A Blueprint for your Disruption: How to Become the next Kodak, the next Blockbuster®, the next Taxi Cab Medallion Owner

A different take on Comcast’s launch of its Peacock streaming service

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Sometimes we see things as customers that are so obvious that we wonder how the companies delivering the product or service could not see it. “How could a company possibly do this?” we ask. While some companies spent countless hours devising business plans that encourage new customers to buy/join and their existing customers to stay, others manage to devise schemes that leave customers with little or no choice but to move to competitive offerings.  I call this a blueprint or recipe for how to become the next Blockbuster, the next Kodak.

Rockefeller once tries to use the legal system to prevent electricity from ever happening; major record labels in the U.S. tried to sue to stop digital music distribution from ever happening; Sony went to the U.S. Supreme Court to try to prevent us from ever recording videos (Sony lost this case by the way, with Mr. Rogers having been cited as one of the major reasons to allow the recording of video, something that is now, of course commonplace). While in hindsight, it is obvious that the widespread use of electricity, digital music distribution and video recording was inevitable, in some instances, such a strategy of putting roadblocks in the way of the new technology can make sense. Specifically, such strategies, known as sand fence or roadblock strategies, can be used effectively to forestall adoption of a new technology provided that the organization is simultaneously developing its own offering in this new space.

Timing is everything. Timing here is crucial – you need to be able to forestall competitive entry in the new space long enough for you to launch your offering and build scale and an adopted customer base. This then makes it that much harder for others to compete with your now established offering.

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Something analogous is happening today in video distribution, but the timing and incentive structure have been so badly managed/ planned (unplanned?) that it provides a blueprint for how to disrupt your own company and industry.

Enter Time Warner Cable/Spectrum.

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It is clear that needing cables attached to the wall in order to watch videos, movies and television will go the way of video cassettes and DVDs. That much is obvious to analysts, customers, industry insiders and executives alike.

Streaming is the future that is here now. How will customers make this transition? Customers will go where they are incentivized to go; incentives take on many forms – economic (via your pricing structure), psychological (image, brand, etc.), ease of use (switching costs, “hassle factor”, etc.). So, let’s examine what Time Warner Cable, now Spectrum, has done to incentivize its customers to leave over the past 3 – 4 years.

Phase I. Physical Boxes.

  1. Cable wire to the wall. Originally, in the “analog days,” most televisions could be connected to the wall directly by cable wire and we would switch channels up and down on the television set itself.
  2. Digital conversion. As cable companies converted to digital services, cable boxes were needed on each and every television in order to receive digital services such as on demand movies and the like. For Time Warner Cable, these boxes were initially provided for free, encouraging customers to make the digital conversion.
  3. Charging for boxes. After a period of time, a per box rental fee was charged for each television that was connected to a box.
  4. Forced digital conversion. Shortly thereafter, the cable companies moved to 100% digital distribution, which meant that a box was required in order to receive a cable signal. Free conversion to smaller digital boxes was offered and the boxes were originally provided for free with no monthly rental fee, but no guide was provided and the remotes were award and difficult to use. Setting up each television involved a lengthy process and a call to the technical services department to “activate” the box. This needed to be done separately for each television, a time consuming process.Picture4
  5. Start charging for small boxes. Shortly after customers adopted and installed these smaller boxes, one per television in the house, a monthly “rental fee” of $5.95 per television/box was added to your monthly bill. Some customers (depending upon how many televisions you had of course) saw a $30 – $40 jump in their monthly cable bill.
  6. Call in for better deal. Many customers then called in to try to negotiate a better deal. Some customers succeeded, some did not. For those that succeed in negotiation a better deal, it was often for a limited time, 3 – 6 months.
  7. Bill increases at end of promotion period. At this point the customer had to call back customer services and once again try to negotiate a better deal. Some customers succeeded, some did not. For those that succeeded in negotiation a better deal, it was often for a limited time, 3 – 6 months.
  8. Call in for a better deal. Again.
  9. And again. Rinse, repeat.
  10. And again. Rinse, repeat. You get the drift.

In my house, I have 7 televisions (yes, I know, way too many televisions). In just over a two-year span, I a) installed 7 different boxes for televisions that used to work simply by connecting the cable to the wall outlet, b) replaced these 7 boxes with 7 different smaller and less functional ones by calling in to “activate” each one by one only to c) see a $45 jump in my cable bill (after taxes and fees) a few months later; then, d) I had to call in every 3 – 6 months after my bill jumped up at the end of the “promotional” period. Over and over. No wonder satisfaction scores of cable companies traditionally rate at the bottom of all industries.

It is important to note that firms and industries are typically disrupted because customers are not happy with existing providers. Uber would likely not have existed if taxi companies had provided better service at fairer prices and availability; Harry’s, Dollar Shave Club and Warby Parker all were formed in large part because customers were tired of paying exorbitant prices for men’s razors and eyeglasses, etc. So, if you are providing a service that rates at or near the bottom of customer satisfaction surveys across all industries, it seems that they very last thing you would ever want to do is to provide an offering that actually encourages your customers to leave. Yet that is precisely what they have done.

Phase II. Streaming Apps.

One of the biggest barriers to switching from one service of any type to another is switching costs. We routinely keep bank accounts that may not give the best interest or terms because of the hassle involved in new checks, auto drafts and the like; we often stay with credit cards that aren’t rated as highly as some others because we’d have to switch bill pay and the list. We all can think of services we aren’t particularly happy with, but we stay with them anyway simply because it’s easier to stay than switch. Switching costs (both monetary and time/effort) typically favor the incumbent.

