The Future, This Week 05 May 2017

Introduction: The Future. This Week. Sydney Business Insights. Do we introduce ourselves? I'm Sandra Peter, I'm Kai Riemer. Once a week we're going to get together and talk about the business news of the week. There's a whole lot I can talk about. OK let's do this.

Sandra:  Today in The Future, This Week...do wearables deserve to die, why Netflix is resilient to hackers and pirates and the challenges of building a great social network. 

Sandra: I'm Sandra Peter. I'm the Director of Sydney Business Insights. 

Kai: I'm Kai Riemer, I'm Professor here at the Business School. I'm also the Leader of the Digital Disruption Research Group. 

Sandra: So Kai what happened in the future this week? 

Kai: Our first story concerns wearables a word we both have problems pronouncing. The story appeared on FastCo Design - it's called wearables aren't dead but they deserve to die. So the author, who was actually an author of a book on wearables, has a bit of a reality check on the topic and she reckons that wearables have run their course. We have tried to make wearables work but we haven't done so yet and she doesn't see a good future for them. So your Fitbits, Apple Watches and other things that you wear haven't lived up to expectations and therefore they deserve to die. But she goes on to discuss a few other things, wearables, that you put in different places not on your wrists but in your ear or on your finger. So she hasn't quite given up on the topic but she thinks we have to fundamentally rethink it. 

Sandra: Yep, and the economic case is therefore fundamentally rethink it. So Pebble sold for almost nothing. Fitbit stock has plummeted. Jawbone is struggling. Apple is... 

Kai:...is conveniently not releasing any numbers on the Apple watch. 

Sandra: Yes and bundling their sales with ipads and iPods and everything else. So why is that? First of all I think what do wearables actually add to our lives. So there was a huge case made for the fact that they will help us lose weight or keep track of all these things we never even dreamed of or wanting to know how much we turned around during our sleep. What our heart rate was when we woke up in the morning or be able to make calls from our wrists. None of those things were actually things that fundamentally changed the way we interact with the world around us in the same way that let's say the iPhone did or even an iPad did. 

Kai: Basically so far the thing does two things: it collects a bunch of data about us and it serves as extensions of our mobile devices. And so the author said that on the one hand we lose interest in that data pretty quickly, it's a bit like a New Year's resolution you have all good intentions, you buy the device you collect the data but then because it's only one particular aspect of changing to a healthy lifestyle it doesn't really stick. You don't make progress and most fitbits and other devices end up in your drawer. And the other thing that they do acting as an extension of your smartphone she actually says that just gets in the way, it just means that we are looking at our devices more and we are doing this already. So there is no real use. So Sandra we're both wearing apple watches. I'm still wearing mine. What do you do with your Apple Watch? 

Sandra: Check my next meeting. Mostly just look at the notifications on my iPhone and do some tracking of the activity that I don't really do. Yeah it's a good reminder that I'm not moving enough. Failing to do all these things that I'm supposedly signed up to do. 

Kai: Yep so lucky enough it tells the time. So that's good for me it does three things really well: it keeps track of data while I'm exercising I actually use it for that. It serves as an unobtrusive alarm clock that taps me on the wrist. I actually wear it during the night so that's really good. 

Sandra: When you charge it?

Kai: I charge it in the morning which actually works quite well. And the other thing is because I commute on the train a lot, it's a really good notification device so I can just glance on my watch when a phone call comes in I can conceive I want to take the call or not. I can see all the messages that are coming in and I can then decide to leave my phone in my pocket so it's basically a way for me... 

Sandra: A notification. 

Kai: Yeah the notifications work well but for me it's mostly not to take my phone out of my pocket that often which when you're sitting on a cramped train it's not actually all that easy. 

Sandra: But it is a fairly expensive device still for what it offers. Expensive notification system, it does tell the time but then so does my iPhone, so does my ipad, my microwave oven, my desktop computer. 

Kai: Which might be spying on you. So my watch might do this. I don't know. 

Sandra: And it's taking up quite important real estate on my wrist, so my wrist was used previously to wear my nice mechanical watch or it was used to wear a nice bracelet or other things. Especially for men, I'm thinking bankers here and consultants would need to wear a nice watch. It's taking up quite valuable real estate. So wearables have failed to be very outcome oriented. That is the case that is being made that this generation of wearables was pretty much just a nice add on but it wasn't geared towards fulfilling a particular outcome. 

