Rovio is a company I have followed and admired for many years. They were pioneers in building the first global family brand through mobile. In later years, they have gone through a big transformation to the company you can see today. I’m proud and grateful to have the opportunity to help them on this continued journey.
“The investment strategy at the time was to find a replacement revenue source for its traditional print media business – which it forecast would decline in the advent of digital media”
That’s a quote from an article describing Naspers, a South African media company, in the 1980s. Koos Bekker – now the Chairman – had suggested that there was potential for a new type of pay TV in South Africa, similar to HBO.
The narrative is immediately familiar. A media company tries to branch out to digital media in order to make up for the shortfall in print. But this is not that kind of story. Instead of cautiously investing a little on the side, Naspers transformed themselves from a legacy media company to one of the most interesting and prominent internet investors in the world.
What makes the story about Naspers even more interesting is that their transformation wasn’t solely driven by clarity of vision. It was – and is – driven by necessity after having hit the investment equivalent of winning the Powerball – their investment in Tencent in 2001. But having an unbelievably successful investment as a listed company is a double edged sword. Naspers’ journey has been both complicated and has led to some extraordinary secondary effects.
Let me explain what I mean. But first, a little background.
A brief history of Naspers
Naspers was founded in South Africa 1915 as a newspaper and magazine publisher. They later added book publishing, and in the 1980s also pay-TV through M-Net. Their original name was De Nasionale Pers Beperkt, and as the name implies they were nationalists – Afrikaner nationalists more specifically.
In the 1990s, the company changed its name to Naspers and listed itself on the Johannesburg Stock Exchange. By then, the TV operations contained a spinout from M-Net, now called Multichoice – a subsaharan provider of pay-TV and sports programming. But still, all in all, very much a traditional media company with newspapers, books, magazines and television.
This is where it starts to get interesting. Naspers had started to diversify, which among other things meant some investing in China and other foreign markets. However, the crash in 2001 forced the company to make a lot of write-offs – among the Chinese activities in particular. They lost hundreds of millions of dollars in total, and about $100 million in China alone. But the CEO at the time – Koos Bekker – still managed to leave the market with one, valuable asset.
As they were leaving Beijing, Bekker was approached by two young men who had started an internet operation called Tencent, which was already signing up users at a remarkable pace. Against the decision to withdraw, Bekker took a gamble on 49% (sic*) of their company.
This was the turning point – when the South African media company started to become a global internet company.
The Tencent investment
Bekker bought 46.5% of Tencent for just $32 million in 2001. 18 years later, in 2019, their stake – after IPO dilution – had grown to $133 billion. An almost unbelievable return, and likely one of the best investments of all time. In 2018 they sold 2% of their Tencent stake, and netted $9.8 billion.
But while the shareholders were happy with the return of their Chinese investment, their trust in what else Naspers was doing seemed to erode. In 2012, 80% of Naspers stock price was based on their stake in Tencent and another 10% on their holding in Mail.ru. That meant that all other activity in the company was valued at only 10% of the total stock price. It also meant that the dependency on Tencent was immense. And with it, a perceived high volatility. Investors were asking themselves: what will happen to Naspers, if Tencent falls?
Being lucky with an individual investment can be a blessing and a curse. In this case, the outlier investment in Tencent forced the management team to start differentiating even further, and much more aggressively. Naspers started to invest a lot into other internet companies – predominantly in emerging markets. Remember – they had already done this once and lost hundreds of millions of dollars about ten years earlier. So this move took some courage. But this time it was a defensive move rather than an offensive one. If the media assets that they owned weren’t going to rebalance the stock volatility – something else had to it. And the bet was that one or several of these new internet companies might do the trick.
The investment era begins
From around 2007 and still to this day, there has been an immense activity in investment and M&A from the South African giant.
Here’s a selection of the e-commerce transactions that they’ve been part of:
These are big deals. There aren’t that many companies in the world that are involved at these levels. And what’s more – note that this was just five of their transactions, in one single category (e-commerce). The complete list is too long to list, but Crunchbase has a longer version for those of you that are especially curious. And below is a little bonus reading about each respective deal mentioned above.
– Is this an internet investment company, like IAC?
– Is this a holding vehicle for Tencent shares, like Altaba was to Alibaba?
The answer to all these questions is basically “yes“. But that’s not very helpful in terms of analysis of course. Naspers acknowledged this.
On top of this confusion, Naspers also had – and still has – a structural disadvantage in that they primarily trade on the JSE – the Johannesburg Stock Exchange. This is troublesome for several reasons, but partly because the South African currency, the Rand, is among the most volatile currencies in the world. The currency risk alone is enough to put many investors off. Also, Naspers size compared to the JSE at large was a becoming an issue. And then you have the complexity to analyze and understand the company overall too.
The solution to this was to restructure the business entirely. It was done in 2019, and this is where Prosus first enters the terminology. The process started by spinning out Multichoice, the entire TV- and cable business, to it’s own listing on the JSE. This made the actual media part of this former media company very small. In fact, it represented just 1.7% of revenues in 2019.
