as truth that some form of this blockchain and distributed ledger is going to become the norm in the banking industry but is looking to establish the necessary standards and protocols—common practice for an emerging technology that necessitates interoperability across multiple platforms (or in this case, the entire financial industry). These banks are essentially trying to implement this technology to virtualize their transactions with each other—analogous to businesses moving to the cloud as opposed to storing every bit of data on their own servers.

While the potential cost savings and scalability improvement are obvious from an infrastructure standpoint, it’s less clear how much additional investment would be required to perform the necessary network upgrades to increase reliability and security to meet the standards of the highly regulated finance industry.

“Right now you’re seeing significant money and time being spent on exploration of these technologies in a fractured way that lacks the strategic, coordinated vision so critical to timely success,” said Kevin Hanley, Director of Design at Royal Bank of Scotland. “The R3 model is changing the game.”

bank blockchain

Financial Times

Furthermore, “the game” being changed has expanded into the way financial markets operate with banks frequently facing the question of how technologies such as cryptography and distributed ledgers can contribute to improvements.

“These new technologies could transform how financial transactions are recorded, reconciled and reported – all with additional security, lower error rates and significant cost reductions,” said Hu Liang, Senior Vice President and head of Emerging Technologies at State Street. “R3 has the people and approach to drive this effort and increase the likelihood of successfully advancing the new technology in the financial industry.”

Assuming this implementation is as inevitable as the R3 collective believes, the next question becomes one of how far the technology might go.

Disruptive potential
The holy grail for a new technology (or, in this case, the reemergence of an existing one), can be boiled down to one of the tech industry’s favorite buzzwords: disruption. Everyone wants to know what this technology is capable of doing to upend the way business is done.

The potential implications of blockchain and distributed ledgers as they pertain to transactions in commercial banking are intuitive, but as Liang and others have alluded to, these technologies threaten established practices well beyond.

Coincidentally, around the same time bitcoin was emerging, investment banks and other financial entities were engaged in an arms race to maximize compute power and, therefore, the speed with which they received information about the markets. Just as computers replaced phone calls and turned minutes into seconds on the trading floor, high-performance computer power was turning seconds into fractions of seconds, providing the edge to those who get the information first—even if that lead time is literally the blink of an eye.

The compute power is still of vital importance, and virtualizing the ledger process would theoretically speed up transactions even more by freeing bandwidth that could be reallocated to processing incoming data.

On a more micro level, the best disruption analogy is third-party payment services, which offered the first viable set of alternatives to cash or credit. PayPal gave users the first option for decoupling their bank accounts or credit cards from their online purchases. Mobile payment services from Google and Apple took this concept to smartphones, and Venmo extended it to person-to-person transactions.

Blockchain and its associated capabilities can have a similarly disruptive effect by redefining the process by which these transactions take place. By being agnostic to the endpoints of the transactions, the technology would eliminate the need for a payment company to be in the middle of every transaction.

Of course, the major question that remains as to how to get the different players in a competitive market to work together to develop the level of interoperability necessary to make this blockchain-backed ledger system a reality—a tall order, indeed.

When’s the last time Google and Apple worked together to make something interoperable?

It was certainly longer ago than the current collaboration among Bank of America, Wells Fargo and 28 of their competitors. Raise your hand if you ever thought of a scenario in which banks were more visionary than tech companies.

That might be the real magic trick.

Lululemon Athletica, More Than Sportswear

lululemon-Vancouver

A healthy lifestyle, which includes eating right and working out, is becoming more and more needed as well as advertised in today’s society. This boom of working out has frequently impacted people’s health, along with athletic wear. Popular athletic apparel companies such as Nike, Under Armor, and Adidas have been the go-to products for comfortable, stylish, clothing to workout in. However, there is a unique athletic apparel company making an impact on consumers in new ways than just style. Lululemon Athletica is a billion dollar company that has established its brand as a top yoga apparel wear and is also influencing the industry in a positive way.

An Established Brand

Lululemon Athletica , also known as LULU, is yoga-inspired apparel which also includes running, dancing, and other athletic pursuits. Its mission statement is creating components for people to live longer, healthier, fun lives. Lululemon’s primary target customer is sophisticated and educated women who understand the importance of an active, healthy lifestyle. They have recently expanded in men’s and youth apparel. LULU creates the athletic clothing to offer performance, fit and comfort while incorporating both function and style. According to Hoovers, it operates some 250 company-owned stores primarily located in North America. The popularity and expansion of its clothing is making the company a competitor in the sportswear industry.