Kai: Let's talk about these kinds of innovations. I mean quite obviously when smartphones were launched when the first iPhone was launched it was a far cry from what it has become and it's pretty clear that even Apple even Steve Jobs did not foresee what would happen later on. Because initially they were quite reluctant to actually create an app store and open up the platform for third party developers and things like that. So, devices are platforms, they are infrastructures for letting us do new things in the world and smart phones have changed in quite profound ways, the ways in which we communicate relate to each other, consume information, media, go about our daily business in the world. Smart watches and Fitbit devices have not done that yet. They might still do it but I think we're still in a learning and experimental phase and use cases might come from unexpected places in niche areas. 

Sandra: One argument for that comes from a really nice Wired article from a couple of years ago already that was making the case that wearables are failing the people who need them most were the people who could actually benefit quite well from this technology. People who are chronically ill for instance, do not. So medical applications of these devices have been very slow to come to develop because of navigating the labyrinth of all the approvals that one would need to get getting through all the bureaucracy if you think medical devices but this has the potential to basically shake up healthcare systems or reduce the cost of chronic disease. 

Kai: Absolutely. There is enough evidence to suggest that Apple is heavily working on extending the Apple Watch to become a medical platform. They are hiring people in this space. They have patents in this space and they have released health kits and research kits to platforms for health applications and medical research. So they're very very active in this space and it harks back to Steve Jobs' vision to fix an important problem in the healthcare space which is the disconnection between different providers and aspects of the health care system. But I think they are struggling with the very problem that they want to fix which is the fragmentation of these systems and these practices and the fact that they have to really get on board and change the way various professions relate to each other - medical research, hospitals, doctors, patients. So it's a really complex business which takes time and energy and a really appealing value proposition to actually change. 

Sandra: And it is quite difficult if you think of all this innovation that's coming out of places like MIT or coming out of the Silicon Valley. Most of these entrepreneurs primarily create things for people just like them. It is very difficult to create for a whole new industry or a whole new area or a whole new category of people. 

Kai: Absolutely. So one area that Apple is tackling is diabetes and obesity. They are working on a glucose sensor for the Apple Watch which might become a game changer for diabetes patients. But we will have to wait and see how this emerges. 

Sandra: So our second story for this week is the big story around Netflix.

Kai: Now this story is from the Washington Post. It's called Hackers Leak Orange Is The New Black. So what happened.

Sandra: So Netflix said that a small production vendor that they work with, that releases the show to TV studios has suffered a breach through which a dark overlord hacker has managed to steal the new season of Orange Is The New Black. And they have asked Netflix for a certain amount of cash, an undisclosed cash figure, actually an undisclosed probably bitcoin figure. And Netflix has not caved to the ransom request and the hackers have actually released Orange Is The New Black and they have followed through with their promise.

Kai: Yes so the new season is released on Pirate Bay and can be downloaded via torrents by anyone who wants to engage in this piracy behaviour. So how does this work, Ransomware? 

Sandra: This is a malicious software that hackers deploy that encrypts the data that these companies or even individuals have and prevents them from accessing it for instance until they pay a ransom and they can access it. Some ransomware encrypts your data, some ransomware steals your data and they say well until you pay us the money we will erase the data. 

Kai: So it's a much bigger problem right. It's just the fact that Netflix is such a high profile case that we're talking about this but it happens to ordinary people, to small businesses all over the place.

Sandra: There has been a huge increase in it over the last five or six years. And last year alone we've seen a 50 percent increase. And there's data by Verizon that appeared in a couple of reports saying it's increased 50 percent last year. So it's a huge problem. 

Kai: So while this is quite obviously illegal behaviour, they really treat this as a business model. 

Sandra: Exactly. And the business model today actually represents a huge departure from traditional business models for hacking. Traditionally what we used to do is hack you, steal your data. Then we would have to sell your data on the darknet. People will have to buy that data which was usual credit card information, make the actual credit cards, use them somewhere in the real world and make some money out of it. 

Kai: So hacking depended on whatever you have to be valuable for me. Right. So ransomware depends on what you have being valuable to me. That's right to you. So what I do as a hacker I just lock up what you have and in order to get it back you have to pay me. 

Sandra: Yes, and the pricing model has changed as well. I don't have to pay you that much I have to pay you in Bitcoin but I have to pay you something that's the equivalent of usually two hundred or 500 dollars or a thousand dollars for a small and medium business. And this happens mostly to individuals and small and medium businesses other than large organisations like Netflix.