Next was to separate Takealot – probably because it is a South African marketplace which makes sense to have listed together with Naspers in their home market.
And then finally – the creation of Prosus, a new company which listed on Euronext Amsterdam in September of 2019. Prosus consists of all of their internet investments, including the 31.1% stake in Tencent. Naspers holds around 73% of Prosus shares, while 27% are floated.
I made a graphic to explain what the relationship looks like, as of February 19, 2020:
As you can see, the Tencent stake represents more than 100% of EBITDA. It’s fair to say that the dependency on this one holding is still very substantial.
Naspers strategy in 2020
Naspers today focuses on the following eight areas:
Let’s look at each of them briefly:
Classifieds – relatively well consolidated and an established business. Now profitable as a whole too. My prediction that they will acquire Adevinta still stands.
E-Commerce – largely a local South African play, and not an area for further expansion given that they have divested Flipkart and Souq.
Food Delivery – has similar market dynamics to classifieds in that it is also a marketplace, but a more underdeveloped one. This one will be costly and require more consolidation before it shows a profit.
Media – a shrinking business that is going to be difficult to divest due to the lack of buyers. I wouldn’t be surprised if these assets were placed in an independent trust instead of run through the operations.
Payments & Fintech – largely a supplemental business to the marketplaces. Having access to massive consumer groups is a great way to launch new payments brands, as well as the additional margin on each purchase.
Social & Internet Platforms – this consists of the holdings in Tencent and Mail.ru.
Travel – a merger created an ownership stake in a listed Indian travel company called MakeMyTrip. No other activity in the space.
Ventures – seems largely opportunistic and a way of identifying new growth areas in the market.
Cursed by success
If the main point of Naspers’ additional investments and acquisition was to diversify from Tencent, how has that worked out? Well, it turns out it is hard to catch up with success. This is how the Tencent stock has performed since it’s IPO:
As of February 17, 2020, Tencent’s market cap is $510.358 billion. The 31.1% ownership that Prosus owns should subsequently be worth ≈ $158.7 billion. However, the total market cap of Prosus is currently at $126.7 billion. The value of the Tencent stake still eclipses the value of the entire company.
This puts Naspers in a familiar position. On the one hand, the performance of Tencent has been incredibly successful – more so then anyone could have imagine. On the other hand, all their other investments and acquisitions still haven’t convinced the stock market that they are worth while. It must be slightly ungrateful to be one of the largest internet investors in the world, and still see your entire portfolio be considered a rounding error in overall valuation of the company. The volatility of the stock remains, and the dependency on Tencent too.
So, why doesn’t the market value Naspers and Prosus higher then? It’s always hard to explain why the market does what it does. In general, investment companies often trade at less than their net asset value, but Naspers discount has been unusually high. Some have raised concerns about the tax liability that selling the Tencent stock could induce, and others have referenced the political instability – including currency risk – that Naspers has in South Africa. These factors could play in, but the market is often not as rational as it is made out to be.
All in all, the fundamental question is: can Naspers do it again? If they have anything in their current portfolio that has close to the development that their one lucky break in China has had, then the tables could quickly turn and the market could start looking at them differently.
Naspers has spent the past 20 years trying to diversify themselves. But no one knows the double edged sword of success like they do. The very success that put them where they are today, is the very thing that is holding them back. The world’s most interesting – and underrated – internet investor in the world, that almost no one has heard of.
Disclaimer: This should not be considered investment advice, and I do not hold any stock positions in Naspers, Prosus, or Tencent.
As a celebration of Joan Ganz Cooney’s first report on kids and media (re-issued here), I wrote a post for their blog. It is about finding a spark of inspiration in times where things might seem a little bleak. A bit like the kids app market today.
Here’s my attempt to remember the big picture and the great opportunities that are ahead:
At times like this, it is important to remember the big picture. We have a generation of kids across the globe growing up with access to smartphones and devices. The collective knowledge of the world is at their fingertips. Communication between friends, family, classmates is free, simple, and immediate. Entertainment is endless and available anytime, anywhere. Families have the infrastructure in place, the time to spend, and the interest in finding new, great ways to help their kids develop, learn, and have fun.
Similarly to last year, I will not be writing a summary of 2019. Sharing less over the year has been surprisingly liberating. For me, it has forced more deliberate attention to a few selected things instead. My writing, for instance.
That being said, I do often get asked what I do all day. I tend to answer “surprisingly little” which is somewhat correct but mostly an unexpected way of answering an expected question.
A more serious answer would be that I’m an independent advisor and analyst. Throughout 2019, I’ve worked with companies in Canada, China, Denmark, England, Germany, Singapore, Sweden, Taiwan, and the United States. I’m very grateful for having the opportunity to have such a varied day to day life.
I have also written a little more often – and longer – than before. Here’s a summary of the articles I wrote this year:
May 2015. Tim Armstrong, the CEO of AOL, is on CNBC. He is wearing a navy blazer, no tie, blue shirt. He’s talking fast, and in bursts of excited management speak. He has a lot to be excited about. It has just been announced that Verizon is going to buy AOL for $4.4 billion.
