Michael Dell has put together a hedge fund, one of his largest suppliers and some debt money to take his company, Dell, Inc. private. There are large investors threatening to sue, claiming the price isn't high enough. While they are wrangling, small investors should consider this privatization manna from heaven, take the new, higher price and run to invest elsewhere – thankful you're getting more than the company is worth.
In the 1990s everybody thought Dell was an incredible company. With literally no innovation a young fellow built an enormously large, profitable company using other people's money, and technology. Dell jumped into the PC business as it was born. Suppliers were making the important bits, and looking for "partners" to build boxes. Dell realized he could let other people invest in microprocessor, memory, disk drive, operating system and application software development. All he had to do was put the pieces together.
Dell was the rare example of a company that was built on nothing more than execution. By marketing hard, selling hard, buying smart and building cheap Dell could produce a product for which demand was skyrocketing. Every year brought out new advancements from suppliers Dell could package up and sell as the latest, greatest model. All Dell had to do was stay focused on its "core" PC market, avoid distractions, and win at execution. Heck, everyone was going to make money building and selling PCs. How much you made boiled down to how hard you worked. It wasn't about strategy or innovation – just execution.
Dell's business worked for one simple reason. Everybody wanted PCs. More than one. And everybody wanted bigger, more powerful PCs as they came available. Market demand exploded as the PC became part of everything companies, and people, do. As long as demand was growing, Dell was growing. And with clever execution – primarily focused on speed (sell, build, deliver, get the cash before the supplier has to be paid) – Dell became a multi-billion dollar company, and its founder a billionaire with no college degree, and no claim to being a technology genius.
But, the market shifted. As this column has pointed out many times, demand for PCs went flat – never to return to previous growth rates. Users have moved to mobile devices such as smartphones and tablets, while corporate IT is transitioning from PC servers to cloud services. iPad sales now nearly match all of Dell's sales. Dell might well be the world's best PC maker, but when people don't want PCs that doesn't matter any more.
Market watchers knew this. That's why Dell's stock took a long ride from its lofty value on the rapids of growth to the recent distinctly low value as it slipped into the whirlpool of failure.
If you think adding debt to Dell will save it from the market shift, just look at how well that strategy worked for fixing Tribune Corporation. A Sam Zell led LBO took over the company claiming he had plans for a new future, as advertisers shifted away from newspapers. Bankruptcy came soon enough, employee pensions were wiped out, massive layoffs undertaken and 4 years of legal fighting followed to see if there was any plan that would keep the company afloat. Debt never fixes a failing company, and Dell knows that. Dell has no answer to changing market demand away from PCs.
Now the buzzards are circling. HP has been caught in a rush to destruction ever since CEO Fiorina decided to buy Compaq and gut the HP R&D in an effort to follow Dell's wild revenue ride. Only massive cost cutting by the following CEO Hurd kept HP alive, wiping out any remnants of innovation. Now HP has a dismal future. But it hopes that as the PC market shrinks the elimination of one competitor, Dell, will give newest CEO Whitman more time to somehow find something HP can do besides follow Dell into bankruptcy court.
Watching as its execution-oriented ecosystem manufacturers are struggling, supplier Microsoft is pulling out its wallet to try and extend the timeline. Plundering its $85B war chest, Microsoft keeps adding features, with acquisitions such as Skype, that consume cash while offering no returns – or even strong reasons for people to stop the transition to tablets.
Additionally it keeps putting up money for companies that it hopes will build end-user products on its software, such as its $500M investment in Barnes & Noble's Nook and now putting $2B into Dell. $85B is a lot of money, but how much more will Microsoft have to spend to keep HP alive – or money losing Acer – or Lenovo? A billion here, a billion there and pretty soon it adds up to a lot of money! Not counting losses in its own entertainmnet and on-line divisions. The transition to mobile devices is permanent and Microsoft has arrived at the game incredibly late – and with products that simply cannot obtain better than mixed reviews.
The lesson to learn is that management, and investors, take a big risk when they focus on execution. Without innovation, organizations become reliant on vendors who may, or may not, stay ahead of market transitions. When an organization fails to be an innovator, someone who creates its own game changers, and instead tries to succeed by being the best at execution eventually market shifts will kill it. It is not a question of if, but when.