The Canadian company was founded in 1998 by Chip Wilson and the first retail store opened in November of 2000, by the beach area of Vancouver BC called Kitsilano. The distinctive name was voted in a survey of a 100 people and includes a logo which is a stylizing “A” that represent the first letter in the name “athletically hip,” one of the names that was up against Lululemon.

According to LULU’s website, the main idea of the first store was for it to be a community hub where people could learn and discuss the physical aspects of healthy living from yoga and diet to running and cycling as well as the mental aspects of living a powerful life of possibilities. However, the popularity of the store grew, making it too busy for employees to help the customers with this concept. This was the determining factor that the company needed to grow.

The Revenue and Expansion

As of February 2015, there are 211 stores in the United States, 57 stores in Canada, 26 stores in Australia, and five in New Zealand. This year Lululemon opened its first store in the United Kingdom and one in Singapore. The company plans on expanding more stores in the UK and Singapore along with opening new ones in Germany and Asia. About 95% of Lululemon’s revenues came from North America in fiscal 2014, which is about $1.5 billion. As the company expands in Europe and Asia the international revenue will begin to climb.

lulu yoga

Lululemon has grown rapidly since its creation in 1998. The growth has influenced expansions for more stores in North America along with global expansion. According to its annual report, the net revenue has increased from $40.7 million in fiscal 2004 to $1.8 billion in fiscal 2014. Also in 2014, the company had an annual growth rate of 13%. Increasing from $1.6 billion in fiscal 2013 to $1.8 billion in fiscal 2014. The net revenue was $1, 797,213 billion in February of 2015.

The apparel company is definitely affected by seasonal trends and receives the most profit during its fourth quarter, which are from the strong sales during the holiday season. However, operating expenses are more equally distributed throughout the year. With this being the case, Lululemon’s substantial portion of its operating profits are generated in the fourth quarter of its fiscal year. For example, during the fourth quarter of the 2014 fiscal year, they generated approximately 42%, 39%, and 41% of its full year operating profit, making holiday shopping an important factor in its overall revenue.

Marketing a Community

The marketing structure of Lululemon is very unique. Mentioned earlier, their number one target is adult women who pursue exercise to achieve physical fitness and inner peace. Over the last couple years the company has designed clothing for men and athletic female youth who also exercise to achieve the same goals. The increase of the Baby Boomer generation seeking more longevity should also help lead to longer-term growth in the athletic participation. The company believes their consumers’ needs are driven by desire of a functional product and the wanting to create a particular lifestyle. Thus, Lululemon trusts their authentic brand is more than just for athletes, but for people who want to lead an active, healthy, and balanced life.

The community in which Lululemon operates in is an important factor for their business. The core of its marketing approach is very community-based and store-centric. LULU has no marketing team and is against advertising, very rarely will you see the brand in a commercial. The company wants to build loyalty and by doing this it creates local initiatives like its ambassador program. The ambassador program is evolved of 1,500 people and extends to unique individuals in store communities who provide the characteristics of the company. As other sportswear companies use star-athlete endorsements, Lululemon relies on the ambassador program in the same way. World-class athletes are a part of the program as well, such as cyclist Ryan Leech and 25 other Olympians. All ambassadors communicate with each other and the stores through an online forum. Social media is also another initiative that allows the company to market its brand.

There are three main channels in which the products reach customers. Corporate-owned retail stores, direct-to-consumer sales, which includes online sales, and wholesales. 80% of sales come from company-owned stores while 15% account from online sales and wholesales bring in the rest.

Lululemon’s mission is to provide technically advanced fabrics with a design team who works closely with their suppliers to incorporate innovative fabrics that create the particular product. Some of these product include shirts, tank tops, sports bras, spandex, long tights, leggings, and head bands.

LULU and Competitors  

The sportswear industry is definitely a competitive market. Lululemon competes against many large competitors with powerful worldwide brand recognition that also target women, such as Nike, Inc., Adidas, The Gap, Inc., and Under Armor, Inc. They also compete with other apparel sellers because of the uneven nature of the sports apparel industry. Many of the competitors have advantages because of their longer operating history, larger and broader customer bases, greater brand recognition, and other resources.