This is of course good news for Mr Armstrong. CNBC anchor, Andrew Ross Sorkin, asks him the key question for the whole telco industry:
– “Why [does] the pipe business need to own content now?”
Telcos – the owners and operators of the infrastructural pipes that the internet and other communications run on – regularly go through this exercise. They ask themselves:
Can we be more than just the backbone for others?
Should we own more of the value chain ourselves?
Can we bundle our existing offering with new, value-added services (VAS)?
The short answer to all of these questions tends to be yes. This is then followed by big acquisitions in the content and media space.
After a few years, it then changes back to no. The telco writes down a massive dollar value and tries to divest the media assets. And so the perpetual identity crisis of telecom companies continues.
This is the Telco Identity Loop. Let’s break it down.
Stage 1: “We have to be more than just pipes”
One would think that being the infrastructure for the internet would be a pretty good business. Everyone loves the internet, right?
Turns out, it is in fact a good business. Telcos often have gross margins of over 80%, and profits at around 20%. Not bad, for being pipes.
But since consumers don’t really care which pipes are being used – as long as their services work well – this puts telcos in a situation where competition can get fierce. And fierce competition is expensive, generally speaking.
So, how does one differentiate these uninteresting pipes? Let’s add something to them! Some services, or rather some VAS – value-added services. A favorite acronym in telco world.
VAS are often content bundles, in some shape or form. They serve the purpose of helping with initial customer acquisition, or retaining existing customers longer.
A current example is Disney+ that launches today. Their tie-up with Verizon was what made me write this blog post in the first place. If you are a certain type of Verizon customer, you get a full year of Disney+ for free. List price: $69.99. T-Mobile has a similar deal with Netflix. If you have two phone lines with them, you get Netflix for free too.
Note that neither of these companies have ownership of each other. They are just partnerships, which is indicative of Stage 1. We don’t really want to commit, but we do need something. It also speaks to their competitors’ tie-ups, that have moved on to Stage 2.
Stage 2: “Let’s buy content!”
When partnering isn’t enough, you go to acquisition instead. Let’s build an integrated offering for the consumer! One big bundle of telecommunications and entertainment services on a single monthly bill.
Entering Stage 2 is expensive, because you need to acquire something substantial enough for it to make a difference. Telcos are large companies, after all.
If we stay with AT&T, last week’s announcement of HBO MAX is the latest example of what this type of consolidation looks like in practice. HBO MAX will consist of both HBO content and a long row of additional content from the WarnerMedia ecosystem. And more importantly in this context – it will be free for viewers who already subscribe to HBO via AT&T. One can imagine some great introductory offers for new AT&T customers, once the service launches too.
This all sounds good, until it doesn’t. This is when it starts becoming obvious that the synergies have failed to appear, and that the corporate cultures of a telco and a media company don’t always jive. That’s when you enter Stage 3.
Stage 3: “Why do we own content again?”
Stage 3 often comes along with a broader management shift. It can be a generational change, or simply sluggish figures for too long. A new CEO is brought in, and they understandably want to pave a new path forward.
In August of 2018, the Swede Hans Vestberg stepped up from CTO to CEO of Verizon. Vestberg was previously at Ericsson – a large provider of telecom services with 5G as their big main bet. Tim Armstrong, who now was running the content division of Verizon (rebranded as Oath), saw the writing on the wall. He left.
As new CEO, Vestberg set out to find out what was really going on inside the company. The process was described like this:
“Vestberg is currently interviewing hundreds of Verizon’s top managers in an effort to refresh the company’s leadership and unify its offerings.”
From Fierce Wireless, by Mike Dano, October 10, 2018
A classic strategic review. It had started earlier in 2018, and had led to shutting down Go90 already. But more things were about to change. Time for Stage 4.
Stage 4: “Back to Basics”
In November of 2018, the new future for Verizon was starting to show.
Oath was written down by $4.6 billion. For context, that’s about half of what they had acquired the two companies for about 2,5 years earlier (Yahoo was $4.5 and AOL was $4.4 billion). Verizon stated that they “didn’t see the synergies it had expected from the combination of Yahoo and AOL” and that 44,000 of their staff had been offered voluntary buyouts.
If not content, then what? In Verizon’s case, it’s 5G. Core telco services – infrastructure. Pipes, but slightly wider pipes than before.
This gets us to August of 2019. Hans Vestberg is now on CNBC – also talking to Andrew Ross Sorkin – and predicting that 50% of Americans will use 5G phones by 2024. That’s where Verizon should be too. Back to basics.
Stuck in the loop
Most telcos are somewhere in this loop. The Disney+ deal is a clear example of how Verizon are leaving Stage 4 and are halfway in Stage 1 again (if you want to learn more about Disney+ and what they are getting out of this, then Matthew Ball is the authority). They still have Verizon Media Group (the new name for Oath) but in Q1 2019, their revenue was only $1.8 billion out of a total of $32.1 billion. These 5.6% of revenues aren’t going to hold back a change of strategy.