Being the world's best PC maker is no better than being the world's best maker of white bread (Hostess) or the world's best maker of photographic film (Kodak) or the world's best 5 and dime retailer (Woolworth's) or the world's best manufacturer of bicycles (Schwinn) or cold rolled steel (Bethlehem Steel.) Being able to execute – even execute really, really well – is not a long-term viable strategy. Eventually, innovation will create market shifts that will kill you.
Reading reviews of Super Bowl ads I was struck by two observations:
The reviewers got the value of most ads backwards
They missed the most important ad of all – on Twitter
Super Bowl ads cost $1M+ to make. Then they cost $2M+ to air. So it is an expensive proposition. This isn't fine art, like a Picasso, with a long shelf life to create a rate of return. These ads need to pay off fast. They need to build the brand with existing and/or new customers to drive sales and make back that money now.
So let's start with one of the best reviewed ads – Chrysler's "God Made a Farmer". Reviewers liked the home-spun approach of using a dead conservative radio commentator voicing over pictures of farmers in pick-ups. Unfortunately, from a rate of return perspective my bet is this ad will end up near the very bottom.
Firstly, the 50 year trend is to urbanization. In 1900 9 out of 10 Americans had something to do with agriculture. Now it is fewer than 1 in 20. Trucks are used for lots of things, but farming makes up a small percentage. It has been a full generation since most 2nd generation Americans had anything to do with a farm. Showing people using a product in ways that almost nobody uses it, and with a message most of your target market doesn't even recognize, leaves most people confused rather than ready to buy.
Secondly, first generation Americans are changing the demographics of America quickly. First generation Americans (can I say immigrant?) proved large enough, and powerful enough, to play a spoiler role in Mitt Romney's run for the Presidency. To them, farming in America has no history, appeal or meaning to their lives.
Thirdly, no one under the age of 35 has any idea who Paul Harvey is. Perhaps Chrysler could have used Bill O'Reilly and achieved its message mission. But as it was, there were two of us +50 people who spent 5 minutes trying to tell the group watching the game at my home who Paul Harvey even was – and why he was being quoted.
A 24 year old boy watching the game with me in suburban Chicago listened to my explanation about Paul Harvey and farming. He drives a Ford F-250 4×4 pick-up. After I finished he looked me square in the eyes and said "Swing, and a miss." And that's what I'd say to Chrysler. Whoever made this ad had more money than market research and common sense.
Simultaneously, reviewers hated GoDaddy.com's "Perfect Match, Bar Rafieli's Big Kiss." This portrayed a very stereotypical engineer enjoying a long kiss with a pretty girl – referring to how the company's products well serve client needs. Reviewers found the ad in bad taste. My bet is this ad will have immediate payback for GoDaddy.com
Have you ever heard of the monstrously successful situation comedy "The Big Bang Theory?" At just about any time you can find this in reruns on at least one, if not more than one, cable channel. The show is so successful that to pull people viewers to its Monday night schedule CBS actually chose to rerun "Big Bang" episodes amidst new episodes of its other programs in January. The show thrives on the tension of male technical professionals seeking to solve the age old question of how a man can appeal to desirable ladies. Politically correct or not, the show is successful because it is a timeless message. Most boys want to be liked by girls.
Today the world of people who have technical, or quasi-technical jobs, is HUGE. GoDaddy's target audience of people buying, and servicing, web domains just happens to be mostly male under-40 men with technical or quasi-technical backgrounds. This little, tasteless demonstration may have upset the high ethics of ad execs (or has "Mad Men" unraveled that myth?) but to its target group this ad was pure gold. And same for GoDaddy.com.
But most importantly, none of these ads will have the payback of 9 words a marketer tweeted when the lights went out at the game. Because it had blown a huge wad of money on a traditional game ad the Oreo brand folks at Mondelez were watching the game with their media agency 360i. Thinking quickly the creatives came up with an idea, and the brand guys approved it – so out went the tweet from Oreo Cookies "No problem. You can still dunk in the dark."