Kai: So there's some real pricing strategies going into this. How do I price this right - just high enough for you to pay but not too high so that you can forego the loss. 

Sandra: Exactly. And it's highly dependent on you actually giving me back my data. And it never actually appearing on any of these websites because you have to trust that if you will pay me I will give you back that data. And it's actually advice that FBI also gives a lot of these organisations: pay and it's the easiest way out. It's also now become extremely inexpensive to buy ransomware itself. So if I wanted to hack you for as little as a couple of thousand dollars I could buy the software or there is ransomware as a service, we know everything is software as a service, so we could profit share and start hacking. 

Kai: Are you threatening me? 

Sandra: No I'm promising. So ransomware actually works and it's done usually as I said to individuals. But however it's also down to places like medical centres where Hollywood's Presbyterian Medical Centre was hit by ransomware earlier this year and there was a huge attack because it held the medical data of all of their patients and seventeen thousand dollars doesn't sound like a lot of money but obviously in this case going back to what paper records? What is your alternative? So it's time sensitive right and the data is quite valuable to the person that you're hacking. 

Kai: Absolutely it's crucial. So the model often depends on people not having much time to react because they need the data back quickly. Right. Because they depend on it existentially for running their business or their operations.

Sandra: And for small and medium businesses that is almost always the case. But what about Netflix, does stealing Orange Is The New Black, the show that was supposed to be released in June and really seeing it on the torrents site a month before or a month and a half before, is that really valuable to Netflix? 

Kai: So on the one hand I think Netflix simply does not want to encourage this kind of behaviour. If they pay this time obviously they encourage this to happen more often. But frankly I don't think they give a shit because the threat of piracy is not what it used to be. Now this has now been released on the pirate bay and it is available for download via torrents. You can do it.

Sandra: We will not include the links in our show notes. 

Kai: No we will not include the links in our show notes but the article makes the point that it is less and less a problem because only a fraction of Internet users actually does pirating. And it's not the demographic that Netflix is interested in. And people do not actually see much value in this because you can get the show via Netflix in good quality to your living room you don't have to bother downloading it and streaming. You know you don't have to go through the hassle it's just there.

Sandra: So first is exactly that argument, Netflix has almost 100 million people who subscribe to it. How many of those people subscribe to it only for Orange is the New Black or would quit once they've got the Orange Is The New Black and Netflix is available in 200 countries so it's actually much easier to pay a very small amount of money to watch it on your nice big screen TV rather than go to a torrent site. Find the right torrent, find one that works for it for it to download then sync it to your TV or to something else and try to watch it that way. 

Kai: Yes but also the article makes an interesting other observation which is there's really no incentive for most people who are watching this particular show, Orange Is The New Black and I think we have a short clip here for you. 

Audio: "I thought you said this was an acting opportunity. It is. Other prisons get to do Shakespeare and shit, I want to play a role like Desdemona or Ophelia or Claire Huxtable. Here we go get ready to see some Shakespeare...You come and cry of curse whose breathe I hate" 

Kai: So people like this show but they also like to talk about the show. So this has become a social viewing experience. It doesn't really make sense to view it before everyone else. When the show is released on Netflix, people binge watch it. So with the market penetration of Netflix and the fact that many people can now have Netflix on all kinds of platforms reasonably cheaply. This has really taken the place that television programs, television of old, some listeners might remember, has had in the past where people would watch a show the night before and then talk the next day at the office. So really it recaptures that social viewing experience that had been lost in the age of on-demand programming and instant access and fragmentation of platforms. 

Sandra: And it highlights how important that is because for some of these companies so not everyone is equal on the net for a company like HBO which is actually not available in 200 countries it's only available in, I don't know, the US, Canada and a few other countries around the world. Their shows, things like Game of Thrones are pirated it like there's no tomorrow because people do not have access to that experience and do want to watch it at the same time as everybody else. 

Kai: Absolutely. And this I think harks back to a misunderstanding about piracy that existed very early on. For many people piracy was never about getting things for free but having access in the first place. Now early piracy via Napster, yes that was an element of we can get music for free but there was also an element of wow we can for the first time discover all this music, we can have access to all this music, that was unprecedented before. So ironically in my view it is the content industries, the music production companies, the recording companies that kept the narrative that the Internet is for free alive for such a long time cue their narrative around piracy. So I think for most people Internet and streaming platforms and apps and smartphones are a platform for gaining access easily and they're quite happy to pay for the service and for the convenience of accessing large catalogues whereas the people who download because they want to get things for free is really a tiny minority and that's what the article says. 

