1. food and drink
2. food and grocery retailers
3. convenience stores

Fortnightly Thoughts
May 21, 2015
Issue 89
At your convenience
Convenience is an important competitive weapon to shift share or upturn industry revenue
pools (think Netflix vs. Blockbuster). Why it matters more now is because tech is changing the
rule book by rapidly shrinking the marginal cost of providing convenience and in turn shifting
user expectations; the on-demand economy for everything - driven by apps, data, artificial
intelligence or logistics - is the democratisation of convenience.
With well-funded start-ups targeting customer pain points, risks are mounting for incumbents
that thrive on complexity and friction costs. And in sectors like media and retail, the need to
marry differentiated content with convenience has become crucial. We identify companies that
are consistently good at making life easier for their users, enablers of convenience as well as
content providers also focused on the ease of use.
What’s inside
The pain points
Interview with…Benedict Evans: Partner at
Andreessen Horowitz
6
Top industries (ex-telcos) by the number of complaints received by the
BBB in the US, 2014
Television
Convenience – Apple’s core: Bill Shope on
Apple’s focus on simplicity and ease of use
8
Sky embracing connectivity: Vighnesh
Padiachy on joining content with convenience
9
Tuning into convenience: Drew Borst on the
lessons video has learnt from music
11
Convenience pays: Our US Payments analysts
on new and faster ways to pay
14
At your doorstep: Our retail analysts write that
the CVS sector is set to sweep across Asia
16
Auto Dealers - New Cars
Collection Agencies
Auto Dealers - Used Cars
Internet Shopping
Furniture - Retail
Banks
Auto Repair & Service
Insurance Companies
Department Stores
Property Management
Apartments
Credit Cards & Plans
Internet Services
Movers
Travel Agencies
Airlines
Satellite Equipment
What’s next for retail: Carl Hazeley on online
disruption and what comes after
18
Electric Companies
0
5000
10000
15000
20000
25000
30000
Source: Better Business Bureau; www.bbb.org
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Sumana Manohar, CFA
[email protected]
+44 (20) 7051 9677
Goldman Sachs International
Hugo Scott-Gall
[email protected]
+1 (212) 902 0159
Goldman, Sachs & Co.
Megha Chaturvedi
[email protected]
+44 (20) 7552 3305
Goldman Sachs International
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see
the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not
registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
Goldman Sachs Global Investment Research
Fortnightly Thoughts
Issue 89
At your convenience
Re-writing rules
The classic marketing textbooks state that sellers can essentially
aim for one or more of these selling propositions: form utility
(making the product available in the format that suits the customer
best; e.g. IKEA’s flat packs, ready-to-eat packaged food), time
utility (ensuring product availability when the customer requires it;
e.g. late-night pharmacies), place utility (ensuring product
availability where the customer requires it; e.g. ATMs, convenience
stores, batteries) and possession utility (allowing consumers to do
as they please with the product once they have bought it).
However, the online-driven on-demand economy has redefined
most of these rules; the ability to pause the TV show on your tablet
to finish ordering groceries at 11 pm for next-day door delivery ticks
so many convenience boxes. It’s similarly hard to put many of the
new-age convenience competitors in just one of these utility
baskets.
Cheque mate
Number of transactions by cheques and cards in billions, G7 countries
Cheques
Cards
120
100
80
60
40
20
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Note: Does not include Japan’s card transactions in 2013 owing to lack of data.
Source: BIS.
Goldman Sachs Global Investment Research
Uber convenient
Share of total paid car rides for business users, US
Uber
Taxi
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
0%
Jan-14
When big market share shifts occur, the investment
opportunity is large. The cause of a large market share shift (and
sometimes extinction) is a shift in a product’s attractiveness in
terms of one or more of the following factors: cost, capability and
convenience. All three are sources of competitive advantage, but in
our view convenience receives insufficient attention, primarily
because it is hard to measure (not everything that counts can be
counted). But this is wrong, as convenience matters, and often a
great deal. Netflix put Blockbuster out of business because a large
part of the shift in the relative attractiveness of their products was
down to convenience. Why does this matter now? Because
technology is massively increasing the potential for improved
convenience and expectations, especially from younger consumers
who not only demand it, but take it for granted. Well-funded startups are taking aim at inconvenience (high friction costs or
complexity) and are seeking to turn industries upside down as they
launch products that are better on at least one, if not more, of the
three Cs. Consider Uber and Instacart or many of the other socalled unicorns; cost and convenience are core to their offering.
With the marginal cost of providing convenience in areas like
media, payments and retail are falling so rapidly, unless an
incumbent is protected by regulation, complexity and friction will
leave it vulnerable to market share loss. In this essay, we explore
where inconvenience has been shattered (and the investment
consequences), where it is being addressed now, and where we
see pain points waiting resolution (and who is at risk from that).
Source: Certify SpendSmart Report 1Q15
Uber is a solution to uncertainty around the availability of
transport, both in terms of time and location. It also provides a
much more convenient alternative to owning a car. It tips the scale
towards access and away from ownership. And these attributes are
fuelling the proliferation of the Uber-business model across various
new apps for all sorts of chores and tasks, including cleaning,
shopping, laundry and other household chores (think handy.com,
instacart or hassle.com). This is the democratisation of
convenience. Then there are attempts to reduce the time spent on
the act of purchasing itself: Amazon’s one-click purchase options or
even its (still beta) Dash button, NFC-based payments (and
ApplePay) and mobile ordering apps for Starbucks or Domino’s are
all successful examples of eliminating those few seconds of hassle
that might put a customer off, even after he or she has made the
purchasing decision. Underestimating how even the most marginal
improvement to the buying process can influence consumer
spending and brand perception can be a mistake that is hard to
recover from. There’s a subtle message here: only when the
new product arrives did you realise that the old one was
inconvenient.
Another way of saving consumer’s time and hassle is by aiding
decision making, providing all the necessary information and
options in one place. By this, we are referring to aggregators and
marketplaces (eBay and Amazon etc.), review sites (like Yelp.com
and Tripadvisor.com), marketplace/platforms (like JustEat and
Etsy) and comparison sites (like Skyscanner and Priceline); they
are all attempting to simplify and reduce the effort needed to
search, sift and choose. These companies all have one thing in
common - they have taken share from the previous way of
purchasing, with high street retail’s woes being the obvious
consequence. We have written previously about the stealthy, but
meaningful shift taking place from reactive to pre-emptive online
recommendations and services; i.e. the difference between having
to search out what the weather’s doing and devices now advising
users proactively to take an umbrella to their next appointment. As
devices become smarter and get access to larger and more diverse
datasets, it is easy to imagine them answering more complex
queries before we ask them, or making simple decisions for us.
Artificial intelligence is a big shift in capability, but it is also shifting
convenience – it could scan all of your data and communications
and enhance your productivity and decision making at minimal cost.
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Fortnightly Thoughts
Issue 89
Simplifying complexity can be very disruptive to
intermediaries that thrive on information asymmetry, i.e. those
with hard to replicate expertise or knowledge that gain from friction
costs coming from often artificially erected barriers to entry. Where
is this happening? Asset management for a start. Start-ups like
Nutmeg, WealthFront and Betterment are offering not only a
cheaper alternative to traditional asset managers - transparency
and convenience are at the core of their pitch (e.g. it takes 10
minutes to open a trading account). The same could happen in
fields such as real estate, healthcare, taxation and recruiting. The
unravelling of information asymmetry is a topic that we will come
back to in the near future, but our point here is that friction costs for
consumers often form the revenue pool for an industry, and
simplification (and information provision) can put that at risk by
increasing convenience in terms of time and effort, as well as
reducing cost.
urban consumer who owns multiple smart devices. And
smartwatches are being pitched as an alternative to digging a
smartphone out of a bag or pocket. Where else do we see pain
points? Applying for visas, opening (and closing) a bank account,
completing tax returns. On a broader level however, the three big
areas where we think there is scope for easier and more
convenient access and services include healthcare, education and
financial services, provided regulation allows some existing
problems to be solved (or better, if regulators promote greater
convenience, e.g. current account portability in the UK). Parts of
financial services are already seeing the rise of disruptors (digital
payments, peer-to-peer lending, decentralisation via blockchain
technology, wealth management, crowdfunding), but education and
healthcare have been relatively immune, and this is reflected in the
fact that they are the only two components of the DM CPI basket
that have consistently become more expensive over time.
No longer stuck in the middle with you
Stuck on the road
Estimates of average annual hours wasted in congested traffic
300
250
200
150
100
50
Paris
France
Stuttgart
Germany
Los Angeles
US
London
0
UK
We’re not heralding the end of intermediaries. But we are arguing
that the shift towards convenience requires a different set of
enablers and middlemen. For instance, logistics (and last-mile
logistics in particular) is the backbone of the on-demand economy.
It’s not the basics of being able to deliver, but having the ability to
deliver to a specific location at a specific time (and handle returns),
which is increasingly becoming the basis of competitiveness for
retailers and other consumer service providers. And we need look
no further than Amazon to understand the economics of providing
convenience and the drive to constantly improve customer service;
Amazon’s capex rose from 1% of Wal-Mart’s outlays in 2004 to
40% in 2015. Our point is that competing on convenience, whether
via logistics, investment in technology (software and equipment like
new point-of-sale terminals) or a rewiring of the supply chain
(especially if customisation and speed is part of the offering), can
be expensive, and something not every incumbent can afford,
especially if it is encumbered by legacy fixed assets.
Source: CEBR report, INRIX
Delivering convenience to your door step
Convenience vs. cost vs. content
Number of commercial vans registered in the UK
100,000
This also brings up the relationship between convenience and
costs, because they tend to go hand in hand; disintermediation or
removal of friction naturally brings down costs. However, the
convenience aspect is often overlooked, as it is harder to quantify.
But it’s not always about costs. Consumers are often willing to pay
for that extra bit of convenience; consider no-frills airlines and extra
charges for allocated seating.