Today, most cable companies offer apps that can be used on smart TVs, Roku boxes, Apple TVs and the like. While this might appear to be a customer-centric move to a streaming world by cable companies, it actually has provided the exact opposite incentive for their customers.

Let’s look at this in more detail.

Spectrum (not unlike Comcast’s Xfinity app and similar offerings) has an app that will broadcast all channels that you pay for on your iPad, Roku TV, Apple TV, phone etc., while you’re in your own home and for a limited set of channels when you’re away from your home. What you cannot do is use the Spectrum app on a TV in any house other than your own (they do this by limiting the app use to the modem registered in your home).

By charging a monthly fee for the box used for each television in the house and providing an app that can be used for free on each TV, they are providing a financial incentive to customers to get rid of the boxes and switch to the app. So, as an example, what did I do? I bought a Roku device for every TV in my house (payback period about 7 months), returned the boxes, and used the app in each TV in the house.

Now, once this is done, there is absolutely no barrier to leaving and cutting the cord – it is now easy to switch to any app that’s non-Spectrum and is available on a Roku device: Hulu Live, Sling, YouTube TV, etc., are all available at lower price points.

OK, so you’d think this is the end of the story. Incredulously, no. They continue to raise prices.

Talk about pushing your customers away! After the boxes are removed, cutting the cord is easy. There are many competitors offering streaming services that have live TV and sports. The customer is now incentivized to choose the best offering. Level playing fields are fine, but when you HAD an incumbency advantage, why would you ever want to create a level playing field?!

At a time where plethora of streaming is coming online – Roku, Apple TV+, YouTube TV, Sling, etc. (read formidable competitors), right at time with alternative Internet provision (Fiber, 5G, etc.) is becoming much more commonplace, you encourage customers to switch to apps and move from the boxes that tie them to you and then keep raising prices once you’ve created a level playing field!

I always think it’s not fair to simply criticize – it’s important to suggest the alternative. In order to suggest an alternative strategy, think back to the “Roadblock” and “Sand Fence” strategies discussed earlier. They were making the same mistake Universal Studios, Sony, and Rockefeller made back in the day.

In part, the problem they faced was that the competition allowed the SAME EXACT experience on multiple devices. I could have YouTube TV on my TV in Chapel Hill, my son could watch it in his house in Clarksdale, MS, I could watch it on my TV at the beach when I go there and on my computer in the office. No different than Hulu, Netflix or Apple TV+.

So, here, the solution was rather simple. Don’t charge monthly rental fees for the boxes. The boxes actually give a better, more seamless experience than the apps. Don’t raise fees. Don’t require the customer to call in every 3 – 6 months to get a fair price. In addition, provide an app offering that can be used wherever the customer is. It doesn’t matter that this is no better than the competition. You ALREADY have the customers locked in since they are using your boxes in their home. Why would they ever want to switch?

What did they do? Just the opposite, providing all of us with a blueprint of what NOT to do if you don’t want to be disrupted.

Key Lessons for other Industries:

  • Don’t charge for the exact device that creates stickiness. By charging a monthly fee for the cable box while simultaneously offering apps (to be used on televisions and mobile devices) for free, you are encouraging – indeed providing a financial incentive to – customers to take the proactive and time consuming task of removing the boxes, returning them to the retail store and installing/setting up the app on each television. Once this is done, you – at best – are on equal footing with the competition.
  • Listen to Customer Satisfaction. Lack of customer satisfaction with existing offerings is the single biggest reason for successful disruptive competing products and services.
  • Think about what you are Incentivizing your Customer to do at Every Step. Here, at every step, Time Warner / Spectrum led the customer, literally paid them, to move in a path the resulted in their leaving for competitive offerings. From switching cable boxes to charging, not charging, raising fees and creating customer angst at every stage. Then, when competitive offering emerged via streaming apps, they encouraged customers to leave to these offerings.
  • Peacock actually has a chance. Comcast’s Xfinity is a superior service. IF Peacock can provide a service competitive to Hulu Live, YouTube TV, Sling and others and it can effectively migrate (read: encourage) its own customers to migrate, it stands a chance. The first good sign is that it’s offered for free for its existing customers. Sounds like a winner if the content is competitive (it needs to be closer to Sling or YouTube TV than to CBS All Access), it stand a chance. Not easy to say in today’s competitive environment.

 

Homeless in Wilmington. An Inspirational Story.

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Homeless in Wilmington. An Inspirational Story.

I was inspired by something that happened this past weekend. I thought I’d share this since there are lessons for business, leadership, life and humility that we all can learn from.

This is one of those posts where you wonder if it’s appropriate for LinkedIn or if it’s a Facebook or an Instagram post. Fully recognizing that if you have to wonder if it’s appropriate or not, it probably isn’t, I decided to post this anyway. I was so inspired by this that I thought it worth taking a chance on posting. I hope you agree.

I was driving from the NC shore back to Chapel Hill, NC this past Saturday evening and decided to stop in downtown Wilmington NC to have dinner. There is a nice restaurant with a nice bar there called Circa 1922 in case you’ve been.

I happened to find a nice parking spot near the restaurant with metered parking and I parallel parked and got out of my car. As it turns out, parking was free after 6:30 pm, but it was only 6:10 and I had no change. There was a parking app noted on the meter, but thinking it would take me longer to install the app, sign up and pay than it would to find change, I looked around to local stores where I could buy a pack of gum or something to get change.

As I was doing this, there was a young man sitting on the bench on the corner across the street who yelled over to me that parking was free after 6:30. I replied “Thank you, but it’s only 6:10 and I don’t have any change”). His response was “Oh, I have change you can use.” He then proceeded to walk over and hand me enough change to get me to 6:30.