Competitors use traditional ways of advertising that are faster than Lululemon, which creates more sales for the competitive companies. This is a down side for LULU. In addition, the company does not own a patent or exclusive intellectual property rights for its products, which makes it easier for its competitors to sell products that have similar styles to LULU’s merchandises.

However, according to Lululemon’s annual report, the company is more profitable than its peers. The company’s retail-oriented model is a factor in the advantage, compared to other athletic goods sellers like Nike, Under Armor, Adidas, and VF Corporation. Sales are very marginal, products sell either through retail outlets or through its websites and phone sales.

Here is a graph that compares Lululemon Athletica with its peers:

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The information provide from the graph shows that LULU has mostly outperformed its peers based on price-to-earnings ratios, except for Nike.

 

 

 

 

 

 

A Happy Work Environment

Working at Lululemon is a distinctive experience compared to other sportswear companies. The goal of the company is to train its people so well that they could in fact positively influence their families, communities and the people walking into its stores.

An employee for Lululemon named Jade Grace went into detail about how the company and its work atmosphere are positive and different from normal retail stores. “Lululemon sets you up to follow your own passion and not necessarily the passion and goals of the company,” Grace said, “They encourage you to follow your own goals and what you want and are looking for in life. No other company does that.”

Grace also went into detail about how in the corporate world LULU has the highest fire and hire turnover rate because so many people are following their own passion. They get the opportunity to be part of a corporate business and then apply that to whatever life adventure they wanted to actually go on. “The company really encourages you to follow your own dreams and not theirs,” Grace said, “In return there is loyalty and compassion the employee will have for the company.”

She also believes attention to small detail is what sets them apart from other big sportswear companies. They always want customer feedback and will actually make changes to its products to make customers happy. It gives freedom and comfort to consumers who wear the clothing. LULU listens to what people want and creates better versions of a product instead of just coming up with an idea that consumers may want.

Positive vibes are constantly promoted throughout the store for consumers and employees. “Lulu believes that happiness is a choice,” Grace Said, “they believe people who chose to be happy are going to be happy.”

Continuing to Grow

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The popularity and demand of Lululemon is forcing the company to make changes and expand. One revenue driver that the company is hoping to rely on in the future is Ivivva, a dance-inspired brand for young girls that was launched in 2009. These stores have increased aggressively and is a key growth driver for the company going forward.

LULU has had a tremendous impact on the US market and will continue to expand. Sales have increased in US stores because of improving labor market and lower energy prices. IN 2017, the company plans on opening 20 new stores in Europe and Asia.

However, as the rapid pace of growing continues, it could be a risk for the company. They may not be able to adapt to the demand and constant complexity of the business. If this were to happen, LULU may result in a loss of market share and a decrease in net revenue and profitability.

Lululemon heavily relies on its brand and the reputation and value it expresses. Though expanding may produce risks that can affect the company, the brand of LULU is what keeps it strong and moving forward in the competitive market. It wants to remain a positive influence in athletics and have an impact on people by being more than just athletic wear, but a way of living.

The Movie Theater Industry isn’t Dying, it’s Evolving

AMC Downtown DisneyThe American movie theater business is in a state of flux. Theaters are scrambling to come up with fresh ideas and marketing strategies aimed at attracting more people to their establishments. Digital technologies like 3D and IMAX formats have pushed theaters to increase ticket prices over much of the last decade. Finally, the growing popularity of streaming services, like Netflix and Amazon Prime, have given people across the country easier access to entertainment. Before the advent of new and emerging entertainment platforms, movie theaters provided many people with an escape from reality. Today, it remains questionable whether the industry has the same influence it once had over the entertainment world. Major chains like Regal Cinemas and AMC now face the challenge of updating their business plans and reminding the public why the movie theater experience is not going anywhere.