90,000
80,000
70,000
60,000
50,000
40,000
An extra serving
30,000
Ancillary revenues as a percentage of total for Ryanair
20,000
25%
10,000
1Q2015
3Q2014
1Q2014
3Q2013
1Q2013
3Q2012
1Q2012
3Q2011
1Q2011
3Q2010
1Q2010
3Q2009
1Q2009
3Q2008
1Q2008
3Q2007
1Q2007
3Q2006
1Q2006
3Q2005
1Q2005
3Q2004
1Q2004
3Q2003
1Q2003
3Q2002
1Q2002
-
20%
Source: Society of Motor Manufacturers and Traders
15%
Inconvenient truths
So the question to ask is, where is convenience-led
competition coming next? We believe it will be where
products/services are difficult to access, inconvenient or plain
unpopular. In our recent piece on artificial intelligence, we looked at
autonomous cars and how they could solve some of the costs and
inconveniences of car ownership (being stuck in traffic, parking and
driving itself). Wireless charging could be a respite for the average
10%
5%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Company data.
Goldman Sachs Global Investment Research
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Fortnightly Thoughts
Issue 89
Similar unbundling of pricing could become more conventional in
the world of media and entertainment. The optionality to pay for
individual channels rather than packages also reveals a lot about
viewer choices and preferences. As Benedict Evans of Andreesen
Horowitz says on page 6, taking this further would mean providing
viewers with the option to pay only for particular TV shows or
specific games, repeating a shift similar to that which we saw in the
world of music, which unbundled from albums to individual songs.
Change the channel
Number of channels receivable and tuned per household in the US
Average channels recievable per TV household
Average channels tuned per TV household
200
180
160
140
120
100
80
60
40
20
17.7
17.3
17.8
17.8
17.5
17.5
The cost of convenience
Convenience often comes at a cost to consumers. We mentioned
the four-pronged utility model earlier, and the last of those is
possession utility, which refers to providing consumers with the
flexibility to use the product as they wish post purchase. Digitisation
and portability allow consumers to use data generated or transfer
goods purchased (like media), but only as long as they choose to
stay in the ecosystem. Apple and Android are perhaps the most
obvious examples here, but as technology elongates the reach of
sellers beyond the point of sale, and if and when switching costs
outweigh the benefits of being in an ecosystem, we think that rights
of possession could become more contentious in terms of customer
satisfaction (e.g. the inability to export data from one smart device
to other platforms, the right to re-sell e-books or passing on songs
on iTunes to dependants). Privacy is a related risk worth
considering, as convenience for consumers often comes at the cost
of giving up personal data such as location or contacts or buying
behaviour. A regulatory backlash that limits the use of private data
could raise hurdles for many of the new convenience-based
business models.
Where else have shifts in consumer behaviour turned against
convenience? Food consumption is one area where this may be
happening; the decline in the demand for canned food, ready meals
and breakfast cereals in the US should signify a shift away from
convenience towards content.
0
2008
2009
2010
2011
2012
2013
Consumers are ready to cook
Source: Nielsen.
Yoy change in per capita sales of canned food and ready meals, US
Marrying differentiated content with convenience (for a reasonable
cost) is key for consumer acquisition and retention; Netflix and
Amazon Prime’s rising investments in exclusive content, should be
taken parallel to moves from the likes of HBO and Dish this year to
begin offering over-the-top streaming services to attract viewers
that were moving away from cable (especially millennial cordcutters) or those that never intended to pay for a cable connection.
Content is still king, but convenience is queen. On page 11, Drew
Borst writes about how the video industry has managed to learn
from the music industry’s tale of woe.
Canned/Preserved Food
Ready Meals
7%
6%
5%
4%
3%
2%
1%
0%
See you later
-1%
Proportion of time-shifted viewing (through TV catch-up services such
as BBC iPlayer etc. or by storing on DVRs) of television by age, UK
-2%
18%
-3%
2001
2002
2003
2004
16%
Source: Euromonitor.
14%
At your convenience
12%
65+
10%
55-65
45-54
35-44
8%
25-34
16-24
6%
4%
2%
0%
2007
2008
2009
2010
2011
2012
2013
Source: OFCOM, BARB, network, based on average daily minutes.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Seeing how the relative attractiveness of products shifts, owing to
cost, capability and convenience, is critical to understanding future
market share dynamics. The most obvious cause for worry is a
company extracting high rents from an inconvenient product. If its
protection is regulation, that can change, as can consumer
expectations. If its protection lies in industry structure, then it is
increasingly possible that a new entrant could arrive from an
unexpected quarter with a product that is cheaper, more capable or
more convenient. In short, invest in an enabler of convenience (e.g.
logistics, aggregators), ecosystem providers (e.g. Apple, Amazon),
content providers that also focus on convenience (the likes of Sky,
TWC and Disney) and watch carefully for industries where the core
offering is yet to be significantly challenged by technology-powered
new alternatives (e.g. financial services, healthcare).
In an age of increasing transparency, tolerance of inconvenience
will almost certainly diminish, and in an age of abundant capital, it
becomes an easy target. And on the next page is how we’ve
thought about investing in this.
Goldman Sachs Global Investment Research
4
Fortnightly Thoughts
Issue 89
How to invest in this
Company
Country/ Sector
Rating Market Cap Last ($mn)
Price
Target Upside
Price
Rationale
Ease of purchase/ delivery Amazon
US Internet
Buy*
196,537 $422 $510
21%
Pioneer of one day deliveries; new offerings like Echo (voice driven device that can add products to cart, control smart devices) and Dash (a simple button that reorders products when pressed) simplify buying process
Ocado
UK Retail
Buy*
3,409 380p 700p
84%
Making grocery shopping more convenient with deliveries at suitable times; online grocery is still nascent (5% of total in the UK), but Ocado has grown sales at 5x the listed 3 supermarkets during '08‐14
Zillow Group
US Internet
Buy
6,154 $97
$127
31%
US real estate aggregator with 100mn+ properties registered on its platform
Buy
749,499 $130 $163
25%
Relentless focus on simplicity is at the core of its platforms and offerings are designed to work together seamlessly. Apple Pay also gaining traction and brings ease of use and increased security features
Ease of product use
Apple
US Hardware
Starbucks
US Buy*
Restaurants
78,487 $51
$57
11%
Mobile ordering app fast gaining traction, allows people to save time by bypassing the line and have the food/drink ready; (3% of total observed transactions came through the app in just one month of launch)
Medtronic
US MedTech
115,764 $78
$90
15%
Its insulin pump automatically adjusts insulin delivery based on constantly monitored glucose readings and reduces the need for multiple injections
Buy
Location‐based convenience
Seven & I Japan Holdings Retail
Buy
38,816 ¥5244 ¥5500
5%
Operates 7‐Eleven, the world’s largest chain of convenience stores 9%
Benefits from the structural growth of convenience stores in Thailand, offers superior returns being the market leader
Makes ATMs; benefits from greater installation of foreign‐card compatible ATMs and cash recyclers (both accept deposits and dispense cash, thus simplify cash handling for stores) in Japan
CP ALL
Asia Retail
Buy*
12,562 Bt47
Oki Electric
Japan Electronics
Buy
1,864 ¥259 ¥300
16%
38,608 $616 $620
Benefits from a strong momentum behind its original and exclusive content (House of 0.6% Cards, Unbreakable Kimmy Schmidt, The Fall etc.) and expansion of the distribution system across connected devices and networks
Bt50.75
Content marries convenience
Netflix
US Internet
Buy
Sky
UK Media
Neutral 29,605 1090p 1200p
10%
Unique content (premier league, HBO partnership) on multiple platforms (apps to allow viewing on the go, catch up services and downloading) is improving customer satisfaction and reducing churn Zalando
Europe Internet
Buy*
38%
Early mover in offering convenience of online shopping to German customers; now focussing on content and personalisation (launching curated shopping to drive higher customer engagement) to sustain leadership
7,897 €29
€40
Source: Datastream, Goldman Sachs Global Investment Research. * On the relevant regional Conviction List. Prices as of May 19, 2015. All target price horizons are 12
months except Ocado and Zalando at 2 years.
Goldman Sachs Global Investment Research
5
Fortnightly Thoughts
Issue 89
Interview with...Benedict Evans
Benedict Evans is a partner at Andreessen Horowitz. As a long-time mobile analyst, Benedict
has been working in the media and technology industries for 15 years. He first entered the
industry as a sell-side equity analyst for investment banks before moving on to strategy and
business development roles at Orange, Channel 4 and NBC Universal. Benedict writes about
and discusses strategic and operating issues around consumer technology, ecosystems and
mobile platform on his blog, and on Twitter @BenedictEvans.
The internet and smartphone revolution
has made many things much easier and
more accessible for consumers. How do
you see this evolving?
One of the fundamental changes we are
witnessing as a result of smartphones is a
move from one device per household to one
device per person, while at the same time
we are moving away from being confined to
a particular location (say your living room)
to having the device with you everywhere you go. And as we move
from the relatively simple interaction model of desktops, to the
much more sophisticated environment of smartphones, the
possibilities around customer engagement are changing too. There
is also a multiplier effect as people do a lot more things much more
frequently on a smartphone than those who are online only on the
web. And this in turn creates a broader set of digital content.
Companies such as Google and Facebook for instance can know
exactly where you are, whether you are walking or standing still,
who your friends are, when your next meeting is etc., and they can
target their offerings based on all of that information.
Of course the locational advantage of smartphones offers
convenience to customers as well. The only thing that people could
do in bed earlier was watch TV or read a physical book before
going to sleep, but by making it possible to read or watch anything
anywhere, tablets and smartphones have changed the nature of
competition for most media-focused business.
Many of these start-ups that start off
trying to solve a relatively small problem, end
up creating a completely new product or
service and eventually end up fundamentally
transforming the way industries operate,
instead of just taking some share away from
incumbents
The other thing that grows as we move content to the digital world
is the scope for greater unbundling. And this in turn changes the
selection behaviour that people exhibit while buying products and
services. This is evident in music; the ability to buy standalone
tracks has changed the industry. I believe that the impact of
unbundling will soon become evident in the TV domain as well. And
this will prove to be a much more interesting phase of unbundling
because it’s not just going to be about unbundling channels from
cable boxes, but also unbundling individual TV shows as
independent brands. Once that happens, each show will have to
compete on its own merits and brand value.
