Are You Sleeping with the Enemy?

What Netflix Can Teach Us About the Risks of Technical Partnerships

Published on: November 2017

Written by: Adam Aranyos

By Adam Aranyos, Director at BTS

Many companies in traditional industries see technical partnerships as a key part of their digital transformations. Partnerships are a seemingly attractive way to acquire relevant digital capabilities (think machine learning and the other usual suspects) from technology companies that are leaders in these areas, without having to build them from the ground up. However, as more and more of these partnerships form, it is paramount to ask: how symbiotic are these relationships in the longer term? What should incumbents in traditional industries do to obtain the technologies they need to stay competitive, without handing the “keys to the kingdom” over to a technology company in one fell swoop?

While the exact answers to these questions will vary by business, companies in established industries need to be cognizant of the risk that comes from giving away data to a technology partner that could easily turn out to have competitive intentions.

For example, the development of autonomous vehicles has spurred partnerships between some of the world’s leading automotive and technology companies. The driving force behind these partnerships is simple: the typical automotive manufacturer has honed its business towards producing vehicles at scale, and does not have the in-house expertise required to create an autonomous driving algorithm. And even if it did possess the skills required, the end-result would be second-rate at best.

This is because the automotive manufacturer’s brand new self-driving algorithm would not have had the time to interact with, and learn from, the high volume of relevant data it needs to improve over time. Meanwhile, the autonomous vehicles developed by Waymo (formerly the Google self-driving car project) have logged over 3 million real world miles, and Tesla has collected 1.3 billion miles of data (a key metric in autonomous driving) from its Autopilot-equipped cars – giving their self-driving technologies a clear advantage, and making catch-up difficult. Access to the right data is the key to successfully applying many of the technologies that are transforming industries – and the traditional companies that today still hold the keys to the lion’s share of this data should think carefully before handing them over to a technology company with the potential to transform from partner to competitor in the blink of an eye.

An example that further demonstrates this risk is the partnership Waymo forged with Fiat Chrysler in 2016. This agreement did not guarantee exclusivity with the auto manufacturer, and did not require Waymo to share the data it collects with Fiat Chrysler. However, the deal has enabled Waymo to leverage Fiat Chrysler’s vehicles to improve the self-driving technology that is quickly becoming a key differentiator in the automotive market. And while Waymo has scaled back its ambitions of manufacturing its own self-driving car for the time being, there is no doubt that the data it collects from companies like Fiat Chrysler might enable it to do so some time in the future, should it choose that path. For that, one need not look any further than Netflix or Amazon as a precedent.

In the world of entertainment, Netflix started its streaming service by acquiring content from established studios to build its own subscriber base. For the studios, Netflix’s acquisition of their content was a much-needed way to boost viewership and revenue numbers in the digital age – an arrangement that was symbiotic until Netflix opened its own studios to compete directly with the companies it had partnered with during its first phase of growth (using viewership data from acquired shows to develop and market new content).

In the world of retail, Amazon used its insights from the sales of goods on its site to create its own line of directly competing AmazonBasics products. In fact, some analysts such as Scott Galloway believe that Amazon will eventually eliminate brands in many of the product categories it carries.

While the risk illustrated by the above examples is very real, it is important to note that not all partnerships between industry incumbents and technology companies are necessarily destined for this same outcome (and there are examples to the contrary). As Jean-Pascal Tricoire, CEO of Schneider Electric, stated at the World Economic Forum in 2016, the big bet that companies undergoing digital transformations must make is really about choosing the right partners and becoming a part of the right ecosystem. Ultimately, the success of a traditional industry leader in the digital economy is less an outcome of whether it pursues a partnership, and has more to do with how it does so. This how is the output of the time a company invests into simulating the effect of, and preparing a response to, a disruptive non-traditional competitor, or a partner turned competitor. Business simulations designed to help executives see the world through the eyes of a digital disruptor are highly effective at building awareness around these risks, while proactively developing unconventional strategies to increase the odds of success. What is your company doing to prepare?