I of course said thank you and asked him what he was doing downtown. He replied that he was homeless, that he had a medical condition (he was wearing a heart monitoring device of some sort) and was happy that it was such a warm evening. I shook his hand, said thank you again and proceeded to talk with him for a couple of minutes. He was seemingly sober, bright, articulate, but clearly had medical issues. I was so touched by his generosity that I gave him all the cash I had, which wasn’t much (at least it wasn’t to me, he seemed especially grateful).

But the story and lessons certainly don’t end here.

I went on my way to my nice restaurant. I sat down and started to tell this story to the bartender. Then I thought to myself:

Here I am sitting at a nice restaurant, dinner ordered, glass of wine in hand and someone down on their luck and homeless gave ME money to fill my parking meter so I could park my nice car on my way to my nice dinner and all I could do for him was to give him some cash.

So, I went back out. Not more than 5 minutes had gone by. I wanted to ask him to join me or buy him dinner somewhere else, whatever I could do to help. He was gone. I walked around and couldn’t find him.

I went back, finished my dinner and walked around some more after hoping to find him. I couldn’t. Maybe he used the cash to buy dinner and he was sitting down over a nice meal. Maybe he used it for something not as constructive, I will never know.

But I walked away inspired by him, by his actions and disappointed in myself that I didn’t act more quickly to do more. So, I thought to post this with the hope that the lessons from this might help us to be better leaders, better managers, better people.

My take-aways (and I am sure I am missing countless others):

  1. Act. Now. If you miss an opportunity to do something, it may be gone forever.
  2. If you miss an opportunity, use it. Give somewhere else, teach someone else, return the favor somewhere else, post to tell others. Miss an opportunity that you regret, give back elsewhere.
  3. Examples of Leadership are all around us. Lessons in generosity, taking charge, sharing one’s own experiences and being open can come from anywhere. Here, someone on the street taught me priceless lessons that warm night in Wilmington.
  4. We’re all equal. No matter where you are on your org chart, you are no better or worse than someone above or below you on that chart – and certainly not because of your position on the org chart. One tech company famously asks job candidates to provide the first name of the receptionist that greeted them in the lobby because the ability to do so says something about them as a person and about their attention to detail. That night in Wilmington, I learned that that homeless person was a far better man than me that night – more generous, caring and open – willing to help a total stranger out of the blue.
  5. Lead by example. He led me that night and I learned that doing is the best kind of leadership.
  6. Priorities. His priority was helping. Even if it meant losing some of the change he accumulated that evening to help a stranger, his priorities were to help first, hoard last. Maybe as we accumulate stuff – titles and pay at work and material things at home – we all can learn from that.

I am sure that there are countless other lessons that I’ve missed as well as cynical views on what transpired that night, but I would argue that if we all did a bit more of what that one gentleman did for me that evening every day, we’d be better leaders, better managers, better humans as a result. I hope this story inspires you as it did me.

Disrupting Distribution through Disintermediation

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How companies can disintermediate to loosen an existing distribution-based source of strategic control):

One often made mistake in business is thinking no one can replace you – after all, no one wants to be the next Blockbuster. This is particularly true for companies that believe they own unique competencies in areas of strategic control. The objective in owning a point of strategic control isn’t the “end game,” rather it gives you the opportunity to leverage this advantage to an adjacent market while others try to “catch up” in your primary market.

This is particularly true today since creative ways around company’s distribution dominance (“disintermediation”) have become much more prevalent in recent years. There is often a common theme across many of the examples of industries being disrupted through disintermediation: dissatisfaction with the current offerings and companies in that industry (e.g., the high cost of eyeglasses and men’s razors, poor performance and lack of availability of taxi cabs). Examples that parallel the earlier discussion of distribution-related sources of strategic control include the following:

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• Disintermediate through alternative “points of access”: Warby Parker. Two Wharton students were on a camping trip when one lost a recently purchased – and very expensive – pair of eyeglasses. After much consternation, the pair (pun intended) set out to revolutionize the eyewear industry. On their website, they explain their rationale as follows:
“Every idea starts with a problem. Ours was simple: glasses are too expensive … It turns out there was a simple explanation. The eyewear industry is dominated by a single company that has been able to keep prices artificially high while reaping huge profits from consumers who have no other options … We started Warby Parker to create an alternative.”
They didn’t attack incumbent rivals directly through traditional retail outlets. Instead, they sell exclusively online, using “pop-up” (temporary stores located in prominent locations) stores and traveling busses to help promote the brand. Their business model is straight forward: a customer picks out 5 frames online and Warby Parker sends a package with these frames for you to try on at home via Federal Express. Pick out the one that you like, order online and send the package back (prepaid) – or send the package back and order a different set of 5 frames. You can try it on at the location of your choice, with your spouse, partner or friend to provide feedback (“Did you really chose THAT frame?!”), all at your convenience. The finished product is then delivered in a few days to your home. As a result, online sales of eyewear products in the United States has almost doubled from 2011 to 2016 and Warby Parker was valued at $1.75 billion in a pre-IPO investment of $75 million.

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• Disintermediate by sidestepping regulatory authorities: Uber, Lyft. Airbnb. The story of Uber, Lyft and Airbnb have been told so many times, there is no need to repeat them here. However, one could argue that each of these companies has been able to succeed because they have found ways to circumvent government regulation: Uber was able to “ride share” so that they would not (at least in theory) be subject to medallion restrictions and Airbnb found a way around regulations that would have required room sharing to be regulated (and taxed) under municipal hotel codes.