Goldman Sachs Global Investment Research
This also relates to the distribution channel, which hugely
influences consumer decisions; take what has happened in apparel
for example. The amount of stock retailers can hold and the way
they display it significantly affects the implicit and explicit choices
consumers make. And so, the decision criteria and buying
behaviour of people is completely different on the web and even
more so on smartphones, given that they make it even more
convenient for people to see the product, add it to a list, find out
more about it, and buy it anywhere, anytime. Books, I think, are a
great example here; books that are bought online tend to be very
different from books that are bought at bookshops.
Many of these solutions to inconveniences are driven by new
entrants. At your firm, do you see this often when
entrepreneurs come to pitch their ideas?
This is a common element to a lot of successful start-ups. Pretty
much everyone who comes to us with a good idea is usually trying
to solve a problem or attack a pain point for consumers.
The other strand here is that many successful start-ups emerge to
tackle local inconveniences and then realise that the solutions can
be generalised globally. For example, the lack of good taxi services
in San Francisco was one of the main reasons for Uber to emerge
here and I think it is unlikely that we would have seen someone in
New York or London come up with a service like Uber, simply
because there wasn’t a similarly big enough need for it.
And it doesn’t stop there. Many of these start-ups that start off
trying to solve a relatively small problem, end up creating a
completely new product or service and eventually end up
fundamentally transforming the way industries operate, instead of
just taking some share away from incumbents. If we look at Uber
again, it is not only taking share from traditional taxi businesses, but
it is also challenging the entire concept of owning a car. Airbnb
similarly is threatening the hotel industry, without actually owning
any hotels.
And that is where the market opportunity lies. Many legacy
business, whether taxis or hotels, exist to due to some historical
logistical issue. When these industries were born they were trying
to solve other types of problems. But if we shift these services to an
entirely new digital platform, then the underlying problems might
change and the solutions need to change too. If you look at the
magazine industry for example, recommendation was one of the
key leverage points for their business, and they thought it was
unlikely that independent blogs and new entities on the internet
could seriously threaten that strength. But the incumbents were
running their businesses like a manufacturing company, in terms of
how they priced and sold their product. On those same terms,
internet-based companies could run their businesses like light
manufacturing businesses (lower cost, greater flexibility) and that
caused them most damage.
6
Fortnightly Thoughts
What about new products like smartwatches? Does the Apple
Watch actually address a genuine pain point and so will it be
widely used in the future?
With respect to the Apple Watch in particular, I think it is positioned
more as a pleasure product that gives people a new experience
rather than something that necessarily targets a specific problem.
But the deeper point to be kept in mind here is that when a
consumer product or device is in its early stages of development,
most people often underestimate the problems it can address or
how it can make life easier in the future, especially as it evolves into
a better product and becomes more economical. When cars didn’t
exist, it didn’t seem like people needed them.
Back in 1980, when a not so powerful, black and white computer
sold for US$5,000, a lot of people had doubts if (a) it would ever get
better and cheaper, and (b) even assuming it did, if would anyone
want to use it. The same is true for mobile phones 20 years back.
No one really thought then that heavy US$1,000 devices would
some day be this cheap and shrink to the size of playing cards.
When trying to find the total addressable market for phones back
then, many analysts would have looked at demographics, number
of business travellers and similar factors. Even the most optimistic
analysts would have arrived at a market size estimate that is much
lower than what it is today. Even if they believed that phones would
become extremely cheap, it would have required a huge mental
leap for someone to conclude that everyone in the world would
eventually own a phone some day. But that’s exactly where we
seem to be headed. The tablet and PC market is similarly set to top
a billion units in sales. Now obviously, not every new tech product
will find that big a market. I don’t think everyone will have a
smartwatch in future, even if they became really cheap, but the
point I’m trying to make is that it is still very hard for people to
realise how widely accepted new tech products can be in the future.
Do you think there is a risk that added convenience comes at
the expense of privacy, and that at some point we may see
some backlash against it?
There are a few things about privacy that are important to
understand. Firstly, the attitude towards privacy risks varies a lot by
countries. Germans on average care about personal data and
privacy much more than Americans, and this stems from the
country’s culture and political history. And Americans in turn care
about privacy more than the British.
Secondly, concerns around privacy also differ by the value
proposition of products and the core promise of the brand in
consideration. Banks for example inherently know the financial
status of their customers and phone companies know about their
location. This has always been true and acceptable in the physical
world, but consumers at times get more sceptical about online
privacy. Not all of those concerns are entirely rational. And that
really hurts brand image. Once consumers are angry about their
privacy being violated, they don’t go back. And that is why, I think,
people use multiple social networks and messaging platforms.
Facebook has positioned itself as a medium where nothing can be
guaranteed to be private and that positioning has meant that many
users don’t use it for private messages.
Also, while the subset of people who feel that privacy should be a
big concern for everyone is an extremely vocal one, a much larger
Issue 89
proportion of people are actually more or less indifferent to online
privacy of personal data, or have already adjusted their behaviour
based on data privacy concerns. Of course, there is another subset
of people who don’t know the risks at all. But in general, most users
now realise that Google knows what they search for and are more
or less ok with it. The continuously rising amount of content that
people are sharing on Facebook is another tangible metric that
shows that the level of concern that people hold for their data
privacy online is often exaggerated. Many surveys around the topic
further exaggerate the perception of data privacy concerns, but in
reality, those survey results are often significantly influenced by the
way questions were framed.
When a consumer product or device is in
its early stages of development, most people
often underestimate the problems it can
address or how it can make life easier in the
future, especially as it evolves into a better
product and becomes more economical
Which companies do you think are consistently good at
coming up with convenient offerings for their customers?
A facile answer to give here would be Silicon Valley, because as an
ecosystem it consistently comes up with more and more convenient
offerings. But if we need to identify companies, I’d say that Apple,
Google, Facebook and Amazon are the four companies that have
built exceptional platforms that allow them to deliver their services
in a consistent way to users, and it is extremely tough to constantly
come up with a flow of innovative, delightful products like they
have. But, while all of them are extremely good at their core
businesses, they are not so good when it comes to things outside
their core competencies.
In essence, Amazon is the world’s biggest warehouse with a very
good search engine, but a customer doesn’t necessarily discover
anything new on Amazon if he or she didn’t know what to look for.
Similarly, Google is excellent at things that fit into its data engine,
but the company hasn’t been very successful at areas that don’t fit
into its model, and this is evident in most of the challenges that
Google has faced. Facebook similarly has been very good at
surfing user behaviour, but not that good at shaping it.
And we have seen that happen repeatedly – Facebook has tried
many times to get subscribers to use the social network in a certain
way, but it has rarely worked in the first attempt. But, then again,
Facebook has been very good at tracking and recognising what
people didn’t like and adapting accordingly. And finally, Apple is
extremely good at creating hardware that delights people, but it isn’t
very good at, say artificial intelligence and other services. We could
argue that this is a deliberate choice that Apple has made, given
that it can use something like Google for expertise in areas like AI.
But the broader point remains that all these four companies are
have all struggled to replicate their success in their core businesses
anywhere else.
.
Goldman Sachs Global Investment Research
7
Fortnightly Thoughts
Issue 89
Convenience: Apple’s core
Bill Shope, our IT Hardware analyst, on how
Apple’s focus on simplicity and ease of use
has driven the company’s financial success
We have long argued that one cannot simply attribute Apple’s
financial success to its seemingly uncanny ability to produce a
sustained string of hit products. More accurately, we believe that
knowledge of the company’s platform model is the key to
understanding its story and the economics behind its success. One
of the critical components of Apple’s platform differentiation has
been its relentless focus on simplicity and “ease of use.” While the
technology behind Apple’s products is far from simple, the company
relentlessly pares down unnecessary bells and whistles so that
users aren’t overburdened with the complexity that so often
accompanies “feature creep” in consumer electronics. In addition,
the company leverages sophisticated software to ensure that its
devices can all seamlessly work together. All of this tends to make
it very convenient to integrate Apple devices into a consumer’s
daily life, and over time, it can be remarkably inconvenient to
abandon the Apple platform.
On the one hand, some would argue that “ease of use” robs users
of the ability to deeply customise their user experience, and Apple’s
competitors often boast of offering customers a broader feature set.
However, we believe that Apple’s focus on fine-tuning its hardware
and software into a system that the casual user can master without
an instruction manual has endeared it to the average consumer and
allowed its premium-priced products to penetrate the mass market
at a surprisingly rapid pace. Apple’s design theory is hinged on
concision: the company spends quite a bit of time deciding what
features and components are absolutely necessary, and then
eliminates all others. From a hardware standpoint, Apple packs a
remarkable amount of technology into its compactly-sized devices
(perhaps the new 13.1mm-thick MacBook best exemplifies this).
Nevertheless, software is responsible for the true ease-of-use
within Apple’s product portfolio: from the most granular elements of
iOS (an increasingly simplified and standardized UI) to the broadest
(iCloud and Apple ID), software allows Apple’s entire product
portfolio to work together in an inimitably unified manner. When an
Apple user purchases a new iPhone, for example, everything—from
contacts to media to preferences and more—seamlessly transitions
from the prior device with little effort.
As Apple’s product portfolio expands, with Macs, the iPod, the
iPhone, the iPad, and now the Watch, the company continues to
focus on ensuring a convenient user experience. With iOS 8,
launched in October, Apple introduced “Continuity,” a service that
allows a user’s iPhone, iPad and Mac to work together in new
ways; one example of this would be that a user can start writing an
email on an iPad and then quickly resume this activity on a Mac.
On the Apple Watch, “Glances”, one of Apple design chief Jony
Ive’s favorite features, is a service that delivers real-time
information like weather, stock quotes and upcoming calendar
events, without requiring the user to open an app or take out an
iPhone. At our Technology and Internet Conference in February,
Tim Cook noted that one of the advantages of the Watch is that
users can check sports scores or read text messages without
needing to take out their phones at the dinner table.