Sandra: So Kai, if a show lands on the pirate bay and nobody watches it, did it really stream? 

Kai: Exactly. That's the point. So piracy is now very much a niche phenomenon. And what we're seeing now is that finally we're making money off the Internet. I remember there was an article not too long ago in The New York Times it's titled "How The Internet is Saving Culture not Killing it". In it the author makes the argument that while in the early days the Internet had been portrayed as this channel that kills art and culture and music and recording businesses. What we're seeing now is actually a successful business model such as Netflix or Spotify, Pandora, Apple Music, Google Play that do make money off the Internet. And what is encouraging that there's a lot of niche phenomena on YouTube, bloggers, podcasts, producers that wouldn't have been part of the industry if it wasn't for the internet so new forms of culture and art that are appearing that actually make money and that allow people to sustain themselves. So he reckons we're seeing a reversal of this trend of this narrative where the Internet is finally emerging as a medium that allows culture and art to thrive and actually to make money and to sustain itself. And I think that's significant. 

Sandra: I would agree. But seriously it is significant for niche artists who now have access through YouTube to audiences that they wouldn't otherwise have access to, to people who are writing books or blogs or who are making movies who have access to YouTube and so on. Also to people who sell their things on Instagram not only directly through the platforms that these large organisations offer but also through the ecosystems that develop behind them. So for instance people on Instagram who are showcasing their lives but they're actually getting sponsorship from other people. Which brings me back to the idea of ecosystems because that's another thing that this Netflix story has highlighted. We are quite often focussed on cyber security within organisations. So we're concerned that the organisation that we gave our data to or the organisation that has our product is susceptible to attacks. And in this case it wasn't really Netflix that got hacked. It was one of Netflix's vendors. So all of these organisations are as strong as their weakest link in their ecosystem and that might be a vendor, it might be a supplier, it might be someone doing the sound editing on one of their movies. 

Kai: And that's always been the case. In the music industry many of the leaks of albums pre-release came from CD production facilities where people would steal the first CDs coming off the production line, would go home digitise them and then upload the MP3s to hacker sites and then distribute them online.

Sandra: So this is not a problem that's also going away any time soon. 

Kai: No it isn't. And the same happens with Apple. We see a lot of rumours and releases of parts of new iPhones or Mac books that are leaked from the Chinese suppliers which produce these devices and obviously they have to produce lots of them pre-release and so the closer we come to the date of announcement or the release date the more accurate pictures and videos of parts and therefore renditions of what the product will look like appear online. So this is not a new phenomenon and it's not one that will go away any time soon. 

Sandra: So this leaves one more story for the day and that story has got to be Yik Yak and the fact that the app is now officially dead. 

Kai: Yik Yak. What's Yik Yak? 

Sandra: Yik Yak was considered the darling of the anonymous messaging space so think snapchat in its early days. And it had an anonymous chat app that mostly drew in high schoolers that could send anonymous messages to each other no matter what they were. 

Kai: So I think what was significant about the app is that when you log in you would be connected to people who were in your vicinity in the same location roughly. So you would automatically talk to in an anonymous way to people who are around you on the same campus. 

Sandra: So especially for high schoolers this would be the way to stay informed, they figure out what's going out then stick around. 

Kai: So why did it fail? Why didn't it work? 

Sandra: So first we need to know that it didn't initially fail. It used to be valued at almost half a billion dollars. It attracted almost 100 million dollars in venture capital. So this was a success for quite a long time. Even though it grew quite rapidly in the beginning with high schoolers and college students flocking to the messenging app, it started to have problems with harassment and bullying. Once you have an anonymous app, that behaviour will emerge and the company never really found a way to beat it. They tried to do something about it. 

Kai: Absolutely, they were in the media for it. They were criticised for it. There were cases that were being flogged in the media so they had some really negative press around this and they tried to do various things... 

Sandra:...such as introduce profiles in it do away with anonymity and introduce some profiling but it never recovered. 

Kai: No. So in the end it turned out that the anonymous aspect was actually which was so appealing to users encouraging all kinds of silly but then also malicious behaviour. And in the end what made the app appealing also brought it down. But is this a case of a start up starting up without a clear master plan? Let's hear from one of the founders of a great social network, Mark Zuckerberg, what he was thinking in the early days of Facebook where things were going and his grand plan for taking over the world shall we. 