"Booya" as my young friends say. 10,000 retweets and an entire Monday news cycle devoted to the quick thinking folks who posted this tweet. ROI? Given that the incremental cost was zero, pretty darn high. If I was investing, I'd take the tweet over the video. The equivalent of a kick return for a TD.
The world has changed. We now live in a 24×7, real-time, always-on world. We no longer wait for the weekly magazine for analysis, or the daily newspaper for information. Or even the 11:00 television daily recap. We pick up alerts on our mobile devices constantly. Receive highlights from friends on Facebook and Twitter. We want our information NOW. And those who connect to this new way of living for providing us information are not only accepted, but admired by those thriving on the social networks.
This year's Super Bowl social media postings were triple last year's; over 30million. This is the world of immediate feedback. Immediate discussion. And the place were ads need to be immediate as well. Those who understand this, and connect to it, will succeed. Others, who spend too much to make and then distribute ads on traditional media, will not. Just as newspaper ads have lost of their relevance – TV ads are destined for the same conclusion.
The good news is that Mondelez and its Oreos team was ready, and willing, to take advantage. Where were most of the other advertisers? Audi, VW and P&G's Tide also jumped in. But of all those millions spent on once-run ads, these major corporate advertisers – and their extremely highly paid ad agencies – were absent. When the easy money was to be made, they simply weren't there. Off drinking beer and watching the game when they should have been working!
Today we learned Twitter is buying Bluefin to make its information on who is tweeting, about what, in real time even better. This will be helpful for any smart advertiser. And not just the multi-billion dollar giants. The good news is anyone, anywhere in any size company can play in this real-time, on-line social media world. You don't have to be huge, or rich.
Where were you when the lights went out? Were you taking advantage of what we may later call a "once in a lifetime" opportunity?
Where will you be the next time? Are you ready to invest in the new world of social media advertising? Or are you stuck spending too much to come in too late?
Last week's earning's announcements gave us some big news. Looking around the tech industry, a number of companies reported about as expected, and their stocks didn't move a lot. Apple had robust sales and earnings, but missed analyst targets and fell out of bed! But without a doubt, the big winner was Netflix, which beat expectations and had an enormous ~50% jump in valuation!
My what a difference 18 months makes (see chart.) For anyone who thinks the stock market is efficient the value of Netflix should make one wonder. In July, 2011 the stock ended a meteoric run-up to $300/share, only to fall 80% to $60/share by year's end. After whipsawing between $50 and $130, but spending most of 2012 near the lower number, the stock is now up 3-fold to $160! Nothing scares investors more than volatility – and this kind of volatility would scare away almost anyone but a day trader!
Yet, through all of this I have been – and I remain – bullish on Netflix. During its run-up in 2010 I wrote "Why You Should Love Netflix," then when the stock crashed in late 2011 I wrote "The Case for Buying Netflix" and last January I predicted Netflix to be "the turnaround story of 2012." It would be logical to ask why I would remain bullish through all the ups and downs of this cycle – especially since Netflix is still only about half of its value at its high-point.
Simply put, Netflix has 2 things going for it that portend a successful future:
Netflix is in a very, very fast growing market. Streaming entertainment. People have what appears to be an insatiable desire for entertainment, and the market not only has grown at a breathtaking rate, but it will continue to grow extremely fast for several more quarters. It is unclear where the growth rate may tap out for content delivery – putting Netflix in a market that offers enormous growth for all participants.
Netflix leadership has shown a penchant for having the right strategy to remain a market leader – even when harshly criticized for taking fast action to deal with market shifts. Specifically, choosing to rapidly cannibalize its own DVD business by aggressively promoting streaming – even at lower margins – meant Netflix chose growth over defensiveness.
In 2011 CEOReed Hastings was given "CEO of the Year 2010" honors by Fortune magazine. But in 2011, as he split Netflix into 2 businesses – DVD and streaming – and allowed them to price independently and compete with each other for customer business he was trounced as the "dunce" of tech CEOs.
His actions led to a price increase of 60% for anyone who decided to buy both Netflix products, and many customers chose to drop one. Analysts predicted this to be the end of Netflix.