Goldman Sachs Global Investment Research
The “convenience factor” of Apple’s products is not only key to
helping it attract new users, but it is also a key driver of the user
loyalty behind its powerful platform model: Apple’s devices and
services work together seamlessly and the addition of non-Apple
products to this ecosystem can dramatically raise complexity,
effectively raising switching costs for iOS users. Indeed, we tested
this theory two years ago when we switched a real iPhone user to a
Samsung S4 Galaxy (see our Switching from the iPhone to
Android: how hard can it be? dated June 19, 2013), and, in brief,
we found the switch to be painfully inconvenient. Indeed, after
painstakingly transferring apps, calendars and multimedia content,
it was still necessary to keep an active iTunes account and Applesupported consumption device (iPad, Apple TV, Mac, etc.) in order
to access our purchased TV shows, movies, and even some DRMprotected songs. We believe that these switching costs remain the
key reason behind iOS loyalty, and this dynamic is what
differentiates Apple from traditional IT hardware companies, who
often struggle with the forces of commoditisation.
That’s been one of my mantras — focus
and simplicity. Simple can be harder than
complex: You have to work hard to get your
thinking clean to make it simple. But it’s worth
it in the end because once you get there, you
can move mountains – Steve Jobs
Moreover, we have conducted consumer surveys to understand the
sources of platform differentiation for smartphones and tablets, and
the data generally favoured our argument that Apple’s ease-of-use
drives platform stickiness. In a late 2012 survey of over 1,000
smartphone users, we found that once a smartphone manufacturer
gains a subscriber, the likelihood of retaining that user is high given
the lock-in through familiarity and the inconvenience and cost of
switching devices and/or platforms. To illustrate this point, we gave
respondents the opportunity to indicate that their phone’s
ecosystem did not matter to them, and only 14% did so. Key
reasons why users wanted to stick to their existing smartphone
manufacturer included: (1) familiarity with how the device works; (2)
an unwillingness to repurchase apps; and (3) a lack of desire to
move photos, music, videos, or e-books (see Clash of the Titans
dated December 7, 2012 for more detail).
Without question, the obvious negative to Apple’s ease-of-use is
that iOS users can become heavily dependent on and locked into
its platform. Nonetheless, we believe the benefits of Apple’s
simplicity far outweigh the costs, and Apple’s continued installed
base growth appears to support this contention.
Bill Shope, CFA
IT Hardware analyst
email:
Tel:
[email protected]
1-212-902-6834
Goldman, Sachs & Co
8
Fortnightly Thoughts
Issue 89
Sky embracing connectivity
Sky's strong grip on premium content and its connected base
provides it with a feedback loop to:
Vighnesh Padiachy, our European Media
analyst, delves into Sky’s initiatives




Sky embracing connectivity - a win/win scenario
There are areas in media in which strong content, aligned with
improving customer functionality, can lead to benefits for both the
consumer and for corporates. In the UK triple-play market, Sky is
beginning to reap the benefits of offering its customers a wide
range of content on multiple platforms. It now has over seven
million connected set top boxes, and an array of apps which allow
consumers to watch linear television, use a PVR, access catch up
services, download movies or box sets and watch content on the go
(either by streaming or by downloading). Since it has embraced
connectivity, churn has reduced to levels last seen in 2005, while
customer satisfaction levels have improved and TV additions have
been at their highest since 2006.
Sky has seen strong connected box growth…
take price where content is most in demand;
create the content which consumers download the most;
target those customers most at risk of churning; and
segment its customer base more effectively.
… and now has the largest installed base
Three-year connected box growth for Sky, VM and BT (mn)
Dec-11
Dec-14
7
Sky's set-top box growth has
outperformed peers' significantly
since Dec-11. Sky added 6.1m
connected customers , giving
them the largest connected box
6
5
+1525%
4
3
Internet connected Sky + HD homes (fiscal quarters; ‘000)
2
7000
1
6000
0
5000
Sky
Virgin Media
BT
Source: Company data.
4000
Driving incremental revenue streams
3000
The connected box is allowing Sky to drive new revenue streams
such as Sky Store Rental, Buy and Keep and box sets:
2000
1000
0
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
Source: Company data.
A high level of content differentiation is key
Sky's ownership of unique content is a strategic differentiator
against the backdrop of a converging market in the UK. It has a
strong position in sports, with its Premier League rights renewed
until mid-2019. It has also built a competitive advantage in
Entertainment (exclusive HBO partner until 2020/ output deals with
all six major studios) and through original content production
(c.£600 mn spend per annum).
While Sky Sports 1&2 are obligated to be wholesaled (in standard
definition), and movies are available ubiquitously, Sky Atlantic is
only available on Sky products. The Sky Atlantic channel features
HBO content such as Game of Thrones and Sky's own
commissions such as Fortitude. In this area, Sky has a high level of
content differentiation and it has seen the biggest drop in churn by
package over the last few quarters.
Box Sets: An entirely new product developed for On Demand
and Sky Go. It is available to over five million customers and Sky
has 50% more content than its nearest rivals. In FY 2014 box sets
added 450k new customers and helped to lower Family Bundle
churn by 500 bp yoy. With strong usage and improved customer
satisfaction, Sky intends to increase prices from this June for box
sets by £1 per month.
Contributing to a 30-fold increase in downloads
Sky+ weekly downloads of content (mn)
25
20
15
x30
10
5
Content and convenience driving down churn and improving
customer satisfaction
0
Sky is allowing its customers to access this content through
multiple distribution forms. Some seven million customers (60% of
the base) are now connected, leading to higher loyalty and
increased consumption. In 2Q 2015 churn at 9.2% was the lowest
in a decade. Growth in pay TV additions was the highest in nine
years, helped by the growth of Now TV, a cheaper online product
which competes with Netflix in the UK.
Goldman Sachs Global Investment Research
Dec-11
Dec-14
Source: Company data.
The next step is to move box sets to a premium service and Sky is
likely to invest in quality titles and new features.
9
Fortnightly Thoughts
Issue 89
Movies on demand is rejuvenating the movie service with over
1,000 movies offered on demand. Some three quarters of the
movie base is now connected and this is leading to increased
consumption. In September 2014, Sky added 50p to movie prices,
the first price rise for movies in three years.
While we are at a relatively early point in this innovation, we believe
that this strategy is likely to succeed. It is an example of an
incumbent leveraging technology to benefit both its users and itself.
It also highlights the ever increasing demand for high-quality video
content.
In addition Sky Store offers movies to buy and rent. Sky has
c.1,600 movies to buy and rent and has plans to increase this total
to c.4,500.
Fewer leaving Sky
Sky churn (quarterly annualised, 1993-2015E)
20%
Connected boxes have allowed Sky to launch a buy and keep
movie service. Consumers can buy a movie in digital form and
received a physical copy in the post. This opens up the £1.4 bn
movie purchase market to Sky. The physical rental market is worth
another c.£180 mn in the UK (as of 2014).
In 1H 2015, Sky Store revenues were up 90% from a low base with
2.7 mn customers transacting. Some 24% of buy and keep
customers had not purchased a movie in the last 12 months.
Decipher analysis also shows that Sky regularly ranks as the
number one or two digital retailer for new releases.
18%
16%
14%
12%
10%
2014
2015E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
8%
1993
In 2015/16 Sky intends to extend the buy and keep service to a
variety of other connected boxes. Box sets and TV shows will also
be added to the service.
Sky Go is increasing customer engagement. Registered
households are now at 5.8 mn (54% of the base). On demand
views have increased threefold since December 2011. Sky Go
Extra allows over 1.5 mn customers to download products and
watch portably (on up to four devices) at an additional cost of £5
per month.
Source: Company data, Goldman Sachs Global Investment Research.
1.
Exclusive and differentiated content;
SkyGo registered households are up 142% in three years
2.
A connected customer base. It may well be that a connected
and converged set top box has greater functionality and use
before TV services move directly onto the cloud; and,
3.
An innovative mindset. Sky's connected strategy is giving it a
valuable feedback loop. There was a risk that NOW TV, which
competes with Netflix UK, could have cannibalised Sky's
traditional pay service. Instead It has helped Sky segment the
market and create new revenue streams - for example in the
last three quarters some one million sports passes were
purchased - a revenue stream which comes at a high
incremental margin.
We believe that there are three factors required to implement such
a strategy:
Registered households (mn)
6
5
4
3
2
1
Vighnesh Padiachy
0
Dec-11
Source: Company data.
Goldman Sachs Global Investment Research
Dec-14
European Media analyst
email:
Tel:
[email protected]
44-20-7774-1857
Goldman Sachs International
10
Fortnightly Thoughts
Issue 89
Tuning into convenience
Drew Borst, our US Media & Entertainment
analyst, argues that the internet has reshaped
the landscape of the industry
Content and convenience
Internet connectivity combined with modern devices (e.g.,
smartphones, tablets, smart TVs) that feature once unimaginable
processing power, form-factor and connectivity, have ushered in an
unprecedented era of access and convenience for consumers.
Many of these advanced devices are now meaningfully scaled,
including smartphones with 75% penetration, DVRs at 49% and
tablets at 48% (see exhibit).
Smarter households
US household penetration
readily and easily accessible to consumers. Of course, lower
barriers to entry have predictably translated into new entrants and
increased competition.
This increased competition has supercharged the fragmentation of
audiences, pressuring advertising business models. At the same
time, subscription business models have been more difficult to
establish online, thanks, in some measure, to online piracy and the
difficulty of competing against free. Another factor, albeit less direct,
is the seemingly limitless pool of capital available to fund disruptive
start-ups, based on valuations derived from metrics nowhere to be
found on standard-issue financial statements (e.g., unique visitors,
total addressable market). But, this is a topic entirely unto itself.
The simple fact of the matter is that the availability of entertainment
content has exploded online. From US$300 mn professionally
produced films to 10-second clips of burping babies, and everything
in between, consumers have never had so much entertainment
content, literally, at their fingertips.
The consumption data demonstrates that consumers have
thoroughly embraced this brave new entertainment world. The
challenge for incumbent entertainment and media companies, in
addition to fending off these new competitors, is to harness this
consumption in a manner that is at once profitable and additive to
existing profits. On this point, the music industry serves as the
ultimate cautionary tale for the broader entertainment industry.
Smartphone
DVR
Tablet
Music Industry: The reluctant digital pioneer
The music industry was the first entertainment business to confront
the digital transition, although it was not exactly a willing pioneer.
Rather, it was thrust into this role as a matter of survival, as it
grappled with the rapid rise of online piracy in the early 2000s.