Audio: When we first launched we were hoping for you know maybe 400, 500 people. Harvard didn't have a Facebook. So that's the gap that we were trying to fill. And now we're at 100000 people. So who knows where we're going next. We're hoping to have many more Universities by fall hopefully over 100 or 200 and from there we're going to launch a bunch of site applications which should keep people coming back to the site and maybe you can make something cool. 

Sandra: So clearly Mark Zuckerberg had a real plan going... 

Kai: Yes he foresaw everything. He had a grand plan. He knew exactly what he was building and he built it. And here we are. That's really not how it works right?

Sandra: No. The way it works is that usually don't have a master plan you figure out things as you go and you try to adapt. So what the successful organisations do is figure out ways to build a community around what they're doing have people coming back and engaging. One of the things you Yik Yak did, and to some extent snapchat did at the beginning as well, was focus a lot on the demographic as the key being attract people of a certain age not enable people of any age to create a community around that space. And they were stuck with the right demographic but that did not make any difference in the long term. 

Kai: No, they failed to give a good incentive for people to come back in the long term. If you're focussing on a particular demographic then you're just stuck with people of a certain age and you have to always appeal again to people of that demographic. What you really want is you want to capture an audience and then have them grow with the platform not kick them out when they leave school for example and you have to give them a reason for coming back. So Facebook connects you to your friends and you keep connected and you can grow that network. So you want to stay with that peer group and hear from that peer group and interact with that peer group. 

Sandra: And have a product that's more rewarding the more you use it. Whereas with things like you Yik Yak the product doesn't become more rewarding the more you use it. 

Kai: So what you want to foreground is relationships instead of transactions. So Yik Yak was a transactional platform. It's a little bit like Groupon for deals. There's no incentive for retailers or customers to come back to Groupon and build lasting relationships unless they always have new deals. They always do new transactions. 

Sandra: With the disclaimer that the type of transaction matters because we could bring up Tinder. 

Kai: Well the type of transaction certainly matters but what matters more is building relationships and then have recurring transactions that over time grow to a higher value with people or organisations that you actually want to engage with. So in the case of Facebook building a social network. Yik Yak was explicitly not doing that because everything was anonymous. And when they reverted from anonymous to having profiles and building networks they were just one among many and they tried to solve a problem that others had already solved. 

Sandra: And we've seen organisations that have tried to learn this lesson so companies like Snapchat have started out in the exact same place as Yik Yak but they have tried to move on to other things. The fact that snapchat does have a battle on its hand with Facebook we've discussed last week, so we won't go into that today. 

Kai: No. The jury is still out on snapchat and their success going forward. But the point here is really about building great networks in that you have to grow them organically so when Mark Zuckerberg started out it was really about growing the community first. And he said that and they started small and then adding services as you go. So what you need is not a master plan but a sense of direction and then a way of iterating forwards experimenting with services keeping what works and discarding what doesn't. 

Sandra: And the way of adapting very quickly, so one of the other failures that we highlighted I think with the Yik Yak story was their inability to respond quickly so the moment they introduced the profiles and that didn't work it took them quite a while to remove them. And by the time they removed them damage was done. 

Kai: So clearly at that point they didn't really know how to respond. Which brings me to a last point harking back also to last week when we discussed Juicero so much like Juicero Yik Yak received a lot of venture capital for an app like this. So they clearly must have thought we are successful we have all these users we have all this money which in my view and we don't know for sure but surely if you have that much money on your hands and you have a successful user community there's no real pressure and incentive for finding ways to make the business sustainable. And the moment in which things unravel, there was no response from the Yik Yak owners of knowing what to do next. So that yardstick was missing. Facebook when they started out, they started out on a shoestring. They had to iterate forward, they had to be smart. Everything they did had to appeal to new users. Yik Yak had lots of users. They had lots of money. There was no pressure to actually iterate forward in a way that keeps them or makes them sustainable. 

Sandra: Exactly. And unfortunately I think that's all we have time for today. 

Kai: I think that was a good session. Thanks for listening.

Sandra: Thanks for listening. 

Outro: This was The Future, This week brought to you by Sydney Business Insights and the Digital Disruption Research Group. You can subscribe to this podcast on SoundCloud, itunes or wherever you get your podcasts. You can follow us online, on Twitter and on Flipboard. If you have any news you want us to discuss, please send them to SBI@sydney.edu.au.