Running an undifferentiated business is very difficult, and it’s hard to fault wanting to expand further into the value chain. But these content acquisitions, more often than not, don’t seem to really change the mothership. They’re just bolting on another side business. The culture, what’s considered core business, the way of thinking – it’s all the same as before. And as such, content becomes a secondary priority. Or perhaps a loss leader and marketing expenditure in order to keep the core business going.
With this loop in mind, where will these telcos go next?
Making predictions is a fools errand really, but it’s fun to both read and write. They also have an asymmetrical upside (you’ll probably only remember if I got it right). So here goes nothing:
Current position: Stage 2 (Content Acquisition). Comment: They overspent and fought to push the deal through. Now they have make to make it work, but performance will likely suffer. It is a huge behemoth full of cultural differences and conflicting interests. The likes of Elliot Management will come knocking again, and this will force change.
Prediction: Write-downs and lay-offs starting in 2020. I think at least 25% of the $85 billion acquisition price.
Current position: Coming out of Stage 4 (Write-offs & Divestments), heading into Stage 1 (Content Partnerships). Comment: 5G is their big bet, but it is still quite far away. I think we can expect several partnerships to the marketing going in the meantime. And once 5G is here, they’ll realize that they need to acquire content companies that can make use of this new technology.
Prediction: Major content M&A starting in 2021 (they’ve already bought VR assets from Disney). Could be a company like Magic Leap (if they’ve survived until then).
Current position: Stage 1 (Content Partnerships). Comment: Merger. The FCC just approved the deal and while there are individual states that are still protesting, this is effectively a done deal. The merger has likely taken – and will continue to take – all management attention for the foreseeable future. I can’t see them moving out of Stage 1 any time soon, even if they would have wanted to.
Prediction: Complete strategic standstill for 12+ months. No major M&A.
Current position: Stage 2 (Content Acquisition) Comment: Telia have been trying to acquire Bonnier Broadcasting since the summer of 2018. Things are finally looking up, and the deal is likely to go through just went through. But there have been a lot of stir-ups while they waited. They now have both a new CEO and a new Chairman of Telia. That being said, it would be strange if they immediately divested the very asset they’ve been trying to get hold of – even if it was a different management team doing it.
I think they’d like to keep expanding in content, but there isn’t that much to buy in the Nordics. Egmont got TV2 Norway and probably won’t sell. TV2 Denmark has been rumored to sell forever, but never does. TV4 Sweden and MTV Media in Finland just went to Telia. Maybe Discovery would consider selling their Nordic markets?
Prediction: If I had to make a bet, I think Telenor will make a big offer for 51% of TV2 Norway and Egmont will, somewhat reluctantly, accept it. Staying in Stage 2 for a while, in other words.
And finally a long shot, from the other direction:
Current position: N/A Comment: Now this is an outsider since Amazon isn’t a telco. But they are one of few players that could come at this from the opposite direction. Prime Video is a strong video offering and they have plenty of other content offerings too (Audible, Kindle, etc).
Prediction: Amazon takes Prime and becomes a US MVNO within 24 months. I don’t see them building any 5G towers any time soon, but they could easily operate in someone else’s network. They could have bought Boost Mobile in front of Dish, but they might be persuasive enough to find another way out there. That would at least stir things up in an otherwise predictable telco market.
Imagine young people longing for an alternate reality. One where regular rules of life do not apply, and one where your imagination prevails. Their parents worry, because this alternate reality is so compelling that these young people sometimes don’t want to leave it. They don’t want to go outside – they have all they need from their new world. Some of them never want to go back to the realities of everyday life.
Margaret Cohen, a professor at Stanford, described these young people as “considered to be in danger of not being able to differentiate between fiction and life”.
Does this sound familiar?
I am of course talking about women reading fictional books, in the late 1800s. In particular, reading the novel “Madame Bovary” by Gustave Flaubert.
To continue quoting from Margaret Cohen – who is a professor at Stanford, but in French literature:
“I think Flaubert is channeling a century of worries about young women as particularly susceptible to the fantasies they find in novels and the seductions of reading”.
I say this not to disparage the current concerns about screens and children – quite the opposite. Concerns about our young are in fact very common, and have been so for hundreds of years. These concerns also tend to accelerate as new types of media have been introduced.
But as this is a familiar situation – historically speaking – we can also benefit from learning what the actual outcomes of many of these changes have been. What turned out to be true, false – and what was completely unexpected? Delightful, even? And how should we think about new technologies when it comes to our children? This is what I’m going to talk about today.
How can we talk about screen time without knowing what is taking place on the screen?
I intentionally chose the example of books as it represents a media format that is not only accepted, but almost universally seen as preferable. Books are great. Books for kids are great. Kids that read books are great.
While I don’t disagree with these statements, I do think it is an overly simplistic way of describing reality. So let’s go more granular. Is it good that kids read books? Generally speaking, yes, right? Is it good that kids read any type of book? Not necessarily. You wouldn’t choose “50 Shades of Grey” as a bedtime story for a preschooler, for instance.
Hence, saying that “books are good” is less useful than saying “some books are good” (or even “most books are good”, if you are more of a positive person than I am). From this we can conclude that books themselves are neither good nor bad. They can be both. It depends on the context, the reader, the intent – and of course it depends on the book itself.