Multimedia Device
(e.g., Roku)
Enabled Smart TV
0%
10%
20%
30%
40%
50%
60%
70%
80%
Note: smartphone penetration is a function of total mobile phone subs.
Source: Nielsen.
For the media and entertainment industry, the internet and
connected devices have reshaped the landscape. For starters, the
barriers to entry have been dramatically reduced, by eliminating the
chokepoints that existed when entertainment production and
distribution was controlled by a handful of corporate gatekeepers
and (yes) media moguls. The migration of media from a packaged,
physical format to a digital one has made entertainment more
The music industry was incredibly slow to respond to the digital
transition. Napster, the original music piracy site, burst onto the
scene in 1999, but it wasn’t until 2004 when Apple iTunes debuted
that consumers grew more and more primed to free music.
This was a serious error and haunted the music industry for years
thereafter, costing the industry multi-billions in annual sales. The
rest of the entertainment industry has taken note and, as a result,
all other entertainment sectors, including video, have been
comparatively quick to embrace digital distribution.
The ‘90s scene…
…doesn’t exist anymore
US music sales (US$ mn)
US music – songs sold (in million)
$16,000
12,000
$14,000
10,000
$12,000
8,000
$10,000
$8,000
6,000
$6,000
4,000
$4,000
2,000
Source: MPAA.
Goldman Sachs Global Investment Research
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0
1991
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
$0
1990
$2,000
Source: MPAA.
11
Fortnightly Thoughts
After a small bump in sales in 2004 from the launch of iTunes, the
declines resumed as the double whammy of album unbundling and
a 30% wholesale price cut took its toll. From 2004 to 2014, US
music unit and dollar sales declined cumulatively by another 50%,
erasing US$5 bn in annual sales.
There is no rest for the weary, and the music industry is already
confronting another digital transition, call it digital transition 2.0, in
the form of online streaming. Song sales stabilised from 2010 to
2012, but have since resumed declining as music demand is now
shifting from digital downloads (ownership) to online streaming
(rentals), such as Pandora.
Home entertainment: Benefiting from music’s misfortune
The digital transition for the home video market, which was once
dominated by thousands of Blockbuster video stores dotted across
the country, has been comparatively smooth, although far from
painless. The US home video market totalled nearly US$18 bn in
retail sales in 2014. While this is 18% below the 2004 peak of
US$22 bn, this is mild in comparison to the music industry.
Over the past 15 years the US home entertainment market has
actually gone through two distinct transitions. First was the
transition from physical rentals to physical ownership, starting in the
late 1990s. In 1999, rentals totalled US$13 bn in retail sales, and
accounted for 91% of the US home video market. Then, DVDs took
over, benefiting from: (1) a step function improvement in technology
over VHS (i.e., picture resolution, durability, and form factor); (2)
attractive retail pricing for ownership; and (3) a favourable US
economic backdrop. By 2006, rental sales accounted for only 20%
of the market, with US$4 bn in annual sales, while DVD purchases,
in less than eight years, had skyrocketed to nearly US$17 bn
annually, accounting for 77% of the market.
Goldman Sachs Global Investment Research
Physical Purchases
$25,000
Physical Rental
Digital
$20,000
$15,000
$10,000
$5,000
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
$0
2001
Against this backdrop of piracy and absent a legal digital
alternative, music sales plummeted. From a peak of nearly US$15
bn in 1999, US music sales declined cumulatively by 15% to US$12
bn in 2003 (previous exhibit). The decline in song units (assuming
10 songs per album) was even more dramatic, declining by 29%
cumulatively to 7.7 bn over the same time. Little did the industry
know that this was only the beginning of the decline. By 2004, the
music industry was in dire straits. Physical sales were in free fall
and its own efforts to launch a digital download service were failing.
Apple, with the dominant digital music player and superior software
engineering skills, was a perfect partner (nay, savior) for the music
industry, with Steve Jobs Achieving a very consumer-friendly retail
price of US$0.99 per song and a wholesale price of US$0.70. This
wholesale price was, in effect, a 30% price reduction from the
implicit price per song on a physical album (i.e., US$10 album
wholesale price, 10 songs per album).
US home entertainment spend, Bn USD
2000
In addition to the failure to launch a legal alternative to the pirate
sites, the music industry was, understandably, paralysed by its fear
of album unbundling. Piracy had given consumers a taste for
singles and there was no going back to albums.
What are they spending on?
1999
The music industry, rather than focusing on a legal digital download
service, initially focused all its effort on shutting down Napster by
way of a copyright infringement lawsuit. Ultimately, the industry
prevailed and the courts shut down Napster in mid-2001; however,
this was a pyrrhic victory. By the time Napster was shut down, the
pirates had moved on to the next new thing: decentralized peer-topeer file sharing, led by Gnutella. Unlike Napster, these piracy sites
were virtually impossible to shut down because there was no
central server storing the files. Shutting down Gnutella would have
been tantamount to shutting down the entire internet.
Issue 89
Source: Digital Entertainment Group, SNL Kagan.
The second home video transition was actually two transitions
wrapped into one; home video moved from physical to digital and
transitioned back to rentals from ownership. At the DVD peak in
2006, digital sales totalled US$1 bn or 5% of the market but by
2014 totalled US$7.6 bn or 42% of the market. Included in digital is
subscription video on-demand (SVOD), such as Netflix, which totals
US$4.8 bn. Meanwhile, DVD sales plummeted by nearly 60% to
US$7 bn in 2014 and, for the first time ever, were eclipsed by digital
sales. Looking at the market through an alternate lens, the
proportion of sales from ownership declined from 77% in 2006 to
48% in 2014 as SVOD consumption displaced DVD purchases.
As rental prices are generally lower than purchase, retail sales
understate the significance of this shift. Since 2008, US home video
unit demand has contracted cumulatively by 35% to 2.3 bn in 2014
as ownership and rentals have each declined by more than 30%
(exhibit below). However, this data excludes SVOD, which has
limited disclosure on unit consumption. However, based on what
we know about Netflix consumption, the rise in Netflix streaming
easily explains the unit decline in home entertainment.
Fewer trips to the DVD store
Home video units (in millions)
4,000
3,500
Digital
Downloads
3,000
DVD sales
2,500
Netflix DVDs by
mail
2,000
Video On
Demand
1,500
DVD rentals
1,000
500
0
2008
2014
Source: Digital Entertainment Group, SNL Kagan.
12
Fortnightly Thoughts
Issue 89
Netflix disclosed that in 1Q15 cumulative global streaming on its
service was 10 bn hours, which equates to average viewing per
subscriber of nearly two hours per day. This figure has doubled
since 2011, as the content library has continued expanding, and
now includes multiple original series. Assuming that US subscriber
consumption is consistent with this global average, this stat implies
annualised consumption among US subscribers of nearly 27 bn
hours. If we convert this consumption into home video units by
crudely assuming 1.5 hours of content per for home video unit, it
would equate to 18 bn units. In other words, the 1.2 bn decline in
home video units from 2008 to 2014 equates to only 7% of current
Netflix streaming consumption.
Of course, this is an “apple-and-orange” comparison, but it does
illustrate that the underlying consumer demand for home video
demand has expanded rather meaningfully, despite the top-line
decline in home video sales, thanks to digital technology. That said,
this notion of demand up meaningfully and sales down, reinforces
the earlier point about the challenges for the incumbent
entertainment companies of growing, or at least defending, profit
streams.
The most active consumers of online video are among the most
active consumers of all forms of video. Some of this is due to the
expansion in connected devices that enable video watching at
times and in places where, in bygone days, it was not even
possible. According to Nielsen, the top quintile of online video
streamers averages 23 minutes of online video viewing per day, 63
minutes surfing the internet and 262 minutes watching television.
What is fascinating about this statistic is that the average daily TV
consumption among this very top quintile of online streamers is
actually 3% higher than the TV viewing for non-streamers and 4%
higher than the TV viewing for the overall population (exhibit
below). The biggest online video streamers not only watch more
video online than everyone else, but they also watch more TV than
everyone else. They are true super video consumers.
Binge watching
Average daily consumption (in minutes)
TV
Online Video
Internet
350
300
Television: Embracing digital to drive consumption
Home video is clearly not the only entertainment sector impacted
by SVOD. Television is another sector that appears vulnerable to
share loss to Netflix. Sure enough, average daily consumption of
traditional (live) TV is down 5%, or 14 minutes per day, since 2011
(Exhibit below). Nearly half of this decline is attributable to
consumption shifting to DVRs. The other half is a shift to
multimedia devices, such as Apple TV and Roku, where Netflix is
undoubtedly one of the most popular apps. Even among this
shifting consumption, the total pie of video consumption has still
increased by 2% or five minutes per day per user.
250
200
150
100
50
0
Top Quintile of Streamers
Non-streamers
Total Avg.
Source: Nielsen.
Times are changing
Average daily consumption (in minutes)
The video industry has clearly learned from the music
industry’s tale of woe
330
320
Video on
Smartphone
310
Video on Internet
300
Multimedia Device
(e.g., Roku)
290
280
DVR
270
Traditional TV
260
250
4Q:11
4Q:14
By embracing digital distribution, the video industry has avoided
some (though not all) of the pitfalls that plagued the music industry
more than a decade ago. The good news for the video industry, writ
large, is that consumer demand for its products has never been
higher and that is always, no matter the business, a mandatory
prerequisite for profit growth. Some pundits think the video industry
is too eager and its digital strategies are undermining long-standing
business models and profit pools. For instance, how does licensing
content to the likes of Netflix impact cable TV subscriptions? This
critique, however, seems based on the false premise that the world
is static, that technology is not constantly evolving and empowering
consumers. Digging in your heels, sticking to the past practices and
ignoring the evolving market is not really a business strategy. Just
ask the music industry.
Source: Digital Entertainment Group, SNL Kagan.
Drew Borst
Media & Entertainment analyst
email:
Tel:
Goldman Sachs Global Investment Research
[email protected]
1-212-902-7906
Goldman, Sachs & Co.
