I am still processing the recently announced F8 Facebook changes, but it seems that Facebook is moving further in the direction of becoming a platform for other content, such as music. As it becomes more of a gatekeeper to eyeballs, the issues of who has and does not have access to the platform and on what terms will become contentious. It’s a good time to review these posts on how these will (but should not) be viewed as antitrust issues. (See here and here and here.) Last week’s hearings on Google are a preview of what is in store for Zuckerberg, Sandberg, and crew.
Archive for September, 2011
For the umpteenth time, I waited to check-in, go through security, and board a flight at JFK in facilities with bad light, rude and indifferent service, and processes that must have been deliberately designed to be inefficient. At one time, I hear the experience of flying was enchanting and magical; now it’s about going through with a “just let it go” mindset. With so much of our time spent in such embarrassing facilities, why don’t we introduce the design attitude inherent in the new economy into our old economy that overwhelmingly still is the face of who we are to the world. The knee jerk response is that we are focused on more substantial goals like security in an airport, but the real answer is that these institutions are run by folks who do not care and/or have the vision to see that a more magical customer experience and killer functionality are not mutually exclusive.
That is the truth. Indeed, can you imagine, if you took the person who designed the Apple retail store experience, and gave him even two weeks to re-design the look, feel, and process flows of JFK or any other airport in the US. We would start to regain the inherent magic in the experience of going somewhere.
Hours after my Netflix post, Reed Hastings sent an email to customers explaining the price increase, and announcing the split of the DVD and streaming businesses (with the entertaining side effect of introducing the unique Qwikster into our Twitter lives).
This has seemingly inflamed a large group of customers, finding the price increase explanation inadequate and complaining about the lesser utility of not being able to keep an integrated movie queue. Equally emotional, but excited instead of angered, are business strategists (including Clay Christensen) and entrepreneurs who have hailed it as a bold example of disrupting your own business.
This has missed the point. In my thinking, disruptive innovation is when a company goes after those customers neglected by the fat, “sitting on his ass, counting his money” incumbent, and in the process creates a market — first a niche of the larger market but then growing into the mainstream. Netflix was disruptive by going after Blockbuster and is disruptive again by going after MVPD. Disruptive innovation, as far as I can tell, requires bringing happiness and value to some customers who currently feel neglected, usually by bringing forth a lower-cost or higher-value option. It’s not a manifesto that customers have no clue, and by making them unhappy, they will one day appreciate what is happening. Contrast this to the essence of Steve Jobs’s innovation when he said that ”It’s not the consumer’s job to know what they want.” What followed is that he delivered products that enchanted customers. Coming back to Netflix, there is nothing enchanting to customers about the price increase or the split of the DVD and streaming businesses.
I think this column by John Gapper in the FT titled Innovators Don’t Ignore Customers hits the nail on the head:
Customers don’t care about corporate structures, cash flows, technologies and growth ratings. They care about whether the familiar envelope containing a DVD arrives on time and whether they can stream a good selection of films at a decent price without their television screens freezing. They were not holding Netflix back from streaming – they were adopting it.
Netflix has been extremely good at providing its service, which is why it flourished while competitors fell away. Its disruption of the Blockbuster business model of charging high fees for late returns of DVDs to stores is one of the biggest reasons why that company filed for bankruptcy last year….
But Netflix subscribers liked both DVDs and streaming and saw them as complementary – they wanted both the traditional product and the disruptive one. Even if it made sense to split the two in financial reports and even to separate them into business divisions, there was no need to force Netflix customers to snap to the organisation chart.
I don’t think this move is the “gold standard” of disruption. It probably comes down to the reality of playing with the studios, and the need for a more segregated subscriber count of those using streaming to get more compelling pricing to the studios for the streaming content as I noted a while ago when discussing the price increase initially. But, I think my analysis is right from the original Netflix post. Assuming the studios were not an issue, the Netflix DVD business is essential to getting to the next phase of more pervasive streaming delivery and the real golden prize — the disruption of the massive unfriendly MVPD business.