This sounds obvious. Yet, if we were to apply the same line of reasoning to kids and screens, things immediately get more messy. I’m sure you’ve heard phrases like “No screen time before 2”. “No screen time in the weekdays”. “One hour of screen time a day”.
But just like we can’t talk about books without knowing more about the specific book – how can we talk about screen time without knowing what is taking place on the screen?
The answer is that we can’t, and we shouldn’t. But what we can do is understand why some people do worry about screen time, and empathize with their concerns. There is a lot of conflicting information available on this topic. You read about a study on Facebook, a parent at the playground guilt trips you about letting your kids use an iPad, or you read somewhere that Steve Jobs didn’t let his kids use technology. I’m a parent of two daughters myself. I get it.
A lot of concern is that screens, and for slightly older kids social media, is making kids feel bad or not develop appropriately. Parents are concerned it could be harmful in some way. I found the latest work from Amy Orben and Andrew Przybylski, both from Oxford University, to have a good take on this.
The reason why I like their work, is that they have almost ten years of data and over 10,000 British preteens and teens in their study. This is significant, and in this space – very rare. It goes far beyond the anecdotal, which is precisely what we need. Let me read a shortened quote from an article they wrote in The Guardian, summarizing their latest workfrom May of 2019. Their question, simply put, was if social media makes you happy or sad.
“What did we find? Well, mostly nothing! In more than half of the thousands of statistical models we tested, we found nothing more than random statistical noise.
Our results indicated that 99.6% of the variability in adolescent girls’ satisfaction with life had nothing to do with how much they used social media.
It is undoubtedly tough being an adolescent. But this was true long before there were any screens.
On the flip side, there are some things that seem legitimately concerning. Myopia – being nearsighted – has almost doubled from 1971 and 2008 which in turn can increase risks of vision related diseases. To me it doesn’t seem unreasonable that screens may have contributed to this, but a causal link is yet to be established. We know that nearsightedness has increased, but we do not know why. Not yet.
In fact, that is where most of the studies on this topic are right now. They are inconclusive. They are often done with a very limited data set. We simply don’t have that much data to imply one way or another. That’s not to say that it is completely safe, but that certainly does not mean that it is harmful.
Most parents are not scientists. Therefore evaluating scientific reports is hard. There are also more pressing priorities for parents than to crack open the latest version of the “Adolescent Brain Cognitive Development Study” on a Friday night. It is easier to listen to an alarmist TV psychologist that – very conveniently – is trying to sell you a book on the topic of screen time.
Siding on caution is not a bad principle in life per se. It is, however, rather blunt and impractical. From a strict harm reduction perspective, it would be best to make kids wear helmets and protective gear at all times. But it is not practical. And it is not preferable, at least not from the kids perspective. Imagine all the things that the kids now could not do! Screens are not dissimilar. By withholding screens from your kids you may be reducing a hypothetical risk, but you are also withholding them from opportunity and potential.
Who should we listen to?
When making this call, who should we listen to? Well, there are some railings to hold on to. The AAP – American Academy of Pediatrics – updated their previously misunderstood screen time guidelines in 2016. In their new recommendations, they specifically call out “high-quality programming/apps” which moves the conversation from looking at the screen itself, towards looking at the activity which is taking place.
Further, they address the context of screen usage and say the following:
“Co-view or co-play with your children, and find other activities to do together that are healthy for the body and mind (e.g., reading, teaching, talking, and playing together)”.
How your kids – and you – are watching, playing, and learning matters too. This is not strictly a numbers game. So say I, and so say the American Academy of Pediatrics too.
Before I conclude, allow me to speculate a little about what the outcomes of screen usage could be. In order to do that, it’s useful to think about what has been said about other media in the past. What did they overlook?
“Withdraw all encouragement relating to the reading of books. Reduce the number available. Act so as to make reading inconvenient except for the set time”.
Now this is easy to laugh about now, but let’s try to empathize with the writer instead. Their concern is the amount of reading, not the reading itself. It is becoming too much, and taking over other activities. Seen in that light, this is a more reasonable approach. It isn’t healthy to only read novels all day. Just as it isn’t healthy to only play football, or to only play Roblox. There is a lesson to be learned here.
Further – where has reading taken us? Especially with the access of the internet, it is the gateway to a world of experiences, literature, perspectives, and knowledge. Most of the world’s written history is available with a few clicks of a button. In all languages, for all people, globally. It only requires a device that costs less than €50. Or in some cases, a free library card.
And while I’m not oblivious to the complexities of conspiracy theorists, disinformation campaigns, and things of that nature – I think it is still fair to say that discouraging reading in 1938 may not have been a great piece of advice. They didn’t know what reading could do for them and their kids – not there and then, and not in the future either. Today this is self-evident.
Where will this thing people call “screen time” take our kids in the future?
With this in mind, where will this thing people call “screen time” take our kids in the future? In some sense we are already there, but just like the reading skeptics in 1938, it is not clear enough for everyone yet.