The Old vs. New Business Models

The relationship between the movie studios and the distributors remains somewhat strict when it comes to how much money each party receives from the films being shown in theaters. David Mumpower, a financial writer for the website Box Office Prophets, explains how most people assume the studios and distributors split the box office gross down the middle. In the past, film studios actually had deals with distributors to gradually give bigger slices of the revenue to the theaters over time. For example, in the opening weekend of a new movie release, the theaters would receive 10 percent of the profits and the following weekend they would receive 20 percent of the profits. This business practice shows how much Hollywood banks on distributing hit movies on a weekly basis. It also demonstrates how volatile the industry can be, especially for the theaters which have unfavorable circumstances when it comes to their revenue.

Today, movie theaters get a standard cut of the profits no matter which week the movie is in theaters. The third quarter income information provided by Regal Entertainment Group, the largest movie theater operator in the country, suggests a growing consistency with how much revenue their theaters get from tickets sales and concessions. In September 2014, Regal Cinemas made $2.19 billion in total revenue, but paid $1.1 billion in film rental and operating costs, which means the theaters received about 50 percent of the profits that year. Similarly, in September 2015, ticket admissions were $2.28 billion and film rental costs were about $1.17 billion, making the theater profits about 49 percent.

In both years, ticket admissions do make up most of the revenue, but the high costs of even renting out theaters for different movies takes away a lot of that revenue. Since the standard revenue for theaters remains fixed, they now depend more on their concessions alone for most of the revenue they actually get to keep. For example, Regal Cinemas made $575 million in concession revenue, which, out of the revenue remaining after the film studios got their cut, was about 49 percent. The cost to operate their concessions falls much lower, which means half of their profits usually come from their concession stands and the other half comes from ticket sales. Despite how nice this sounds for the theaters in theory, movie theaters are now facing problems which are undermining this system of compromise with the film studios.

Trends: Attendance and Ticket Prices

Screen Shot 2015-12-08 at 9.28.10 PMIn 2002, the average American went to a movie theater 4.9 times per year. In 2014, the number dropped to 3.6 times per year. Decreasing attendance has been a major factor in the decline of the old movie theater business model. According to CEO Randy White of the White Hutchinson Leisure and Learning Group, the last twelve years of per capita movie attendance had a steady drop of over 25 percent. The 2014 calendar year had only 1.26 billion consumers buying movie tickets which comes dangerously close to the 1.24 billion consumers seen in 1994. Overall, theater attendance does fluctuate every year, but the steady decline paints a negative picture of attendance in the long term.

What caused attendance to reach a twenty-year low last year? The National Association of Theater Owners point to the underwhelming performances of most tentpole movies and franchises in 2014. The Amazing Spider-Man 2 made nearly $60 million less than its predecessor and Transformers: Age of Extinction made nearly $107 million less than its predecessor.

Screen Shot 2015-12-09 at 10.26.40 AMIn its most recent annual theatrical statistics report, the Motion Pictures Association of America emphasizes the dramatic decline in 3D movie attendance as another culprit. On average, 27 percent of the population went to a 3D movie in 2014, but the numbers for different age groups have all dropped between 5 to 10 percent since 2010. Since the arrival of Avatar in 2009, the U.S. film studios have hoped to replicate its success; however, the push to make more films in 3D might be losing steam mainly because it costs too much to make, which has an adverse effect on ticket prices.

In a 2012 interview with technology site CNET, CEO of 3D digital production company 3ality Steve Schklair explained how studios rely too much on the expensive post production conversion process to transform their movies. He thinks this affects the experience the audience receives in the theater and, therefore, the willingness for people to continue spending more money. In the chart below, ticket prices have never been higher with a steady increase of 25 percent from $6.41 in 2005 to $8.17 in 2014. 3D movies might have their moments of greatness on the big screen, but since they are more expensive to make, they have had a negative effect on both 2D and 3D ticket prices. Earlier this year, consulting firm PricewaterhouseCoopers took a survey of over 1,000 consumers in fall of 2014. The company asked consumers the main reason why they stayed away from movie theaters; approximately 53 percent said admission prices were too high .

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What Else Is Hurting the Business?

Beasts-of-No-Nation-Poster-1It is hard to avoid the rise in online streaming services as a major reason why movie theaters are scared about the future. In October of this year, streaming giant Netflix released its own feature-length film called Beasts of No Nation. This film marked the second time the company released a movie online as well as in the theaters, which did not make exhibitors very happy. In an article from Variety, the four largest theater chains – Regal, AMC, Cinemark, and Carmine – announced they would not show the film because it did not follow the ’90-day delay rule’ between theatrical and home release. They do not see the the release of the film on various platforms as fair to any theater chain around the country.