Much like dissatisfaction in the market for eyewear that led to the rise of companies like Warby Parker, had taxicabs met customer needs with good service, low prices and high satisfaction, there would never have been an opening for ride sharing services such as Uber and Lyft. As noted earlier, there is a common theme here –incumbents doing a poor job meeting customer needs often opens the door for a new entrant using a new business model or a new offering the disrupts/disintermediates incumbents.

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• Disintermediate by going online and employing a subscription model: Dollar Shave Club and Harry’s. Dollar Shave Club was founded by Mark Levine and Michael Dubin in 2011 after they met at a party and spoke of their frustrations with the cost of razor blades. There had to be a better way they argued. Launched online in 2012, they developed a subscription model with three tiers whereby razors are delivered to your door monthly rather than purchasing at a brick-and-mortar retailer. Note, as in the previous examples, dissatisfaction with the high price of men’s razors led many to try the new player in the market. Once trial happened, the ease of re-ordering created stickiness – easy repeat behavior is often a recipe for success in consumer goods markets.

Five years and over three million subscribers later, the company was acquired by Unilever for more than $1 billion (from Unilever’s perspective, “If you can’t beat them, joint them”). Harry’s founded in 2013, uses both a direct delivery and retail approach to addressing the same concerns (high cost of men’s razors) that prompted the founding of the Dollar Shave Club. Recently, Harry’s has been valued at just under $1 billion. Disintermediation through a “Judo Strategy” (not attacking larger rivals directly) pays – in men’s razors to the tune of $1 billion+!

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• Disintermediate via a multi-faceted approach to distribution: Globe Union. Sometimes, competing effectively in the face of a dominant distribution presence can be accomplished through more traditional means. For example, in order to overcome traditional distribution brand concentration, Globe Union employs a multi-faceted approach. They use two private branded products, Danze and Gerber to sell outside of big box retail (these two brands, by design, do not do sell to big box stores). Instead, these two brands sell almost exclusively through two-step distribution (distribution to wholesalers to plumbers or builders). In big box, Globe Union’s parent company, Industrial Corporation in Taiwan, manufactures and sells private label products for big box stores, giving them access to both big box (via the private labels) and plumbers/builders (via Gerber and Danze). It also uses Gerber (“the plumber’s brand”) to focus on the service plumber market. Thus, via this multi-pronged approach, they are able to compete effectively across multiple traditional distribution channels, enabling them to grow in ways a single branded/single channel approach could not.

There are many ways to disrupt an existing distribution-based point of strategic control; these are just a few. Playing the “game’ of strategic control is the playing field of today’s competitive markets. Use this to your advantage – and to your competitor’s peril!

Six Sources of Strategic Control

In an earlier post, I discussed how Vanderbilt exerted a point of Strategic Control to dominate the railroad market during the Industrial Revolution. In my forthcoming book, The Carrot and the Stick: Leveraging Strategic Control for Growth (University of Toronto Press, June 2019), I discuss 6 potential points of strategic control that exist in today’s fast-paced business environment:

1. Distribution/Access
2. Information
a. Hardware/software
b. Data access, ownership and analytics
3. Production/capacity
4. Raw material and input
5. IP and regulatory-based market access
6. Key manufacturing components

In this post, I overview the first of these, distribution.

Potential Sources of Strategic Control: Distribution.

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Distribution is perhaps one of the most common sources of strategic control; lock up distribution and it can be exceedingly difficult for someone else to gain access to the market. Some classic examples:

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• The market for eyewear. One major supplier of eyeglasses and sunglasses controls multiple brand names and owns most of retail distribution throughout many parts of the world. Milan-based Luxottica owned over 8,000 retail locations in over 150 countries.; it also owns a dominant 50% market share in sunglasses. French company Essilor owned 45% of the prescription lenses market and 15% of the sunglasses market in 2015. In January 2017, the two companies announced that they were merging (approved by US and EU regulators in March of 2018). The combined entity now owns over 50% of the prescription eyewear and over 65% of the sunglasses market. Add in the only other significant player, Safilo with a 14% market share in sunglasses and a 3.7% market share in prescription lenses, and the two companies own a staggering percentage of the retail eyecare market with tight retail distribution control. Significant new competitive entry through retail distribution would be exceedingly difficult and certainly fought tooth-and-nail.

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• Men’s razors. Gillette’s and Schick’s traditional dominance of the men’s shaver market. For example, Gillette and Schick had a combined 78.5% market share back in 2011 and they routinely introduced relatively minor product variants to occupy most of the available retail shelf space. Entering the market with a new razor with an additional blade (who truly needs the fifth, sixth or seventh blade?) and push behemoth Gillette off of preexisting allocated shelf space has proven to be exceedingly difficult for any potential new entrant.

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• Taxi cabs. The monopoly traditionally afforded taxi cabs by local municipalities vis-à-vis the medallion program (a system whereby a vehicle needs a “medallion”, often posted on the vehicle itself, in order to legally operate a taxi cab under local jurisdiction). In cities like New York and San Francisco, the right to own and operate a taxi cab has been historically tightly regulated by local governments. For example, in New York, the medallion program began in 1937 when the supply of taxi cabs was significantly greater than demand. Medallions in NY were selling for $2,500 in 1947 and peaked in 2013 at a hefty price tag of $1.3 million. Competition was limited to the number of medallions that were approved by the City of New York and competition – at least prior to ride sharing companies such as Uber and Lyft – was prohibited (obviously a very strong point of strategic control).