Fortnite looks like a game where people shoot each other and do weird dances to celebrate it. But Fortnite is also an online social club where leadership and teamwork develop. It’s deep and multi-layered. When was the last time you collaborated with a global group of people, in real-time, towards a common goal?
Minecraft is similar. It looks like a game with strange block-like graphics and people walking around with axes. Or you could say that Minecraft is a creative tool that opened the doors to architecture and construction for millions. Spatial thinking, creative expression, community.
For me, I think the future of screen time is togetherness. I see a world where global collaboration is seamless and enriching. People working together, building on each others knowledge, and learning from each others cultures. The initial building blocks are already in place. Why would we want to hold our children back from these types of experiences?
So, where do we begin? We need to start on the ground floor, with the simplest of questions. Addressing the immediate needs of guilt-ridden families trying to work out what is best for their kids. With this in mind, here are my four suggestions for how to think about kids and technology:
1. What matters is what is on the screen, not the screen itself.
Help your kids find the right thing for them. There’s so much great stuff out there. Don’t assume that your kids have necessarily found it themselves. And if they have found something – help them to use it the right way. What matters is what is on the screen, not the screen itself.
2.Consider the context
How are your kids playing? Are they doing it together with others – siblings, friends, online friends? Is the screen the main part of the activity, or actually a facilitator of something else? If you think Fortnite is about shooting each other, you haven’t been paying attention.
Is there an opportunity for you to participate in the activity? You can probably add layers to any activity that is going on, creating both a learning opportunity as well as a shared space between you and your kids. Consider the context.
3. Encourage variety
I think there’s much to be gained from Fortnite, but I wouldn’t suggest playing and streaming it for 8 hours straight everyday. But come to think of it – there are very few activities I would recommend for 8 hours straight everyday. Go beyond the screen and ensure that your kids have varied activities in all places – including with screens. Encourage variety.
4. Treat the screen like you would anything else
When I was the CEO of Toca Boca and tried to explain my job to people, almost everyone said “ah, you mean educational apps”. It was precluded that if you make apps for children, their primary purpose must be education. There’s no other area in kids lives that you would hold to that standard.
What if all food you served your kids had to have a specific nutritional formula? That’s interesting in theory, but anyone saying that has never been in a car with a hungry toddler. Different circumstances call for different solutions.
Childhood is more than just education. But if you want apps to be educational, you can find plenty that are really great. You can also find ones that encourage kids to become artists or musicians! Or sometimes – just things that let them chill out and relax a little. The screen is just like life in general – don’t treat it any differently.
I’m a huge podcast fan, and have followed the industry from the sidelines for many years. I hope to contribute to the continued success of the company by offering an entrepreneurial perspective among the voices on the board.
As my third and final post on the kids app market, I have made a wish list. What if things were different? How could the market improve?
Even if all of my wishes were to come true, the majority of the market complexities would remain. Your user is not your customer. That won’t ever change. But as I’ve stated before – things can still improve. All parts of the ecosystem can do better.
This wish list is my way of contributing to these improvements. I want to show that there are many things that could be reworked, changed, or improved. I sometimes get the feeling that people look at this market as stagnant – almost impossible. With this wishlist I’m simply saying: it doesn’t have to be this way. Let’s make some changes!
There’s more to kids apps than ABCs and 123s One of the reasons it is hard to find great apps is that so many of them are going for the exact same concept. With the same sort of developer name. With the same sort of art style. Everything looks and feels the same, and it creates the impression of a non-differentiated market.
I wish developers would take it a step or two further. Yes, ABCs are important. But that app concept is pretty well covered by now. There’s so much more to be done.
Define your authorship Go beyond the most immediate common denominator when it comes to design. Look at children’s books for inspiration – Jon Klassen or Chris Haughton for example. They have a tone of voice, a look, a sense of authorship. This is far too often missing from kids apps.
Where is the Pixar of apps? By saying Pixar, I don’t necessarily mean that exact studio (although that would have been lovely too). But where are the studios that have that amount of care and attention to detail? The app studios that love their craft like Pixar loves movies? I understand the financial reality of developing for this space – I really do. But ambition is free. And I rarely even see an experiment with a sense of curiosity or adventurousness. It would reinvigorate the market in a way that is needed to get the excitement back.
Don’t forget the parents There’s more to this ecosystem than just apps for kids. Apps for parents live in their own ecosystem currently, but there’s a lot of overlap here in terms of communication and discovery. There’s loads of room for innovation in this area.
Platforms & App Stores
Delay App Store charges by 24h I’ve spoken to countless parents that bought an app (or an IAP) that ended up being bad or disappointing. This had discouraged them from buying other apps in general. This is a huge problem, but an understandable situation.
To me, there’s a very simple change that would increase product quality across the App Store overnight: move the credit card charge 24h forwards in time. Ask the consumer one day later if they’d like to keep the purchase they made, and if not the charge (and purchase) is reverted. What’s more – the ranking in the store should only kick in based on the purchases kept, which instantly rewards quality and longevity. Finally – let bought in-app purchases be shared across all family devices.