But in retrospect we can see the brilliance of this decision. CEO Hastings actually did what textbooks tell us to do – he began milking the installed, but outdated, DVD business. He did not kill it, but he began pulling profits and cash out of it to pay for building the faster growing, but lower margin, streaming business. This allowed Netflix to actually grow revenue, and grow profits, while making the market transition from one platform (DVD) to another (streaming.)
Almost no company pulls off this kind of transition. Most companies try to defend and extend the company's "core" product far too long, missing the market transition. But now Netflix is adding around 2 million new streaming customers/quarter, while losing 400,000 DVD subscribers. And with the price changes, this has allowed the company to add content and expand internationally — and increase profits!!
Marketwatch headlined that "Naysayers Must Feel Foolish." But truthfully, they were just looking at the wrong numbers. They were fixated on the shrinking installed base of DVD subscribers. But by pushing these customers to make a fast decision, Netflix was able to convert most of them to its new streaming business before they went out and bought the service from a competitor.
Aggressive cannibalization actually was the BEST strategy given how fast tablet and smartphone sales were growing and driving up demand for streaming entertainment. Capturing the growth market was far, far more valuable than trying to defend the business destined for obsolescence.
Netflix simply did its planning looking out the windshield, at what the market was going to look like in 3 years, rather than trying to protect what it saw in the rear view mirror. The market was going to change – really fast. Faster than most people expected. Competitors like Hulu and Amazon and even Comcast wanted to grab those customers. The Netflix goal had to be to go headlong into the cold, but fast moving, water of the new streaming market as aggressively as possible. Or it would end up like Blockbuster that tried renting DVDs from its stores too long – and wound up in bankruptcy court.
There are people who still doubt that Netflix can compete against other streaming players. And this has been the knock on Netflix since 2005. That Amazon, Walmart or Comcast would crush the smaller company. But what these analysts missed was that Amazon and Walmart are in a war for the future of retail – not entertainment – and their efforts in streaming were more to protect a flank in their retail strategy, not win in streaming entertainment. Likewise, Comcast and its brethren are out to defend cable TV, not really win at anytime, anywhere streaming entertainment. Their defensive behavior would never allow them to lead in a fast-growing new marketplace. Thus the market was left for Netflix to capture – if it had the courage to rapidly cannibalize its base and commit to the new marketplace.
Hulu and Redbox are also competitors. And they very likely will do very well for several years. Because the market is growing very fast and can support multiple players. But Netflix benefits from being first, and being biggest. It has the most cash flow to invest in additional growth. It has the largest subscriber base to attract content providers earlier, and offer them the most money. By maintaining its #1 position – even by cannibalizing itself to do so – Netflix is able to keep the other competitors at bay; reinforcing its leadership position.
There are some good lessons here for everyone:
Think long-term, not short-term. A king can become a goat only to become a king again if he haa the right strategy. You probably aren't as good as the press says when they like you, nor as bad as they say when hated. Don't let yourself be goaded into giving up the long-term win for short-term benefits.
Growth covers a multitude of sins! The way Netflix launched its 2-division campaign in 2011 was a disaster. But when a market is growing at 100%+ you can rapidly recover. Netflix grew its streaming user base by more than 50% last year – and that fixes a lot of mistakes. Anytime you have a choice, go for the fast growing market!!
Follow the trend! Never fight the trend! Tablet sales were growing at an amazing clip, while DVD players had no sales gains. With tablet and smartphone sales eclipsing DVD player sales, the smart move was to go where the trend was headed. Being first on the trend has high payoff. Moving slowly is death. Kodak failed to aggressively convert film camera customers to its own digital cameras, and it filed bankruptcy in 2012.
Dont' forget to be profitable! Even if it means raising prices on dated solutions that will eventually become obsolete – to customer howls. You must maximize the profits of an outdated product line as fast as possible. Don't try to defend and extend it. Those tactics use up cash and resources rather than contributing to future success.
Cannibalizing your installed base is smart when markets shift. Regardless the margin concerns. Newspapers said they could not replace "print ad dollars" with "on-line ad dimes" so many went bankrupt defending the paper as the market shifted. Move fast. Force the cannibalization early so you can convert existing customers to your solution, and keep them, before they go to an emerging competitor.