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• Faucets, Windows. In DIY “big box” retail (e.g., Lowes, Home Depot and Menards), Anderson and Pella dominate windows, while Kohler, Moen and Delta dominate faucet shelf space. Combined, Kohler, Moen, Delta and American Standard own a 78% market share in the United States in the construction market. In retail, shelf space allocation is almost everything and manufacturers routinely pay “slotting allowances” (paying to get on the shelf) and are required to guarantee sales performance (vis-à-vis “failure fees).

Other examples of companies that have successfully locked up distribution and precluded entry by rivals is as long and as varied as there are markets. Examples ranging from Microsoft’s inclusion of Internet Explorer included in (or “tied” to) its Windows operating system to Vanderbilt’s bridge, have been covered in depth in antitrust law classes and business school MBA classes. Always use distribution as a “stick” under the advice of legal counsel for excluding competition via distribution can be viewed with admiration (in some business classes) and/or at your own peril (in some antitrust law classes)!

In a future posting, I’ll address some strategies for overcoming someone these distribution-based source of strategic control through disintermediation.

Well, it all sounded like a good idea … the folly of an unsustainable business model

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Based in New York and founded by technology and entertainment entrepreneurs Stacy Spikes and Hamet Watt in 2011, MoviePass allows users to purchase access to a movie a day for a single monthly subscription fee. It was originally funded by major investors including True Ventures, AOL Ventures, Lambert Media, and Moxie Pictures. In June of 2016, the company named Mitch Lowe, a former executive of Netflix and Redbox as its CEO. In short, it has had significant heavy hitters creating, backing and running the company.[1]

Further, it seemed to understand an important segment of its market – movie loyalists who frequently go to the movies. As a result, the MoviePass subscriber base grew quickly (to more than 2 million in February of 2018) as its $9.95 per month fee for one movie a day (as of August 2017) was a great deal.[2]

However, since its launch, MoviePass has faced objections from major cinema chains. AMC Theaters has been one of the more vocal critics, saying that MoviePass “would not be welcome” at its theaters in late 2017 (AMC has recently launched a subscription service at its own, one valid at only AMC Theaters). Many of the objections relate to concerns about the sustainability of the MoviePass business model. There is merit in these concerns: in July 2018 Helios and Matheson Analytics (who purchased a majority stake in 2017) filed to raise $1.2 billion just to keep MoviePass solvent, while auditors doubted its ability to sustain operations.[3]Its viability as on ongoing enterprise remains uncertain.

On the face of it, the objections seem odd since the theaters get revenue from filling their seats (seats are perishable after all – a seat that goes unsold for a movie showing is revenue lost forever) and higher occupancy means additional concession revenue as well. Further, the movie theater gets full price for the ticket from MoviePass. Again, on the face of it, one wonders why there is resistance from the theaters; filling seats that might otherwise go unsold is, surely, a good thing.

The Folly: A Startup’s Scale must supportthe business model – in this case, scale actually hurts the business, leading to an unsustainable business model.

Since MoviePass pays theaters full price for tickets, here are two possible effects on theater pricing, neither good for the theaters or the sustainability of MoviePass:

  • Upward pricing pressure due to demand effects. Any startup knows that “speed to scale” is important – scale usually brings lower costs and potentially “network” effects that make rival entry more difficult. This is the ironic twist that leads to sheer folly in this case: here, such scale actually hurts the viability of the business. As the number of MoviePass subscribers increase, the demand for tickets increases.[4]This increase in demand exerts upward pressure on ticket prices. Further, theater owners know they have a base (now over 2 million strong) of MoviePass subscribers who are entirely price insensitive (MoviePass pays full price while demand is generated by their subscribers who have an incremental ticket cost of $0). Thus, while most startups are able to reducecostsas scale grows, MoviePass is likely to experience significantincreasesin costs as scale grows. In a world characterized by seating scarcity in theaters (e.g., during an economic growth period, in select geographic markets, for high demand movies, etc.), the effect will be even more pronounced.
  • Perceived value of theater tickets erodes. For MoviePass, as the number of subscribers grow, the perceived value of a theater ticket is likely to decline since more and more people are paying significantly less than full price for each movie they attend (why pay over $10 for a single ticket when my neighbor or person sitting next to me is paying $9.95 for the entire month?!). This would naturally face resistance from the theaters (no firm ever wants the perceived value of their market offering to decline; this is almost invariably fiercely protected), likely resulting in reactions from outright bans (as by AMC and Landmark) to competitive launches aimed at MoviePass (as occurred in August of 2018).

In building a strategy, we try to build strategies that are robust to future states of the world, i.e., strategies that do not depend upon our forecast of the future being correct. We also try to build business models that are self-reinforcing (e.g., Amazon’s “Flywheel of Growth”).[5]

Unfortunately for MoviePass, this was turned on its head. Every possible scenario leads to its demise. As their subscriber base grows, MoviePass costs are likely to increase, while understandably facing fierce resistance from theaters.

This is sheer folly: a classic example of an unsustainable business model at work.

How the investors could not see this is the biggest – and most vexing – question!

 

 

Notes:

[1]Key sources: https://en.wikipedia.org/wiki/MoviePass, https://www.slashfilm.com/amc-theatres-banning-moviepass-probably-not-possible/

[2]Operationally, the company signed a deal with MasterCard that provides users with a special credit card linked to an app that allows people to check in to a movie and pay for the ticket using either the app or the card.

[3]https://www.nytimes.com/2018/07/29/business/moviepass-service-outage-finances.html

[4]This increase in demand happens in two different ways: via existing individual subscribers (movie-goers are paying substantially below market prices) and via the new subscribers that are added.