Checkbox for kids search Identify the searches that are clearly intended for kids and add a checkbox to filter out all results that aren’t in the Kids category. If you want to show up in search, comply with the rules of the kids category (more on that below).
Encourage inclusion in the Kids category During WWDC this year, Apple announced that they would ban all use of analytics for apps in the Kids category. And while I can understand the intent, this sends the wrong message to the developer community. The Kids category already has more strict requirements than the rest, and several kids developers simply avoid the category and rely on discovery outside it instead. This change penalizes the developers that are trying to comply with best practices and leaves the blatant category misuse from certain developers to continue.
In my opinion, Apple should be doing the opposite. They should be strongly incentivizing developers to join the Kids category (and by doing so, comply with a higher standard of regulation – which is a good thing).
In the context of the App Store, incentives mean promotion. Make a Kids tab in the store. Stop promoting any kids directed app that isn’t in the Kids category. Remove apps from kids directed search (as per above). There’s lots to do here to make the Kids category safer for families and better for developers.
Follow a developer Developers don’t have any way of contacting their former customers in the App Store today. It relies on parents signing up for a mailing list or a social media account and then catch that message when the time comes. There are a lot of steps that can go wrong there. At the same time, consumers don’t want to be spammed from every developer that they ever downloaded an app from.
A solution could be to let consumers follow a developer in the App Store. That way they could voluntarily get notified when developers of their choice released new products, and receive it as a push notification from the App Store. This would encourage loyalty and help with discovery of new products.
Incentivize referrals Apple had an affiliate program that they removed recently. Given how difficult discovery in this category is, they should incentivize outside ecosystems to help with this. Finding quality products will lead to more spending since the experience is better. Sharing this spending with the broader community that helps with the discovery seems very fair and reasonable to me. If there has been issues around fraud in certain categories, only turn this on for the Kids category to begin with.
Parents, please pay This is simple and perhaps naive, but this is a wish list after all. Please pay for apps. One way or another. Generally, I’m not a big fan of industries complaining that their customers don’t understand their own greatness. But this is an industry that needs support in order to become self-sustaining. And if you want your favorite developers to keep producing great apps for kids, then my wish would be that they got financially supported to a higher extent than today.
Take an informed view of screen time This is a long and complicated topic that I won’t get into here. The jury is also still out on many issues as we wait for the research to come in. But until then, take a look at the American Academy of Pediatrics’ recommendations. And while I don’t agree with everything there, their view on quality over quantity provides a useful lens to have when determining how you want technology to be used in your family. This shouldn’t be a binary matter.
Treat apps like culture I wish we would stop thinking about apps as software and start treating them as a part of culture instead. Or as a part of media at the very least. Technology is only the carrier – not the category. When apps are seen as small pieces of tech hidden away in the back section of magazines, so much of the potential is lost. I’m not saying all apps deserve to be on the cover of Time Magazine. But looking at them as a part of a broader culture would encourage more developers – and not only kids ditto – to aim higher.
Where are Oprah & Ellen? This space needs a cultural icon that points people to good things. Like Oprah and Ellen do. They carry massive influence, are trusted in their spaces, and help guide people to great products. Kids apps really needs their own Oprah and Ellen.
Regulation & Privacy
Clarity In my experience, most kids app developers have the best of intentions. There are easier ways of making money than this, so the immediate gold rush tends to go in other directions. Nevertheless, all of them get tangled up in the regulation that guides this space. Developers are treading on eggshells to not break a law – by mistake.
It doesn’t have to be this way. The developer community just needs clarity in regulation. I’m all for safe harbor programs, but you shouldn’t need one to comply with regulation. I’m not advocating watering the law down – I just want it to be crystal clear when you are compliant and not.
Neutral, private, authentication Account and data management are often needed to create a great experience. It is also the beginning of a privacy nightmare – for everyone. The kids space would benefit from a neutral, private, cross-platform, COPPA/GDPR-K compliant way of handling identity, authentication, and data management. That way developers could use this and therefore not have to solve these issues individually. Quick for the developers, simple for the user, transparent for parent.
That was my wish list. Please add your own in the comments!
My last post about the kids app market received a lot of interest and a fair bit of feedback too. It’s very rewarding to write when people take the time to read it. Thank you.
To honor the feedback that I got, I will address a few additions and questions here below. The third and last part of this series will be a wish list of improvements and changes that I think would improve the market.
In short, I look at them in the same way as the entertainment market. Both their strategy and outcomes are the same, more or less.
Longer version: In my model of the market, I chose to only include Gaming, Technology, Education, and Entertainment. This was a simplification to make it more clear. From a structural perspective, however, the publishing and toy industry treat the market very similarly to the entertainment industry. It is a supplement to their main business, and primarily serves a marketing purpose. Their apps are, mainly, created as a consequence of other products being developed first. This is what makes them a good candidate for licensing. You generally wouldn’t license out the categories that you consider your core business.
It is fair to say that there are more players in the market than I initially described, but the additions don’t warrant further analysis if you understand the entertainment side. Their strategies are almost identical.
– What’s the responsibility of parents that don’t pay for high quality apps?