When you need to move into a new market set up a new division to attack it. And give them permission to do whatever it takes. Even if their actions aggravate existing customers and industry participants. Push them to learn fast, and grow fast – and even to attack old sacred cows (like bundled pricing.)
There were a lot of people who thought my call that Netflix would be the turnaround tech story of 2012 was simply bizarre. But they didn't realize the implications of the massive trend to tablets and smartphones. The impact is far-reaching – affecting not only computer companies but television, content delivery and content creation. Netflix positioned itself to be a winner, and implemented the tactics to make that strategy work despite widespread skepticism.
Hats off to Netflix leadership. A rare breed. That's why long-term investors should own the stock.
Microsoft needed a great Christmas season. After years of product stagnation, and a big market shift toward mobile devices from PCs, Microsoft's future relied on the company seeing customers demonstrate they were ready to jump in heavily for Windows8 products – including the new Surface tablet.
Looking deeper, for the 4th quarter PC sales declined by almost 5% according to Gartner research, and by almost 6.5% according to IDC. Both groups no longer expect a rebound in PC shipments, as they believe homes will no longer have more than 1 PC due to the mobile device penetration – the market where Surface and Win8 phones have failed to make any significant impact or move beyond a tiny market share. Users increasingly see the complexity of shifting to Win8 as not worth the effort; and if a switch is to be made consumer and businesses now favor iOS and Android.
These trends mean nothing short of the ruin of Microsoft. Microsoft makes more than 75% of its profits from Windows and Office. Less than 25% comes from its vaunted servers and tools. And Microsoft makes nothing from its xBox/Kinect entertainment division, while losing vast sums on-line (negative $350M-$750M/quarter). No matter how much anyone likes the non-Windows Microsoft products, without the historical Windows/Office sales and profits Microsoft is not sustainable.
So what can we expect at Microsoft:
Ballmer has committed to fight to the death in his effort to defend & extend Windows. So expect death as resources are poured into the unwinnable battle to convert users from iOS and Android.
As resources are poured out of the company in the Quixotic effort to prolong Windows/Office, any hope of future dividends falls to zero.
Expect enormous layoffs over the next 3 years. Something like 50-60%, or more, of employees will go away.
Expect closure of the long-suffering on-line division in order to conserve resources.
The entertainment division will be spun off, sold to someone like Sony or even Barnes & Noble, or dramatically reduced in size. Unable to make a profit it will increasingly be seen as a distraction to the battle for saving Windows – and Microsoft leadership has long shown they have no idea how to profitably grow this business unit.
As more and more of the market shifts to competitive cloud businesses Apple, Amazon and others will grow significantly. Microsoft, losing its user base, will demonstrate its inability to build a new business in the cloud, mimicking its historical experiences with Zune (mobile music) and Microsoft mobile phones. Microsoft server and tool sales will suffer, creating a much more difficult profit environment for the sole remaining profitable division.
Missing the market shift to mobile has already forever tarnished the Microsoft brand. No longer is Microsoft seen as a leader, and instead it is rapidly losing market relevancy as people look to Apple, Google, Amazon, Samsung, Facebook and others for leadership. The declining sales, and lack of customer interest will lead to a tailspin at Microsoft not unlike what happened to RIM. Cash will be burned in what Microsoft will consider an "epic" struggle to save the "core of the company."
But failure is already inevitable. At this stage, not even a new CEO can save Microsoft. Steve Ballmer played "Bet the Company" on the long-delayed release of Win8, losing the chance to refocus Microsoft on other growing divisions with greater chance of success. Unfortunately, the other players already had enough chips to simply bid Microsoft out of the mobile game – and Microsoft's ante is now long gone – without holding a hand even remotely able to turn around the product situation.
Game over. Ballmer loses. And if you keep your money invested in Microsoft it will disappear along with the company.
The Harvard Business Review recently published its list of the 100 Best Performing CEOs. This list is better than most because it looks at long-term performance of the CEO during his or her time in the job – with many on the list in service more than a decade.