[5]See, for example, https://www.inc.com/jeff-haden/the-1-principle-jeff-bezos-and-amazon-follow-to-fuel-incredible-growth.html

Those who cannot remember the past are condemned to repeat it …

The quote, most likely due to writer and philosopher George Santayana, plays out in many markets today. In an earlier post, I discussed how Vanderbilt exerted a point of strategic control in railroads during the Industrial Revolution and asked the question will history repeat? Well, a recent example may inform this debate.

After a recent talk at the Yale CEO LATAM Forum Miami, the CEO of one of the largest insurance companies in Latin America came up to me right before lunch and said, “I hate Google.” I responded by saying “that sounded pretty harsh” and asked why he felt so strongly. His response was both simple and telling. He said that Google was “extorting much of my profits.” He claimed that, via our cell phones, in his home country, Google has the ability to show that Guillermo has a heavy foot on the gas, Luis doesn’t leave enough space between his car and the one in front, while Carlos respects all traffic rules—including speed limits. Therefore, armed with such data from Google, insurance companies can now better match the risk-rate profiles of their customers and charge premiums for drivers who are higher-risk.

However, as you can imagine, Google wants a significant “cut” of the resulting profits. In fact, he claimed that if he didn’t “pay up,” Google threatened to sell similar information to competitors; thus, he would be at a significant disadvantage vis-à-vis their rivals. In sum, Google owns a key strategic control point (SCP) in this industry—data on drivers’ locations and speeds—and is demanding a cut of insurer’s margin as a result.

There are many things that Google’s parent Alphabet must have in place in order to exert such margin pressure. Primarily, of course, they need to be able to access the data. In the example above, Google is accessing data via operating systems (i.e., the Android OS) and a location-based app (i.e., Google Maps). According to the insurance executive, over 90 percent of the phones in his home market use one and/or the other, which, combined, give Google access to movement data for over 90 percent of drivers on the road. So, Google has slowly been building the infrastructure to gather and own the data that they need to extract margins from this insurance executive’s company.

This begs a number of questions, not the least of which are the following:

  • Given recent global debates on privacy ranging from Facebook’s Cambridge Analytica scandal to the European Union’s recent GDPR (General Data Protection Regulation) initiative, is Google’s parent Alphabet merely repeating the history of Vanderbilt’s Hudson Avenue Bridge?
  • Will data and privacy law parallel the development of US Antitrust legislation passed 100 years ago?

See https://www.linkedin.com/feed/update/urn:li:activity:6437667028089217024 for a discussion …

The First Day of ‘T-Ball and Management 101: The Atlanta Hartsfield-Jackson Airport Shutdown tells us how little we’ve learned since 9/11

Anyone who has ever played baseball as a child or coached as an adult understands the meaning of “T-Ball,” where a baseball is placed on a stationary stand (a “T”) for the hitter to hit before learning how to hit a pitched baseball. The first day of “T-Ball” also typically comes with basic lessons that remain for life such as keep your glove on the ground when fielding a ground ball – the worst mistake any player can make is to allow a ball that is hit on the ground to go under their glove.

Management – particularly for public institutions such as Atlanta’s Hartsfield-Jackson Airport, the world’s busiest airport – has similar principles that you would learn early in a “Management 101” course, be it in a business school or in the school of hard knocks. Analogous to keeping your glove on the ground when fielding a ground ball in baseball, managers of public institutions need to be prepared and practice for various events that are foreseeable if not likely.

I was stuck for almost 6 hours on the tarmac in Atlanta last Sunday, 12/17/17. The passengers and Delta flight crew dealt with our 6 hours on the tarmac with smiles and good humor. What was utterly shocking, however, was the complete lack of preparedness once everyone deplaned. While there have been reports of announcements earlier in the day, from the minute passengers walked off the jet bridge at approximately 7:45 pm to the time we found – eventually – a way out of the airport via MARTA (Atlanta’s subway system), there was not a single person, not one, directing passengers. No information, no officials directing people where to go, no one with placards or vests explaining where the exits were, nothing. Elderly passengers in canes were slowly walking up multiple flights of non-working escalators without direction, not knowing what the top would bring. This was a full 7 hours after the event that took out the world’s busiest airport’s power. In 7 hours, the airport and the city had not mobilized to direct passengers and ease the confusion and stress.

This was shocking.

The following video was taken outside of the secure area and it depicts passengers walking aimlessly and with no order in the darkness:

 

While no one could have predicted that a fire would take out the electricity at the airport, it is not out of the realm of possibilities that a terrorist attack – be it a direct attack or an electromagnetic pulse – could take out the main power supply of any municipality.

What was absolutely egregious was that there was no plan in place for something like this.

Any airport or municipality should practice frequently for a potential terrorist event and know like clockwork what to do were something like this to happen, regardless of the cause. Workers should know where to go, areas should be pre-designated to direct passengers and explain what to do. This should be practiced and practiced and practiced for any event, be it a terrorist attack or a fire taking out the power supply. While most municipalities are resource constrained, often starved, this is not an overly expensive endeavor – it involves planning and practice.

This is Management 101. Be prepared. Just like first day of T-Ball. Keep your glove to the ground.

A few years ago, I had the privilege of sitting at a dinner next to Jim Goodwin, the CEO of United Airlines on 9/11. I asked him about what it was like being CEO on that nightmare of a day and what would he have done differently. He said that he was extraordinarily proud of his people on that day, that they had a plan in place were something like 9/11 to happen, one that they practiced over and over at least once a month. He said that priority number one was getting all of the planes on the ground to keep the passengers safe and that his United employees executed the plan flawlessly, just like they had practiced over and over. However, the one part of the plan that they never thought about was what to do once the hundreds of planes and thousands of people were on the ground. This was his one regret: that so many people suffered from being on the tarmac for so long without a plan in place.