Mr Christensen and his colleagues list five habits of mind that characterise disruptive innovators: associating, questioning, observing, networking and experimenting.
Professor Christensen is one of the heroes of this blog, and his theories of disruptive innovation better than others capture what make entrepreneurship so exciting — a tool to change the world by disrupting lazy, fat markets. See here, here and here, for example. In part due to his book, I expect to come back refreshed from this vacation, ready to take on new disruptive challenges!
Fred Wilson has a nice post on Netflix and vigorous discussion ongoing on AVC today. Netflix has been a favorite topic on this blog. Fred’s post is a good opportunity to catch up on what I think of where Netflix has been and where it is now:
1) I am a huge admirer of Netflix in disrupting the video rental business, and in its efforts to disrupt the MVPD (i.e. cable and related distribution) business. Netflix has been one of the gold standard examples of “disruptive innovation” over the last decade. See this post.
2) The MVPD market (worth hundreds of billions in the US) has left itself massively exposed after at least a couple of decades of annual above-inflation price hikes, a primary driver of which has been the bundling of channels in basic-level tiers combined with the ever-increasing costs of sports rights. As I noted in this post:
This model is threatened by Netflix and other such models. To the extent that you are not interested in live sports and are willing to endure a certain delay in watching other programs (for example, when a series is available on DVD). Netflix gives you the option to cut the cord. You can fill in news online. If non-sports watchers stop handing money over to the cable systems and subsequently over to the sports networks to help pay for the inflated sports rights, one of the stool legs making those ever-increasing prices possible — namely the willingness of cable and satellite subscribers to also pay higher rates for their television subscription packages– will be weakened, threatening the system.
3) HBO is an appropriate role model for Netflix, and it appears that Netflix has molded itself in that way. Selling a service for $10-20/monthly both distributing non-original content and producing groundbreaking original content has proven to be incredibly profitable. HBO is sui generis, but the advantage that Netflix potentially has is that HBO is “tied to the cord” and is hurt by the constantly escalating prices of basic packages which consumers are increasingly unable to pay, since consumers cannot access HBO without buying the bloated basic package. As the Economist put it, “imagine a supermarket where, in order to buy the item you really want, you first have to buy almost everything else in the shop. Now imagine the price of all those other items is constantly rising.” In contrast, Netflix can position itself as a cable alternative. There is tremendous opportunity in this model and positioning. See this post on the HBO model.
4) In order to be HBO-like, Netflix had to enter, at least in a small way, the original programming market, which it has done, with its acquisition of the “House of Cards” series. See this post.
5) Perhaps even more importantly, HBO needs the studios to play ball to give it access to television and movie properties for its streaming service. The studios — most who have a direct or indirect interest in the immensely profitable distribution business — have been vocal in their lack of interest in providing Netflix with the programming that would facilitate its undermining of the distribution business. By becoming a competitor in the programming acquisition market, Netflix sent a “mutually assured destruction” message to the studio-distributors — if you don’t cooperate with us on the streaming business, we will compete with you in the content acquisition business, raising your costs if you are heavily invested on the distribution side. See this post for an interview with Reed Hastings.
6) While Netflix’s game theory has been brilliant, a few recent developments make me very worried recently. First, the content providers have seemed to decide that they are not playing ball. The contents of the streaming cupboard were pretty bare anyway. Starz was the highlight, and its breaking off negotiations with Netflix, took out a lot of the little premium content that was there. Netflix needs to figure out a way to get the content providers to the table.