13
Fortnightly Thoughts
Issue 89
Convenience pays
being explored by disruptors could lower the cost of payment
acceptance. These disruptors seek to lower the cost of payment
acceptance for merchants by replacing the existing credit/debit card
networks operated by Visa, MasterCard, and AmEx with either
existing payment infrastructure (such as ACH) or distributed
network technology (such as Bitcoin). Although we think these
alternatives have a chance of succeeding, they will have to
overcome several disadvantages including less consumer
protection, as well as a lack of loyalty and rewards programmes
compared with traditional credit/debit card networks.
James Schneider and SK Prasad Borra
discuss the way we will pay in the future
Convenience drives customer adoption and disruption in
payments
In developed markets such as the United States and Western
Europe, there has been a substantial shift away from cash and
cheques toward electronic payments over the past 20 years.
Greater convenience, along with rewards programmes and
consumer protection regulations, have stimulated growth in
electronic payments globally. In parallel, a number of innovative
and disruptive payment vendors have emerged over the past five
years, and user adoption has grown dramatically over that period.
Banks and payment networks have built a powerful market position,
reinforced by tangible benefits for consumers. Importantly,
incumbent payment networks are innovating. From enabling mobile
payment systems like Apple Pay, Google Wallet, and Samsung Pay
to developing merchant analytics platforms like MasterCard
Advisors and Visa Transaction Advisors, payment networks are
evolving their offerings to make them more competitive with
emerging players.
Consumer convenience was the driving force behind the
growth of payment networks
The need for a system where banks can easily communicate and
process credit card transactions gave rise to credit card networks
including Visa and MasterCard, which began as bank-owned
associations facilitating transaction authorisation, clearing, and
settlement among member banks. The card network associations
established a number of rules which bind merchants who accept
credit cards, in order to ensure universal acceptance of credit cards
as a form of payment, as well as the equitable treatment of all
banks which are part of the network. Ultimately, these rules were
key to the early expansion of credit card acceptance in the United
States given the convenience of using electronic payments and the
lack of additional charges for doing so (for consumers), the
incremental sales (and higher ticket rate per transaction) generated
(for merchants), and fees and interest generated from greater
consumer credit balances (for issuing banks).
We see the payment networks’ strong market position continuing
for the foreseeable future, so long as they remain nimble and
innovative. However, we see the opportunity for emerging players
to make inroads, particularly outside the US and in emerging
markets, where regulatory and cultural dynamics differ.
C2C payments: A fast-moving market with significant
disruption potential
Few areas of payment technology are changing as rapidly as
consumer-to-consumer transactions, also known as C2C. C2C
payments involve consumers directly transacting with each other
using technology infrastructure provided mainly by banks.
Technology and demographics are shaping C2C payments, with
new technologies like “Instant ACH” allowing for real-time transfers
between consumer bank accounts, and mobile apps like Venmo
and Square Cash being adopted by tech-savvy Millennials for
everyday transactions between friends.
In the US, this system has resulted in a dramatic increase in
electronic forms of payment over the past 20 years.
Disruptors promise convenience, lower costs and faster
payments
We believe C2C payments are most likely to see significant
disruption over the next 10 years for several reasons:
We believe that there is real demand among merchants for many of
the services offered by innovators, and think new technologies
Developed markets have high adoption of electronic payments
Transactions by payment format
Credit Card Transactions
100%
Debit Transactions
ATM transactions
Pre-Paid Card Transactions
Other
90%
80%
70%
60%
50%
40%
30%
20%
10%
Germany
S. Arabia
Russia
Italy
Nether.
India
Spain
France
Indonesia
Mexico
UK
Switz.
China
Brazil
Australia
US
Turkey
Japan
Canada
S Korea
0%
Source: Eurostat.
Goldman Sachs Global Investment Research
14
Fortnightly Thoughts
Issue 89
(1) convenience and ease of use; (2) lack of “entrenched”
counterparties such as businesses, which are typically much slower
to adopt new business processes; (3) lack of “stickiness” for
incumbent service providers such as offers and rewards.
Consumers under 35 display a significantly greater willingness to
provide personal data in exchange for rewards
Very comfortable
Extremely comfortable
60%
50%
solution works with payment and technology incumbents (including
networks and banks) to bring ease-of-use and increased security
features to consumers, issuers, and merchants. Three months after
launch, Apple Pay accounted for more than 65% of contactless
payment dollar volume across all payments networks in the US.
Over 90% of US credit card issuers, the payment networks, and
several merchants have already signed up to support Apple Pay,
which we believe signals the early impact Apple Pay is having on
the industry. In addition we believe Apple Pay will serve as a slight
catalyst for merchant NFC adoption, with many large merchants
already accepting Apple Pay payments. We see point of sale (POS)
vendor Verifone as the key beneficiary of EMV and NFC adoption
in US.
40%
Convenience and distribution strength is creating new
payment models in emerging markets
30%
20%
10%
0%
18 - 25
26 - 34
35 - 44
45 - 54
55 - 64
65 and above
Overall
Source: Alix Partners.
Today, consumer-to-consumer (C2C) payments represent an
estimated US$30 bn in fee revenue, mainly driven by international
money remittance. Few, if any, domestic C2C services charge
explicit fees (they are embedded in standard consumer banking
fees) and thus there is no profit pool to disrupt. However, there is a
significant profit pool in international C2C payments and
crossborder remittance. New online approaches (like Xoom) plus
new technology approaches (like Bitcoin, TransferWise, and Ripple
Labs) have the opportunity to disrupt traditional in-person money
transfer services provided by Western Union and many large
banks. Although Bitcoin and other cryptocurrencies are still in the
early stages of development, they could gain traction once clear
use cases become more established.
Access to a bank account is one of the most basic needs in DMs
such as the US and Western Europe. However, the World Bank
estimates that more than 50% of the global population (over the
age of 15) does not have access to basic financial services. Nonfinancial institutions with distribution strength are tapping into the
unbanked and under-banked population. Historically, wireless
telecom carriers have had a negligible role in payments, but the
emergence of mobile as the primary growth channel for payments
is creating interesting new opportunities for telcos. Ventures like MPesa show the opportunity related to unbanked customers in
emerging markets given high mobile penetration rates and its ease
of use for consumers. M-Pesa (JV between Vodafone, Safaricom)
has over 12.8 million active customers. According to the GSMA,
there are 150 live mobile money deployments, and an additional
110 deployments are being planned.
Significant gap between mobile and banking penetration creates
attractive opportunities
Mobile penetration (%), access to financial services (%)
180%
Mobile
Financial
160%
140%
C2C FX vendors reduce transaction costs using a currency
marketplace
120%
Total cost of sending £1,000 from UK to Germany
100%
80%
8%
60%
7%
40%
6%
20%
5%
Gabon
Botswana
Gambia
Nambia
Ivory Coast
South Africa
Ghana
Morroco
Kenya
4%
Nigeria
Tanzania
0%
Source: GSMA Mobile Money Tracker.
3%
2%
James Schneider, Ph.D
1%
Payments and IT Services analyst
0%
HSBC (branch)
Santander
(branch)
RBS (branch) Average (excl. Lloyds (branch) Western Union TransferWise
TransferWise)
(online)
email:
Tel:
[email protected]
1-917-343-3149
Goldman, Sachs & Co.
Source: TransferWise (survey conducted by Charterhouse Research).
S.K.Prasad Borra
Apple Pay: The convenience of one-touch payments
Payments and IT Services analyst
In September 2014, Apple introduced Apple Pay, its mobile
payments service. Apple Pay allows iPhone and Apple Watch users
to make one-touch payments for goods and services with their
Apple devices at retail locations with NFC enabled terminals. The
email:
Tel:
Goldman Sachs Global Investment Research
[email protected]
1-917-343-7293
Goldman, Sachs & Co.
15
Fortnightly Thoughts
Issue 89
At your doorstep
Our Japan and Korea Consumer analysts
examine how convenience stores are suited
to serving Asia’s urban millions
Thailand, Korea and Taiwan CVS entering the second stage of
growth…
Convenience store development stages
Looking for a way to capitalize on Asia’s growing urban millions?
We think convenience stores are an attractive vehicle to take
advantage of the theme, with Asia’s convenience store sector
entering a dynamic stage of its development – a burgeoning urban
population, greater wealth, changing spending consumer habits
and a maturing business model are all acting as tailwinds.
Not just your corner shop
In Tokyo, you could happily live without going further afield than
your local convenience store. Not only can you buy the usual fare:
a drink, chewing gum or cigarettes; you can also get freshly cooked
hot food with a cup of fresh-brewed coffee, a new pair of socks, or
ready-to-cook vegetables. You can get cash from an ATM, pick up
a parcel, pay your bills, buy a movie ticket or make photocopies, 24
hours a day. Convenience stores are veritable treasure troves, 100
square metre stores selling 3,000 odd items to 1,000 people per
store per day. There are more than 50,000 convenience stores in
Japan, dominated by 7-Eleven, serving 100 mn urbanites, with
sales of US$100 bn a year and accounting for a surprisingly high
10% of all retail sales.
Did you know that...?
CVS are one of the most resilient retail formats to e-commerce.
Some 70% of items sold at CVS either cannot be bought online or
are not online-friendly such as fast food, tobacco and alcohol. As
most CVS products have low ASP and offer gross profits below
US$10, they are generally unsuited to online sales.
Lifestyle, climate and development factors to spur growth
Although Japan clearly leads the way, convenience stores have
gained popularity in Thailand, Taiwan, and South Korea; and have
begun to take root in China. As of 2014, convenience stores’
weighting as percentage of the retail industry is highest in Japan
and Thailand at 10%, followed by Taiwan (8%) and Korea (5%).
This is generally much higher than in the US (1%) or Europe and
we attribute this to:
Source: Goldman Sachs Global Investment Research.
Five underlying tailwinds to the industry in Asia to drive US$63
bn in sales by 2020E…
We expect convenience stores in Asia’s cities to almost double
their sales, to US$63 bn by 2020, from US$37 bn in 2013. We
identify five key secular drivers:
1)
2)
3)
4)
5)
(1) population density and concentration in urban areas,
(2) relatively high smoking rates making a substantial boost to
store footfall, and
(3) local culture and consumer habits, including commuting
method (on foot, by bicycle or public transport) and frequency of
purchases (i.e. Asian consumers tend to buy small amounts of food
and daily essentials rather than the less frequent, larger basket
sizes of their European/US counterparts).