We clearly have learned little in the 16 years since 9/11.

The City of Atlanta and the officials of Atlanta Hartsfield Airport should be ashamed.

Management 101. The first day of T-Ball.

 

My Father’s beloved Indian motorcycle and the Queen of England – from “Old School” to “It changes Everything” in just 50 years

My father was “old school. ” He grew up in the Bronx, NY, joined the Navy at the age of 17 to serve in WWII and became a NYPD police officer when he returned from service. He proceeded to walk a “street beat” in the toughest neighborhoods of NY back when cops walked patrol by themselves. He eventually worked his way to be a motorcycle cop chasing speeders in the Bronx.

He was also an interesting character (to say the least) complete with handlebar mustache and New York attitude. He often spoke fondly of his old Indian, the brand of motorcycle he rode on the streets of NY, and while escorting such dignitaries at President Kennedy, President Truman, Fidel Castro and the Queen of England.

Stories. He never lacked for stories. My Dad had “escorted” (the police term for the motorcycle riders (“escorts”) in a motorcade) President Truman, for example, on multiple occasions. On one occasion, he stood at President Truman’s side after the President had left office and asked him, “Mr. President, now that you are out of office, how should I address you?” President Truman characteristically responded, “Just call me Harry.” He had also “escorted” the Queen of England when she was in NY and, while visiting Buckingham Palace many years later, he struck up a conversation with one on the palace guards, mentioning to him that he had “once escorted the queen.” He didn’t realize that the comment probably was ill advised until later when he saw two guards pointing at him, snickering. It turns out that “escorting” the Queen means something very different in England – they thought he was claiming to have escorted her to a ball or palace event! Of course, they didn’t know that snickering at a rough-and-tumble ex-NY cop might also have been ill advised!

One day, while chasing a speeder at over 90 miles per hour on his beloved Indian, his bike went one way and he the other. Not a good thing to do while traveling at 90+ miles an hour on a motorcycle. I am telling this story in good humor since not only did he live to tell about it, surviving a broken neck, he lived a mostly healthful life until he passed away, still ornery, at the age of 80.

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Jay Rogers is also an interesting guy. His grandfather OWNED the Indian Motorcycle Company. He went from Princeton University to a startup in China and then to the US Marine Corps, where he served for 9 years. In the middle of these 9 years, he did something very few do – applied to Stanford, got accepted at Stanford and then proceeded to turn them down. He turned them down since he felt he had more service to give to his country, a duty that he felt was more important than his business degree, a decision I greatly admire. He eventually finished his tour and “settled” on that “other” business school, the Harvard Business School (as Yale faculty, Harvard will always be the “other school”) where he earned his MBA. His time at Harvard was often spent working on his dream, a dream to not just start his own automobile company, but to revolutionize the entire automobile industry, a lofty goal to be sure.

Turns out that this goal was even loftier than you might think – he has done something else that no one else has done before – his company, Local Motors, has “3D printed” a car. Yes, you read that right. The key to this story, however, rests not with the impact of “additive manufacturing” (“3D printing”) on automobile manufacturers, but rather with reverberations throughout every aspect of manufacturing:

“Think of walking into a store, the likes of which you have never seen before, order a car of which there are 5 new models every month, and you can order it and take delivery that afternoon … Then, if you get into a crash and the materials for that car only costs $2,000, so you take the components that work off it – there are, after all only 50 parts – and print a new car. You had 4 seats to begin with, what about 5 seats this time?”

Local Motors was founded in 2007 with the vision of designing, building and delivering vehicles differently. The concept is relatively simple: uses the collective brainpower of the crowd by having innovative people from all over the world design the car. Then, use this design – which can easily be modified by any buyer for uniqueness – to produce it in local “micro factories” that produce vehicles locally faster with far fewer parts (50 versus a traditional 25,000+ utilizing between 500 and 1,500 suppliers). For example, they brought their Strati vehicle to production in ¼ of the time it took Tesla to bring its first model to production and used 1/100th of the capital that Chevrolet used to develop its Volt electric vehicle. They can do this in part because they “crowd source” both interior and exterior design from community users. For the Strati, the global crowd source contest winner was an Italian, Michele Anoe, who came to the US from Italy with tears in his eyes saying “This is a country that put a man on the moon and now I’m helping in this country 3D print a car.” He didn’t even have a passport and Local Motors had to move mountains to get him over to the U.S quickly. It truly is a different world in which we live today.

Perhaps most importantly, under traditional automobile manufacturing, with its 25,000 parts and 500 to 1,500 suppliers delivering parts, you can’t change quickly. In just 4 weeks, Local Motors used crowdsourcing and designed a car, the Strati, designed by someone in Italy, with just 50 parts. Because of this, they are able to control all aspects of the production, back to front in the value chain. Much like Amazon, they can control – and earn margin on – every step. Much like Tesla, they have learned that owning the chain right down to the retail level enables them to leverage their platform and community of engineers and designers in ways that few others can imitate. It’s something Amazon learned a long time ago. According to Jay Rogers:

“Car companies have killed each other on the retail end because they sell the same product to a ton of different retailers – dealers – and then they all compete for the razor thin margin of price. We won’t do that in our business because we control the chain. And you’ve heard of Tesla fighting to distribute products differently to the world and they are being fought tooth and nail by the dealers of the world and we have to stop that because it’s stifling innovation.”