Amy Kaufman, a producer on the film, noted the multiple ways people can get their content now and how that is shifting the film business in a different direction. Online streaming services like Netflix, Hulu, and Amazon Prime continue to have a large influence over the viewing habits of the average consumer. First, the convenience of renting or buying a movie through a subscription service from the comforts of your own home appeals to large portion of the population. Streaming services remove the whole ordeal of having to drive to a theater, pick up expensive tickets, buy expensive food, and deal with distracting people in a movie theater. As of April 2015, Netflix boasts over 60 million subscribers. Second, digital technology continues to evolve and audiences continue to crave more interactive experiences. In their 2014 report, the MPAA looked at how many devices moviegoers own and about 26 percent of them own at least 5 different devices. Therefore, theaters are not only competing for attention with television shows anymore, but also with computers, smartphones, and tablets.

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Why are Movie Theaters still Relevant?

amc-recliner-seatsDespite all of these issues, the movie theaters still have certain attributes that are difficult to replicate elsewhere and theater chains have started enhancing the moviegoing experience for they customers. AMC Entertainment, for instance, showed how it would lead the improvement in customer experience by spending over $230 million to upgrade some of their theaters in 2014. Some of the upgrades include replacing some of the smaller seats with cushy recliner chairs, increasing the variety of food and beverages available including the installation of bars for adult customers, and expanding their multiplexes by building more screens. In an interview with Deadline, CEO Gerry Lopez hoped the overall relaxing atmosphere the company is striving for will improve revenue per customer visit. Cinemark, the third largest theater chain in the country, had a decent start to the year even with a 2 percent drop in ticket revenue during the last three months of 2014. Their success, according to their CEO Timothy Warner, came from a growing demand for food and drinks after the company installed self-service concessions stands. Warner said in his interview with the Washington Post the food and drink sales had increased five percent since the new concession stands were installed.

This seems to have paid off for AMC and Cinemark this year when their stocks increased 24 percent and 9 percent in the first three months of 2015 of this year respectively.  Film business analysts say successful films premiering or in theaters during the non-peak seasons, like Fifty Shades of Grey and American Sniper, have changed how theater companies view the normal business model. Fifty Shades of Grey premiered in February and made about $94 million during President’s Day weekend. American Sniper opened in January with $107 million in its first weekend. Both movies had a large social media following before their respective premiere date, which suggests the identity of movie theaters as a place to have a social experience remains strong and the business does not have to limit itself to certain times of year or certain blockbuster films.

Screen Shot 2015-12-09 at 4.09.29 PMThe revenue trends from the last twelve years, courtesy of analysts from Bloomberg, show how film business experts project revenue for the movie theater business to reach approximately $11.5 billion this year. The business seems to still be alive and companies are starting to notice what makes the average consumer want to come back again and again: incentivization.

Incentivizing and Why It Works

Screen Shot 2015-12-09 at 9.24.03 PMThe MPAA says 11 percent of people in the U.S and Canada were frequent moviegoers in 2014, yet those same people made up over 51 percent of tickets sold. This information correlates with the increasing price of tickets: Film buffs are the people most willing to pay to see multiple movies over the course of the year, so they would likely make up a sizable amount of the tickets sold.

In December 2014, AMC Entertainment took this information to heart when they started beta-testing a new subscription service called MoviePass. The movie geeks dream app allows subscribers to pay a fee to see as many movies they want each month. Subscriptions differ based on specific cities people live in and subscribers can only watch one movie per day. The average subscription fee in the U.S. is currently about $30, which means avid moviegoers have the ability to see more movies at a lower aggregate price. This seems nice for the cinephiles around the country, but the downside for most people could be underusing the subscription. Since ticket prices continue to rise, the MoviePass subscription service means AMC and other theater chains might have found an alternative method of making profits by taking a note from their current competitors like Netflix.

Other options theater chains have already started exploring to boost ticket sales include loyalty programs. As of 2013, the Regal Cinema Crown Club offers discounts up to $1 off tickets at various locations in five different states. According to the 2013 Loyalty Census conducted by research firm Colloquy, loyalty programs across the entertainment sector rose 35 percent in 2012 reaching a total of 30.5 million people.