That said, this affinity for the CVS format, coupled with increasing
wealth, leads us to expect the convenience store format to continue
to penetrate the retail sector in Asia.
As shown in the following exhibit, we believe that Thailand, Taiwan
and Korea are in the second stage of their CVS development, with
prices on a gradual rise, convenience store awareness rising and
customer footfall at reasonable levels.
Goldman Sachs Global Investment Research
Asia’s urban population to grow by 900 mn to 2.8 bn by
2030 (with 350 mn in China, Taiwan, Korea and Thailand).
Asian city life is a tailwind with most people still getting
around by foot, bicycle, train, bus, train or motorcycle.
Convenience stores afford easy access and generally do not
require parking lots.
Asians set to spend more on “having fun”, and hence more
on “eating out”.
Resilience to the e-commerce threat with c.70% of items
sold in CVS unsuitable for e-commerce. Convenience stores’
average ticket is below US$10, making it difficult for ecommerce providers to cover the cost of delivery (around
¥1,000).
Demographic tailwinds include ageing population (i.e.
consumers aged 50 and over drove growth in the second half
of the 1990s for Japanese convenience stores) and smaller
household sizes, with approximately half of households in
Japan/Korea/Taiwan and Thailand being one/two person.
Where’s the upside?
There is a wide gap between average daily sales at convenience
stores in Japan and those in other Asian markets as illustrated in
the following exhibit.
1)
2)
3)
Differences in food prices: partly a function of Japan’s
relative wealth in GDP per capita so will take more time for
other regions to catch up. Another key driver is;
Japan’s meaningfully higher fast food and private-brand
contribution to sales – 44% in Japan versus 17% in Korea,
25% in Taiwan and 27% in Thailand. We view fast food and
private label expansion as crucial to future of CVS growth in
these regions, which will require…
…major changes to distribution and manufacturing
channels. If the CVS can overcome these hurdles, we expect
daily sales to increase, convenience stores to play a greater
role in the social infrastructure, and the format to establish a
solid footing in the overall retail industry.
16
Fortnightly Thoughts
Issue 89
Japanese daily sales stand out; showing the way
Fast food and private brands are the key to higher ticket and
profitability…
Average daily sales of major CVS chains by market (US$, FY2013)
PSD (nominal, US$)
8000
Taiwan (35)
Taiwan average
Japan (100)
Average combined fast food/private brand ratio at CVS in Asia
(FY2013)
Japan average
Other Asia
Other
7000
Fast food and Private brand
100%
6000
90%
5000
80%
4000
70%
3000
2000
60%
1000
50%
40%
7-11 Philippines
7-11 Malaysia
FamilyMart Shanghai
7-11 Shanghai
7-11 Indonesia
CP All Thailand
CU (BGF)
GS Retail
FamilyMart Japan
Lawson
7-11 Japan
FamilyMart Taiwan
7-11 Taiwan
0
30%
20%
10%
Note: PSD = Daily sales per store.
Source: Company data, Goldman Sachs Global Investment Research.
Mind the gap: Raising the weighting of fast food and private
brand sales is the key
In the initial stage of convenience store development in Japan,
Seven Eleven’s fast food/private brand ratio (although it had no
private brand then) was just 12%, so in the last three decades it
has increased the ratio by more than 30 pp. Other Asian
convenience store operators are already focusing on this gap and
have begun taking steps to increase fast food/private brand sales.
We estimate that the fast food/private brand ratio in each of these
three markets will rise by around 1 pp annually (in line with Japan’s
history). How do we think Korea, Taiwan and Thailand will compare
to Japan’s example?

Korea: We believe that Korea’s CVS logistics infrastructure is
roughly on a par with Japan’s, but see ample room from for
fast food/private brand penetration as the current 17% is one
of the lowest in the region. For instance, fresh brewed coffee
and desserts/delicatessen is a big, lucrative white space
category (vs. 7-11 Japan/Taiwan among the top coffee
retailers), which should have positive implications not only for
ticket growth and profitability, but also for expanding the CVS
consumer base to female and younger customers, hence
boosting store traffic.

Taiwan: Logistics remains mostly a three-step process of
factory to center to store, but efforts are underway to shift to a
two-step process with integrated factory/logistics sites
delivering straight to stores. We believe that this will enable
operators to reduce delivery times and introduce a threedelivery-a-day system, which should help boost the fast
food/private brand ratio.

Thailand: Daily deliveries are possible only to a limited
number of stores in the central city, with other stores receiving
deliveries only about three times a week, indicating substantial
room for improvement. Thailand 7-11 is also rolling out fresh
brewed coffee and a private brand delicatessen in 2015, which
should help boost the fast food category.
0%
Japan (2014)
Japan (1981)
Korea
Taiwan
Thailand
Source: Company data, Korea CVS Association, Goldman Sachs Global
Investment Research.
Make sure you plug into the top CVS ideas in the region: Seven
& I (Japan), BGF Retail (Korea) and CP All (Thailand)
We cover eight CVS stocks in Asia with three Buy ideas (BGF
Retail, CP All and Seven & I).

CP All (CL-Buy; Bt45.5): We believe CP All offers three
attractive propositions in one: exposure to the structural growth
of convenience stores in Thailand, superior returns as the
market leader, and an earnings turnaround story.

BGF Retail (Buy; W135,000): BGF is our preferred
convenience store vehicle in Korea given top-quartile returns
and double-digit earnings growth out to 2017E.

Seven & I (Buy; Y5,271): Continues to strengthen same-store
sales and provide support for franchise stores as it fends off
lower-ranked chains. Its position in the sector remains
extremely strong in our view, and we expect it to benefit from
any industry shakeout in Japan.

Taiwan FamilyMart (Neutral; NT$241): TW FM is catching up
with 7-Eleven on higher SSSG and margin expansion thanks
to operating leverage and product mix upgrades. We expect it
to deliver stronger earnings growth than 7-Eleven in Taiwan.
However, Neutral on valuation grounds despite liking its
longer-term prospects.
Sho Kawano
Japan Retail & Restaurants analyst
email:
Tel:
[email protected]
81-3-6437-9905
Goldman Sachs Japan Co., Ltd.
Christine Cho
Asia-Pacific Consumer & Retail analyst
email:
Tel:
Goldman Sachs Global Investment Research
[email protected]
+82 (2) 3788 1773
Goldman Sachs (Asia) L.L.C, Seoul Branch.
17
Fortnightly Thoughts
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What’s next for retail?
Our European retail & internet analyst Carl
Hazeley on how some companies are
catching up in online convenience and some
first movers are extending their lead
For as long as there have been retailers, they have catered to
various consumer needs beyond simply offering merchandise in
order to get them shopping. Be it Sears at the turn of the last
century, which offered all manner of products in a single place, to
luxury brands that offered customers the opportunity to make a
statement about their lifestyle or personality. In this context, the
shift driven by e-commerce at the turn of this century has been no
major surprise. Online businesses, in the first instance, put
convenience at the heart of their customer proposition: the ease of
shopping at home, more choice, price transparency and home
delivery were all important in attracting customers at the expense of
offline players. In UK grocery, this has been a source of competitive
advantage for Ocado as we discuss later.
In other end-markets, brand, personalised service and product
quality remain areas of focus of the customer proposition.
Established players have been able to use their heritage (e.g.
Hermes in luxury) and brand momentum (e.g. Michael Kors in
speciality apparel and accessories) to sustain pricing power even
as online has made it easier for new brands to reach customers at
scale. In some of the most commoditised sectors, we have seen
bifurcation of the incumbents’ performance. For instance, in
consumer electronics RadioShack filed for bankruptcy while Dixons
faced headwinds leading to its merger with Carphone Warehouse.
Conversely in apparel, Next has made significant strides in the
online channel; it represents 37% of brand sales. Meanwhile a
number of successful first movers online are at the next frontier,
using content, aggregation and scale to generate network effect,
which could make it tougher for incumbents to catch up, which we
will explore
Ocado used convenience to grow faster than offline supermarkets
Ocado UK grocery revenue growth vs. ‘listed 3’ supermarkets UK
growth CY2008-14
Listed 3
needs. Using the internet, Ocado took this one step further by
offering the added convenience of being able to shop home at any
time of day, and added service of having your groceries delivered
right to your door at a time that suits. The preceding exhibit shows
that Ocado has grown revenues by c.5x the rate of the ‘listed 3’
supermarkets through 2008-14, leveraging convenience, price,
choice, and service. UK supermarkets were forced to respond, and
have developed their own online offerings but online represented
only c.5% of UK grocery sales in 2014 illustrating how nascent the
shift to online is in the category. By comparison, 2014 online
penetration in UK apparel was c.18%.
Where are incumbents responding online? Incumbents
catching up as convenience becomes commoditised
While initially slow to adapt to and eventually adopt e-commerce
channels than their disruptive, oft leaner, and nimbler online
competitors, offline incumbents have in many cases been able to
replicate convenience and service through their own online
offerings. In some cases, the offline component has in fact been a
key contributor improving the customer proposition. For example,
Inditex believes Zara has a lower returns rate for online orders than
online-only competitors as customers simply return or exchange
products in store.
Within apparel, the rise of offline players in online retail has been
more pronounced for more commoditised, lower-value goods. For
example, Debenhams (60% apparel and accessories) has been
relatively successful in developing an online offering, with 19% of
UK retail sales online in 2014. For Next, the transition to online was
easier because it was able to migrate a captive catalogue / mail
order customer base online, giving its e-commerce efforts a scale
advantage from inception. Indeed, Next’s online sales were 37% of
brand revenues in 2014 and the segment represented 46% of 2014
brand EBIT.
Offline incumbents are catching up with online in apparel
Next, Debenhams UK, and Next online sales as a percentage of total
retail sales (fiscal years)
60%
Next Directory as % of Brand sales
Debenhams online as % UK retail
Ted Baker e-commerce as % Retail sales
50%
Ocado
30.0%
40%
25.0%
30%
20.0%
20%
15.0%
10%
10.0%
5.0%
0%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Company data, Goldman Sachs Global Investment Research.