Simply put: Why don’t parents pay for great apps? Wouldn’t this solve everything? In fact, many do pay. But they have stopped paying in the way that a lot of developers prefer, which is upfront. They are also not buying the apps of the highest quality, but rather the ones that are the best at marketing. But since the kids grossing top list is still growing, it means that more money is being spent in the category overall. So where is this discrepancy of perception coming from?
A large part of the kids market frowned upon using in-app purchases for a very long time. It was seen as unethical to try to sell to kids in the middle of their app experience. There’s still a strong case to be made for this, from an experiential point of view.
What’s changed is how parents choose to spend their money. They want to try before they buy. They are surprisingly fine with subscriptions. But the developers of high quality apps don’t necessarily have a product strategy (or overall philosophy) that aligns with this shift in consumer spending. It’s a bit of an indie mentality where you hold onto what you think is right, even if the world has moved on. For better or worse. The paying parents are still there though – they are just paying in different ways.
Then there are the parents that don’t pay at all. Regardless of the business model. And this is the vast majority of parents. They simply don’t value or perceive the quality to be high enough to justify the price. There are countless free apps for kids that seem fine. Why pay?
One reason for them to pay could be to avoid advertising or to not get your kids’ privacy violated. But in order for that to drive a purchase, you have to:
a) know that it is happening, b) perceive it as an issue you’d like to avoid, c) preferably have an equivalent alternative to purchase instead.
There are issues with all three of these prerequisites in the market today. For many parents, this is not clear at all. That being said – there are countless parents that do acknowledge it, complain loudly, and still won’t pay a penny to solve it. It would be better if they did. But this is unlikely to change.
I’m not saying that it is parents fault that the kids app market is hard. It’s not Apple’s or Google’s fault either. Or the developers themselves. But I am saying that all three parties could have – and can – do better.
– What are the advantages of making kids apps?
Perhaps my last post came across as more gloomy than intended. You can be successful in this market. I have been so myself. What I tried to illustrate were the complexities of the market. That naturally skews towards challenges rather than opportunities. But let’s switch sides a little, and shine some light on three positive aspects instead.
1. A recurring target group
If you’re 35, an app you downloaded five years ago is going to be pretty dated by now. Your expectations are higher than they were then. Your taste may have changed.
For a 3 year old, this is not necessarily the case. The 3 year old that is now 8 will feel similarly, but now there’s a new 3 year old in the market instead. And a 3 year old now, compared to a 3 year old five years ago, is going to be pretty similar.
What does this mean? It means that if you make a fantastic app for a 3 year old, it’s probably going to be fantastic for 3 year olds for a very long time. This creates a steady stream of new customers to a product that you finished a long time ago. This is a huge opportunity, if played the right way.
Some regular games fall into the retro category and experience something similar. But it is rare and tends to take much longer. Super Mario Bros 3 is still awesome (and was released in 1988).
2. International kids are similar
With a similar line of reasoning as above, a Chinese 3 year old is considerably more similar to an American or a Norwegian 3 year old than the 35 year olds. Cultural context gets added over time, and in school especially. For developers this means that if you have a great app in one country, other countries are likely to agree. With ecosystems like the App Store that lets you publish to over 100 territories with a single click – this is a big deal and something you should make the most of.
Parents, however, are not especially similar. Language alone can be a barrier. So the marketing will be a challenge. But compared to making a completely new app for a geographical market, this is a big opportunity to take advantage of.
3. It’s simple (but not easy)
Compared to many other categories, developing for kids can be quite simple. By simple, I mean that you don’t need to run constant A/B tests, yield optimizers for ads, price sensitivity testing, live ops management, or community engagement campaigns.
Look at Toca Hair Salon for instance. It is one of the most successful kids apps of all time. It doesn’t even have a backend. Everything lives in the app itself, works offline, and requires no server costs. Over time, this means the app is running at 0% margin cost and 0% distribution cost (minus the 30% cost of sales). Year after year (as per point 1), and in every market (as per point 2). That is a great business.
Now, it isn’t easy to make an app like Toca Hair Salon. But it is simple to run it, once you have it. That’s more than can be said for most regular games and online services.
– What about the ethics of marketing to kids?
This is a tricky one. And I’m no ethicist either. But I’ll offer a few pieces of advice to consider at least.
Take kids seriously. They’re not small adults. They’re not stupid. They shouldn’t have to settle for less. This might sound obvious, but spend five minutes looking at marketing for kids and you’ll see why this is advice is needed.
Make your own guidelines, and stick to them. It is easy to get caught up in trying to increase conversions or click-throughs. But making your own framework can be a good ethical railing to hold onto when you get deep into operations.
Consider the context you are in. This isn’t your average “buy-500-gems-get-250-for-free” game. Or at least it shouldn’t be. Because the notion of buying virtual gems is predatory if the user can’t distinguish what that transaction entails. This goes for how the product is designed, and subsequently for how it is marketed (inside and outside of the app).
Follow the law. Know your COPPA and your GDPR-K. They are there for a reason.
This summarizes the majority of the feedback and questions that I received. As mentioned, the third and final part of this series will be a wish list of how things could be improved to make this market better for all parties.