7) Second, the 60% price increase was totally misconceived and has alienated customers. See this post on the price increase. It sent the message that Netflix was overvaluing the streaming content, when many customers clearly know it is not. It also sent the message, probably not intended, that Netflix was undervaluing its DVD business. In fact, Netflix’s advantages in the near-future are in the DVD business where it has built up a hard to match distribution infrastructure, and where it does not need the studios’ cooperation because of its legal freedom to distribute DVDs for rental. In streaming, Netflix does not have an indefensible infrastructure, and it needs the studio’s cooperation. As I said in the prior post:
Because of the limited available content, streaming is just not a compelling enough product yet for Netflix to hang its hat on. There are a number of emerging competitors in that business including Amazon, Apple, and Google, and, in addition, Netflix does not control its destiny because it needs to negotiate with content providers for streaming. By contrast, the mail part of the business and Netflix’s superior logistics in executing that business are what distinguishes Netflix, in particular as the video rental stores have been boarded up. My guess is that Netflix will be quite happy for the mail business to continue given the strong defensible position it has there regardless of the infrastructure and postage costs, while it further develops the streaming business into an experience that resembles the original mail offering instead of resembling it’s less interesting and less capable step brother.
8) Perhaps most importantly, on the streaming side, Google, Amazon, Apple, Dish/Blockbuster among others, are in the market. They have other ways to make market from streaming. For example, Amazon can bundle the price into its Amazon prime delivery fee. Google will find a way to monetize its content through its core business of ads. Apple obviously makes huge profits by selling high-margin hardware like iPads. These other companies also have other carrots and sticks to play with the studios because of their other businesses than Netflix has. See this post on Amazon, and this post on Google, and this post on Dish/Blockbuster.
I have hope for Netflix, because it is led by visionary management, that it’s not impossible for it to find a way out of this snakepit, but at the moment I am not very bullish.
The Economist has a wonderful article on how HBO has become the most exciting property on television, and in doing so, has raised the creative game for television. Many customers happily pay the premium price for the HBO suite of channels, getting something of an altogether different quality compared to most of what else is available on television. But this willingness to pay for HBO is threatened by the flabby bundle of channels in the basic suite. HBO is second in line for consumer wallets, only getting an opportunity for the dollars left after basic cable has been paid. The article poses the fascinating question of what would happen if HBO bypassed the pay-tv system altogether (a la Netflix), to get consumers while they had more dollars in their pockets:
HBO did not cause the rise in the price of basic-cable packages. But because it is sold as an add-on, other channels are in effect increasing its price. Imagine a supermarket where, in order to buy the item you really want, you first have to buy almost everything else in the shop. Now imagine the price of all those other items is constantly rising.
There is no easy solution to this problem. But HBO has a strategy. It has gradually rolled out HBO Go, an online video service which makes many shows and films available on-demand to anybody who can prove they subscribe to the network. HBO can do this because it owns its programmes. It is promoting the service heavily, occasionally putting popular programmes online before they air on cable.
If HBO were to try selling its programmes directly via the internet it would have a hugely disruptive effect on the television business—more disruptive than anything Netflix or any other company has yet done.
HBO, being a part of the Time Warner umbrella and its many cable properties, has a stake in the status quo. If it didn’t, and could go all out in disrupting the current cable business, imagine how much more valuable it would be.
There is less of a connect between food and tires today (although there once was), and the Michelin guide, in some ways, may be getting out of date, but even with a little evidence that it helps sell a few more tires, and with the fact that the entry of Michelin Guides into new markets like China draws enormous press attention, I can’t imagine why anyone at Michelin would be spending time worrying that it generates 15m Euros in losses annually. After all, the global tires market is approximately $150 billion and Michelin has about $25 billion in sales. 15m Euros is a small part of its marketing budget.
Of course, the counter to this type of thinking, is how do you tell a “Michelin” project from a number of corporate side vanity projects that companies do which are seen as squandering shareholder capital, perhaps with little analytical support other than to buff management’s ego and vanity. It seems to me that this is what makes being innovative in business models and being visionary in management so interesting and so unpredictable. There are no easy rules and in part it is intuition and instinct. If it works, you are celebrated , if it does not, you are discarded like burnt toast. In this instance, the Michelin family’s effort was pure genius, although a business consultant advising in real-time would have branded them fools for not focusing on their “core competency.”
Being random again, perhaps, this is one way to think of Google’s many non-search projects that it is often too quickly criticized for in a narrow-minded way.