0.0%
-5.0%
2008
2009
2010
2011
2012
2013
2014
Source: Company data, Goldman Sachs Global Investment Research.
Where is just being online enough? Convenience a key factor
in UK grocery
Through most of the 19th century, customers would visit their local
butcher, baker and other small shops to buy their groceries. The
advent of the supermarket in the late 1800s and then the selfservice supermarket in the 1950s meant that customers could more
conveniently visit a single location for the majority of their grocery
Goldman Sachs Global Investment Research
Moving up the price ladder, brands such as Ted Baker have been
slower to migrate online than their apparel peers mentioned above.
Ted’s e-commerce sales were 9% of retail revenues in 2014 from
just 1% in 2010. In luxury, online penetration is still mid-single-digit
on a global basis. For Burberry, a digital leader in luxury, we
estimate online penetration is only c.10%.
18
Fortnightly Thoughts
Issue 89
How are incumbents responding offline? Brands using
personalisation and content
For brands, e-commerce can expand consumer and category
reach, transforming their margin structure, pricing power and
significance. One way in which potential brands of the future are
well positioned for the new landscape is through a focus on
personalisation by leveraging faster supply chains, which may allow
for higher price premiums. Made to order and measure products
such as Nike ID in sportswear may become more prevalent as
brands seek to empower customers with greater control, selection
and a bespoke experience. Customised products should mean
greater price premiums and faster, more efficient supply chains
should lower the cost of production leading to higher profitability.
Personalised product can drive pricing power for brands
Price premiums for personalised products
Nike Air Zoom pegasus can cost up to US$135
personalised vs. $100 standard
Nike
Adidas running shoes can cost $150 personalised vs. $130
standard
Adidas
Tiffany & Company
Return to Tiffany charm bracelet with engraving can cost
$315 vs. $285 standard
Jaeger LeCoultre
Jaeger LeCoultre Reverso personalised costs $5,300 vs.
$4,800 standard
Pandora charm bracelet with engraved charm costs $61
vs. $56 standard
Pandora
Cartier Love ring with engraving costs from $1,175
vs. $1,100 standard
Cartier
Michael Kors monogrammed tote costs $278 for both
personalised and standard
Michael Kors
Ralph Lauren Polo shirt costs $85 for both personalised and
standard
Ralph Lauren
0%
5%
10%
15%
20%
25%
30%
35%
40%
Source: Goldman Sachs Global Investment Research.
An interesting dynamic has developed in the music industry as it
evolves from primarily ownership of content to on-demand access
which more convenient, putting pressure on industry revenues.
Falling commoditised music revenues increasing focus on live
music?
Sales of CDs, cassettes, LP/Eps, subscription & streaming and legal
downloads
CD
Cassette
LP/EP
Vinyl Single
Subscription & Streaming
Download
16,000
14,000
Disruption?
Format
Replacement
12,000
One way in which the industry is partially offsetting this is through
focusing on live content (concert tours) where the experience on
offer is much tougher to disintermediate via online. Compared to
the marked decline in music sales shown in the preceding exhibit,
through 2007-12 US concert revenues grew 2.4% (global concert
revenues grew 0.7%). In 2012 concert tour ticket sales represented
54% of global industry revenues.
How are online players responding? What’s next for online?
Content and more convenience…staying ahead through
curation, aggregation and network effects
Some online companies have found innovative ways to stay ahead
of the competition as the initial attraction of convenience becomes
more abundant. For instance, Trunk Club, Enclothed, Lyst and
Farfetch are examples of companies which have put product and
content curation at the heart of their customer proposition.
Customers of Trunk Club and Enclothed input their clothing style
and budget preferences and are sent a box of clothes curated by
stylists. Here, the convenience element has evolved as customers
are offered free returns on whichever items do not suit. Lyst and
Farefetch use content curation to differentiate themselves from
other online apparel/luxury distributors. Lyst pools roughly 11,500
online stores and designers, while Farfetch gathers approximately
300 luxury fashion boutiques and 1,000 labels.
Aggregation has thus far proven to be a larger barrier to success
for new entrants to overcome, partly due to the first mover
advantage enjoyed by online players, leading to scale, or due to
self-reinforcing network effects which can trump the simple
convenience of the online channel on its own. For example,
Rightmove has roughly twenty thousand UK real estate agents on
its platform vs. Zoopla’s eight thousand, partly owing to the former
benefiting from first mover advantage. As a result, Rightmove
commanded around four times the page views and around two
times the average revenue per advertiser in 2013. By comparison,
new entrant On The Market has averaged c.1/16th of Zoopla’s
weekly traffic in the 12 weeks since its launch.
JUST EAT has leveraged its aggregation of c.25k takeaway /
delivery food restaurants in the UK to generate high organic and
direct traffic (61% of orders are on mobile), leading to c.46 mn UK
orders in 2014. While the key customer proposition remains centred
on convenience (a single hub for multiple restaurants, wide choice,
card payment, reviews), the scale of the content (by comparison,
the UK #2 player has only c.10k restaurants on its platform) and the
network effect it generates has created an ever-growing moat
which new entrants and existing competitors will find it increasingly
hard to overcome.
10,000
8,000
6,000
4,000
2,000
0
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
Source: RIAA, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
19
Fortnightly Thoughts
Issue 89
Scale drives content, content drives scale
Overview of JUST EAT’s network effect in the UK, 2011-20E
Source: Company data, Goldman Sachs Global Investment Research.
Turning first mover advantage into sustainable leadership
Apparel retailer Zalando initially benefitted from first mover
advantage by offering convenience to German customers underserved online by incumbent mail order / catalogue businesses.
Despite being only seven years old, the company is taking steps to
develop a platform for long-term leadership bringing together
content and personalisation to drive positive network effects. This
should lead to a sustainable competitive barrier against new market
entrants and incumbents developing their respective online
offerings.
Leveraging network effects to drive sustainable leadership
Overview of Zalando’s platform network effect
Preference for sustainable leaders: Buy Ocado, Zalando,
ASOS
Customers
Traditional online retail
Brand solutions
Curated shopping
Brands
Intermediaries
Advertising services
Source: Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
On personalisation, Zalando is launching curated shopping which
will be similar to Trunk Club and Enclothed. This should drive
higher customer engagement with the platform and help shift away
from a conversion-focused, convenience-led model which can be
more easily replicated by peers. One way in which Zalando will
leverage content is by developing flagship online stores for its
brand partners within the Zalando website. Brands will have full
control of their sites, giving them a direct route to engage with
customers. For customers, more, specialised content should further
increase engagement. For the c.1,500 brands currently on Zalando,
extending their relationships should lead to higher attachment to
the platform and strengthen Zalando’s position between suppliers
and customers for the long-term.
Across our internet coverage, we have a preference for companies
that are able to able to cement leadership positions by using brand,
content, curation and personalisation to drive an attractive
customer proposition. We also see companies with significant scale
owing to aggregation and network effects as well placed to sustain
long-term leadership. We are Buy rated on Ocado (Conviction List;
379.8p), Zalando (Conviction List; €28.9), and ASOS (3,785p).
Carl Hazeley
Retail, Digital Consumer analyst
email:
Tel:
[email protected]
44-20-7552-3139
Goldman Sachs International
20
Fortnightly Thoughts
Issue 89
Six of the best – our favourite charts
In our six of the best section, we pull together a pot pourri of charts that we hope you will find
interesting. They will be different in each edition but hopefully always of note.
Hit it and quit
The Art of selling
Ratio of quits to layoffs in the US, 3-month moving average
Global art transactions
Education and health services
3.5x
60,000
Total private
3.0x
60
Volume (mn, RHS)
Value (€mn)
50,000
50
40,000
40
30,000
30
20,000
20
10,000
10
2.5x
2.0x
1.5x
1.0x
0.5x
Oct-14
Feb-15
Jun-14
Oct-13
Feb-14
Jun-13
Oct-12
Feb-13
Jun-12
Oct-11
Feb-12
Jun-11
Oct-10
Feb-11
Oct-09
Jun-10
Feb-10
Jun-09
Oct-08
Feb-09
Jun-08
Oct-07
Feb-08
Jun-07
Oct-06
Feb-07
Jun-06
Oct-05
Jun-05
Feb-06
0.0x
0
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: BLS.
Source: TEFAF Art Market Report.
Go east, young man
Health drives
Amazon and Apple job postings, top 10 countries ex-US
Google Ventures investments (new investments only)
700
2013
2014
100%
600
Energy
80%
500
Commerce
400
60%
Consumer
300
200
Enterprise & Data
40%
100
Mobile
20%
AMAZON
Israel
Life sciences & Health
Brazil
Turkey
Australia
France
Japan
UK
Ireland
China
Singapore
S.Africa
France
Ireland
Canada
Lux.
Japan
China
Germany
UK
India
0
0%
2013
APPLE
2014
Note: The US has most openings for both
Source: Company website.
Source: Google Ventures.
Emptying the bat cave
Still a big chunk
Comic book sales on ebay (US$)
Dividends paid by Oil & Gas companies as a percentage of total
US
Batman
20%
Avengers
18%
Europe
16%
Hulk
14%
Wolverine
12%
Superman
10%
Spiderman
8%
Iron man
6%
Captain America
4%
Deadpool
2%
Thor
5,000
Note: DC's superheroes in black, Marvel's in blue. Data gathered over 180-day
period ending March 29, 2015 from ebay US.
Source: Terapeak.
Goldman Sachs Global Investment Research
2014
4,500
2013
4,000
2012
3,500
2011
3,000
2010
2,500
2009
2,000
2008
1,500
2007
1,000
2006
500
2005
0%
-
Note: Based on companies that give data for all years in Datastream universe
Source: Datastream.
21
Fortnightly Thoughts
Issue 89
Disclosure Appendix
Reg AC
We, Sumana Manohar, Hugo Scott-Gall, Megha Chaturvedi, Bill Shope, Vighnesh Padiachy, Drew Borst, S.K. Prassad Borra, James
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Buy
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32%
54%
14%
46%
37%
32%
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Goldman Sachs Global Investment Research
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Fortnightly Thoughts
Issue 89
Price target and rating history chart(s)
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Fortnightly Thoughts
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Goldman Sachs Global Investment Research
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Fortnightly Thoughts
Issue 89
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