Towards The Future and Beyond

Movie theaters are not only thinking about financial changes, but also aesthetic changes. The audio company Dolby launched a new project called Dolby Cinema in 2014, which aims to compete with and move beyond the IMAX theater format by transforming entire theaters into interactive experiences. Some of the features include acoustic panels surrounding the speakers which are meant to immerse the audience in the movie. The official website shows the company will partner with AMC Prime theaters to begin bringing the premium moviegoing experience to people around the country.

Sources

http://www.boxofficeprophets.com/column/index.cfm?columnID=16796&cmin=10&columnpage=2

http://investor.regmovies.com/phoenix.zhtml?c=222211&p=irol-newsArticle&ID=2103033

http://www.hollywoodreporter.com/news/box-office-2014-moviegoing-hits-760766?

http://www.boxofficemojo.com/franchises/chart/?id=spiderman.htm

http://www.boxofficemojo.com/franchises/chart/?id=transformers.htm

http://www.mpaa.org/wp-content/uploads/2015/03/MPAA-Theatrical-Market-Statistics-2014.pdf

http://www.cnet.com/news/why-3d-movies-are-a-waste-of-money/

http://natoonline.org/data/ticket-price/

http://deadline.com/2015/01/movie-ticket-prices-high-summer-2014-box-office-1201349337/

http://variety.com/2015/film/news/major-theater-chains-to-boycott-netflixs-beasts-of-no-nation-1201445636/

http://www.forbes.com/sites/samanthasharf/2015/04/15/netflix-subscriber-count-crosses-62-million-sending-stock-above-500/

http://deadline.com/2014/09/amc-entertainment-accelerates-theater-upgrades-836097/

https://www.washingtonpost.com/news/business/wp/2015/02/23/forget-netflix-movie-theaters-are-on-track-to-have-their-best-year-yet/

http://business.time.com/2012/10/02/moviepass-goes-national-unlimited-trips-to-the-movies-from-25-per-month/

http://www.cnbc.com/id/100814464

http://www.dolby.com/us/en/platforms/dolby-cinema.html

The Milk Rush of China

In China, the bourgeoning market of liquid milk and dairy products has transformed into a fierce battlefield packed with domestic and international milk producers fighting aggressively for the market share. This situation seriously challenges the status quo of a long-standing milk duopoly in China, and more importantly, unveils great market potential of the under-saturated and under-estimated liquid milk demand for foreign brands.

 

Money, Milk, and Media

It was not a long time before Chinese consumers were bombarded with flooding milk commercials and dazzling dairy product placement in variety shows and movies. In November, Yili, the largest dairy firm in China, pledged $470 million U.S. dollars in its TV advertising campaign for the year of 2016. With $171 million dollars on exclusive naming rights for two of the most-watched Chinese reality shows, Yili also bought exclusive primetime advertising slots for CCTV’s 2016 Rio Summer Olympics Scoreboard and other leading entertainment shows.

Not to be eclipsed its most ambitious competitor Yili, Mengniu also marched on with its advertising campaign. The firm generously invested hundreds of millions of dollars in naming TV programs that are major rivalry with those sponsored by Yili. During the media sponsorship auction season this year in China, in TV advertising alone, Mengniu sponsored $120 million dollars with competition show Run for Time and Summertime Sweetheart Season 1, a reality show that is even still in its brainstorming stage.

There has been a long history of Yili and Mengniu’s competition in the Chinese milk industry. Unlike baby formula market where foreign brands completely outplay Chinese domestic sellers and claim 54% of the market, liquid milk consumption is a different story.

Yili and Mengniu, counterparts of Apple and Android in the cell phone industry, dominate significant market shares of liquid milk in China. Both milk giants account for 21.7% and 18.8% of Chinese liquid milk sales respectively, followed by WaHaHa of 9.6% and Bright Dairy of 6.9% in 2013. Yili earned a profit of $652 million dollars in 2014 while Mengniu claimed its profit at $360 million dollars.

The overwhelming advertising strategy employed by dairy companies guarantees that if a television show consumer turns on his TV during prime time, this target consumer would be very likely exposed to milk advertisements, either kids drinking milk with smiling faces or young professionals trying a solve her digestion problem with premium-priced yogurt.