Illustrating one of the key principles of Strategic Control, the ability to leverage strength in one market space and from one value chain to another, Local Motors has taken its ability to design, build and deliver vehicles and expanded to work with GE on microwave ovens and rapid design testing, with Dominos Pizza and BMW on parts, and with Airbus in 2016 on drones. Own the value chain back to front in one industry and then leverage this to other industries and value chains, much as Amazon has done.

 

Satellites, Supply Chain and Speed: How seemingly unrelated events are setting the stage for transformation and disruption

Two articles on the front page of the Business and Technology section of the Wall Street Journal on April 19th are, at first glance, entirely unrelated: one about the earthquakes in Japan and the other about Airbus’ satellite production announcement.

The first article (“Earthquakes Expose Supply-Chain Frailty”, Wall Street Journal, 4/19/16, print edition page B1) discusses how the once envy of the world, Japan’s “Just in Time” (JIT) production has made it such that any disruption at all – let alone one as large as the series of earthquakes recently to hit Japan – often leads to disastrous production delays (in this case, Toyota temporarily shutting down 26 car assembly lines in Japan). Lean assembly without disruption can be incredibly efficient, but disruption in one part of the chain can reverberate throughout the entire chain and lead to costly delays.

The second article (Airbus Joint Venture Aims to Churn out Satellites, http://www.wsj.com/articles/airbus-joint-venture-aims-to-churn-out-satellites-1461011968) discusses Airbus’ joint venture to produce small (around 300 pounds) advanced satellites at a rate never before even remotely achieved – as much as 15 satellites per week. The facility is slated to be located, interestingly, at a site located at the Kennedy Space Center next to Jeff Bezos’ Blue Origin LLC.

The old model of production efficiency is rapidly – with light speed – giving way to IoT (Internet of Things) cloud-based interconnectivity led by automated robotics, Artificial Intelligence (AI), additive manufacturing (3D printing) and interconnected devises resulting in supply chain efficiencies and factory automation in ways we have never seen before. Gartner group, in numbers that are likely inflated, but not by as much as you may think, estimates that the “Industrial Internet” will dwarf the “Consume Internet,” generating a staggering $37 trillion in revenue by 2025, just 9 years away.

So, we read about supply chain disruptions in Japan due to a series of earthquakes and we realize quickly that the JIT production that made Japan great in the 1970’s and 1980’s is rapidly giving way to IoT interconnected devises so that the supply chain – now interconnected through the cloud and guided by AI optimization algorithms – adjusts to any supply chain disruption automatically.

How are all of these processes connected globally? Through the IoT interoperability provided by the satellite communications that Airbus, Boeing, Google, Facebook, Amazon and others are frantically fighting for as you read this. The winners in this battle will be the backbone of future production just like Japan’s Lean Six Sigma and JIT production efficiency transformed factories worldwide back in the 1980s.

The pace of change we see today, however, won’t take decades; rather it will take a short number of years … and supply chain disruptions like we see in Toyota’s supply chain today will be a thing of the past.

The winner? Global growth. Hold your hats. You think the Internet, as we know it, has transformed out lives? We are about to witness an explosion in growth unlike we have ever seen. Get ready for the ride!

Why the NY Times is “Broken” about Google Glass Being “Broke”

Many have pointed to the decision by Google to pull the plug on the Explorer program for Google Glass as evidence that the “experiment” in the Google Glass program has failed. No other article has been more prominent than the recent piece in the NY Times “Why Google Glass Broke” (http://www.nytimes.com/2015/02/05/style/why-google-glass-broke.html?_r=0). Catchy title. Unfortunately, the article is all downhill from there. It completely misses the point. All of it.

OK, before I explain why all of this completely misses the point, I have a confession. I don’t want to be accused of being “Brian Williams” these days after all! OK, I admit it. I own Google Glass – complete with designer frame. I know personally that all that you read about the product itself is true (I’ve even personally seen Sergey Brin in a NY restaurant sans glasses!). It is not ready for primetime. All of the concerns about battery life, limited capabilities and not feeling safe in public (I have not dared to wear it in public) are spot on correct. But this isn’t the point.

It’s like saying that the first portable computer, the Osborne 1 (introduced in April of 1981 at a price of $1,795), had limited capabilities and battery life and so portable computers were a failure. Google’s Glass in it’s current form would never be a hit, much like the Osborne 1 couldn’t have been. However, and this is a big however, unlike the small startup Osborne, what Google, with its vast resources, has learned from Glass is all about strategic control, all about what is the key to its success: ubiquitous interconnectivity. And that is all that matters. And for this, Glass has been a huge success.

I wrote earlier (see https://competesmarternotharder.wordpress.com/googles-project-glass/) about wearables and how companies will, sooner that we think, make smartphones as we know it obsolete. After all of the hype around Google Glass and the Apple iWatch, see the following for two other executions:

https://www.youtube.com/embed/9J7GpVQCfms or http://www.cnet.com/news/after-google-glass-google-developing-contact-lens-camera/

The point has ALWAYS been about the interconnectivity. Whether it be Glass, contact lenses, a bracelet, a watch, a piece of clothing or something not yet imagined, isn’t the point. Whatever the delivery mechanism, the company that wins will be able to do this:

https://www.youtube.com/watch?v=9c6W4CCU9M4

And Google above all other companies – be it through Project Loon, Project Fiber, its satellite foray with Elon Musk and Space-X, knows that what it has learned with Google Glass along with the ubiquitous interconnectivity, will be the company to do what the last video shows.

If only the NY Times got it, Google might not be in “stealth” mode anymore and competition might be for real. For Google, competitive ignorance is bliss. Sergey couldn’t have written the NY Times piece any better!