The aggressive marketing approach, along with the considerable amount of advertising money that is more than 80 percent of the annual profit, exactly reflects how desperate Chinese milk companies are in order to capture the ever growing market of liquid milk. But the duopolistic situation is about to change, when foreign competitors come into play and try to get a share of the huge cake.

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(Yili and Mengniu’s TV ad campaigns with reality shows Where Are We Going Dad? Season 3 and Run For Time Season 1.)

The Next Growth Point

If there is anything that deserves attention in the Chinese milk industry, it’s the exuberant and growing demand that dictate the liquid milk market. As the Chinese government abandoned its controversial one-child policy, China will implement its two-child policy starting from next year. For dairy firms around the globe, the good news is that in the next decade, millions more children will be accompanied with cow milk during their childhood and adolescence. In the future, those who grow up with milk consumption behavior can be core customers that help support sustainable growth of dairy companies in the long run.

Even if the new two-child policy may bring more babies, the sales increase in the baby formula market has remained comparatively weak. A Nielsen report shows that in the first half of 2014, dollar sales of baby milk powder in China jumped by 7 percent, however unit sales slumped by 4 percent. As the competition in milk powder market intensifies and the market gets saturated, price wars can become a normal state in the industry, making it harder for firms to grasp the market share. While the sales of baby milk are likely to face its bottleneck in the near future, liquid milk, in contrast, has a brighter prospect.

Thanks to the continuing urbanization and shifting consumer behavior in the Chinese rural area and third- and fourth-tier cities, more people are switching from drinking soy milk to cow milk for their breakfast. In 2012, a Chinese consumes only 32 pounds of milk a year on average, whereas an American drinks 168 pounds per year and the figures for neighboring Japan and South Korea are 75 pounds. A ten percent annual increase of discretionary income over the past decade enables Chinese consumers to spare more money on their groceries, thus creating huge potential for liquid milk consumption.

However, the 2008 melamine scandal left long-lasting aftershock on Chinese domestic milk brands. Eighteen local dairies were found adding melamine into raw milk in order to fake high quality cow milk. Consumer confidence has never recovered from deep suspicion against local milk companies since then. In an effort to appeal to those who have lost their faith in domestic milk, foreign companies seized the chance and launched its marketing campaign. The result proved to be a huge success.

In the past decade, the amount of imported liquid milk in China have grown exponentially, from less than 4,000 tons in 2005 to 200,000 tons in 2014, according to the U.S. Department of Agriculture. As of 2015, firms from 27 countries, including the U.S., Germany, and Australia, have been exporting liquid milk to Chinese market with more than 100 brands. The confidence in safety and quality is the major driver behind the growth.

Since the baby formula market has already been dominated by international brands, Chinese firms are now fighting hard to prevent its liquid milk business from being taken away by foreign competitors. Unfortunately, it seems that both Chinese and international companies are primarily targeting the same group of consumers.

 

Target the High-End Market

Milk has always been a luxury in China for thousands of years until 1980s, when the economy went back on track after the end of the disastrous Cultural Revolution. A large part of Chinese population is intolerant to lactose, making it hard for them to digest milk, cheese, or other dairy products. Chinese never in their history used milk, so when milk companies attempted to create demand in the 80s and 90s, they marketed milk as a necessary source for strength, nutrition, and energy, as well as a symbol for better living standard. “A pound of milk a day, keeps Chinese strong,” slogans similar to “an apple a day keeps the doctor away” could be heard on TV and radio on a daily basis.

As milk consumption steadily rose since 2000, Chinese firms shrewdly sensed the huge potential purchasing power of Chinese middle class families. That’s why Yili spent hundreds of millions of adverting budget on reality TV shows like Where Are We Going Dad? to broadcast visuals of celebrities’ children drinking its QQStar, a flavored milk product that is designed for kids under 12 and priced at a premium. QQStar comes with a small 4-ounce carton, meaning lower packaging costs compared to regular milk packaging. By targeting millions of middle- and upper-class parents of spoiled only-child, Yili managed to generate more profit margin from selling milk in smaller size.

In the liquid milk market, international firms price their products at even higher premium to attract high-end customers in Chinese market. Australian milk firms like Pauls, Harvey Fresh, and Lemnos mostly sell their merchandise through online stores. By branding themselves as the gateway to high-quality lifestyle, they successfully drew attention from urban wealthy families that don’t care much about money but instead put more weight on the product quality they receive. German brand Oldenburger, for instance, even put German flags and huge “product of Germany” banners on goods shelves in some stores to signal its German origin.

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(Imported milk products in Chinese stores.)

Historically, because of the perception that imported goods are usually superior in quality, Chinese consumers are willing to pay more than do global customers. Merchandise that is not native to the Chinese market – coffee, cherries, pistachios – are generally well accepted at higher prices in anticipation of higher value. Imported milk is no exception. An imported product typically doesn’t require massive advertising campaign to push sales, because its country of origin is a good selling point in itself.

It’s difficult to predict whether international companies will occupy larger shares than do Chinese brands in liquid milk market. However, it can be foreseen that in the near future, Chinese firms are likely to undergo more intense competition from each other, because international companies have overall greater and more trustworthy brand images. For Chinese milk giants Yili and Mengniu, they might lose their leader status if they failed to grapple opportunities to cater to customer needs and to rebuild their brand images.

They are working hard on it. Perhaps it may seem awkward sometimes, especially when you see a 15-second close-up shot of Yili milk carton held in American actor Stanley Tucci’s hand, in the 2014 Transformers: Age of Extinction movie.

 

Sources:

China Milk and Dairy Market Report 2015, KPMG China, May 2015

Peoples Republic of China Dairy and Products Semi-annual Report 2015, U.S. Department of Agriculture

 

Dressing up

One of the biggest mysteries of women clothing is how a woman weighing roughly the same as she did 20 or more years ago wears smaller-sized clothing than she used to. The explanation is “size inflation” AKA vanity sizing. This phenomenon is described as: clothes with the same size label have become steadily larger over time.”

Measurements vary by brand, but research by the Economist finds that the average British size-14 pair of women’s pants is more than four inches bigger at the waist today than they were in the 1970s, and over three inches wider at the hips. A size 14 today fits like a former size 18, and a size 10 fits like an old size 14. The same “downsizing” has happened in America where, to confuse matters further, a size 10 is equivalent to a British size 12 or 14, depending on the manufacturer.

So, why do clothing brands do this? It makes shopping for clothes more difficult when manufacturers don’t use the same standards for labeling, and no doubt increases return rates when products don’t fit as expected. The simple answer is that the downsized labels make customers feel good.

A study in 2013, published in the Journal of Consumer Psychology found that smaller sizes boosted the self esteem of the customers, while larger size labels (for the same actual size clothing) negatively affected the customer’s self esteem which transfers badly on the brand and leads to lower sales.

Though size inflation mainly affects women’s clothing, men are not immune to this. Even though most of mens pants are sized in inches rather than in arbitrary units, studies in America and Britain have shown that some brands of men’s pants labelled “waist 36 inches” are infact up to 5 inches larger.

Imagine this in a real world situation, if a consumer was originally a size 8 but has been gradually adding a few pounds, she may be unaware that in the world of standardized accurate fitting dresses she would now fit better in a size 10 dress. In the store, she tries on a dress from 2 brands, A and B. A keeps their clothing sizes consistent and the measurements haven’t changed in decades. While B, has gradually expanded the measurements for each size to the point that what might have been a size 10 dress years ago is now labeled a size 8.

So when the customer tries on a size 8 dress from A it is uncomfortably tight and will need to go up to a size 10. She finds a size 8 dress from B and it fits just fine.

So if the customer keeps finding that only larger sizes of brand A’s fit her then it is likely that her perception of that brand will decline. Is it any surprise that brands are building a few extra inches into their clothing?

In fact, clothing sizing has increased so much that in 2001, the clothing industry introduced size 0 and in 2011, they had to invent size 00 to ensure slimmer individuals could find clothing that fit.

Despite the desire of consumers for honesty and transparency in the marketing process, it seems that they may be willing for brands to lie a little when it comes to telling them their size. This is an important message for all brands: if you give the customers a product that makes them feel good about themselves, they will like the product more and you will sell more. And if your product makes them feel worse, they might as well spend their money elsewhere.