#1 was Steve Jobs. #2 is Jeff Bezos – making him the greatest living CEO. It is startling just how well these two CEOs performed. During Jobs' tenure Apple investors achieved a return of 66.8 times their money. During Mr. Bezos' tenure shareholders achieved a remarkable 124.3 times return on their money. In an era when most of us are happy to earn 5-10%/year – which equates to doubling your money about once a decade – these CEOs exceeded expectations 30-60 fold!
Both of these CEOs achieved greatness by transforming an industry. We all know the Apple story. From near bankruptcy as the Mac company Mr. Jobs led Apple into the mobile devices business, and created a transformation from Walkmen, Razrs and PCs to iPods, iPhones and iPads – to the detriment of Sony, Motorola, Nokia, Microsoft, HP and Dell.
The Amazon story is all the more remarkable because it has been written in the far more mundane world of retail – not known for being nearly as fast-changing at tech.
Lest we forget, Amazon started as an on-line seller of books frequently unavailable at your local bookstore. "What's a local bookstore?" you may now ask, because through continuous upgrading of its capability to build on the advances in internet usage – across machines, browsers, wi-fi and mobile – Amazon drove into bankruptcy such large booksellers as B.Dalton and Borders – leaving Barnes & Noble a mere shell of its former self and on tenous footing. And the number of small bookshops has dropped dramatically.
But Amazon's industry transformation has gone far beyond bookselling. Amazon was one of the first, and by most users considered the best, at offering a complete on-line storefront for any retailer who wants to sell goods through Amazon's site. You can set up your inventory, display products, provide user information, manage a shopping cart and handle check out all through Amazon – with minimal technical skill. This allowed Amazon to bring vastly more products to customers; and without adding all the inventory or warehousing cost.
As digital uses grew, Amazon moved beyond the slow-paced publishers to launch the Kindle and give us eReaders displacing paper books and periodicals. But this was just the first salvo in the effort to promote additional on-line buying, as Amazon next launched Kindle Fire which at remarkably low cost gave people a tablet already set up for doing retail shopping at Amazon.
As Amazon launched its book downloads and on-line services, it built its own cloud services business to aid businesses and people in using tablets, and doing more things on-line; which further reinforced the digital retail world in which Amazon dominates.
And make no doubt about it, Kindle Fire – and the use of all other tablets – is the WalMart and other traditional brick-and-mortar retail killer. Amazon is now a player in all pieces of the transition which is happening in retail, from traditional shopping to on-line.
Demand for retail space in the USA began declining in 2009 and has not stopped. Most analysts blamed it on the great recession. But in retrospect we can now see it was the watershed year for customers to begin looking more, and buying more, on-line. Now each year growth in on-line retail continues, while demand at traditional stores wanes.
Just look at this last holiday season. To (hopefully) drive revenue stores were opening on Thanksgiving, and doing 24 and 48 hours of non-stop staffing and promotions to drive sales. But it was mostly in vain, as traditional retail saw almost no gains. Despite doing more and more of what they've always done – trying to be better, faster and cheaper – they simply could not change the trend away from shopping on-line and back into the stores.
For the last year the #1 trend in retailing has been "showrooming" where customers stand in a store with a smartphone comparison pricing on-line (most frequently Amazon) to the product on the shelf. Retailers were forced to match on-line prices, despite their higher overhead, or lose the business. And now Target has implemented a policy of price-matching Amazon for all of 2013 in hopes of slowing the trend to on-line purchasing.
Circuit City went bankrupt, which saved Best Buy as it picked up their lost business. But now Best Buy is close to failure. Same store sales at WalMart have been flat. JCPenney recruited Apple's retail store wizard as CEO – but he's learned when you have to compete with Amazon life simply sucks. Nobody in traditional retail has found a way to reverse the on-line shopping trend, which is still dominated by Amazon.
We all can learn from these two CEOs and the companies they built. First, and foremost, is understand trends and align with them. If you help people move in the direction they want to go life is easy, and growth can be phenomenal. Trying to slow, stop or reverse a trend doesn't work, and is expensive.
Second, don't ask customers what they want, instead give them what they need. Customers may be on a trend, but they will frame their requests in the old paradigm. By creating new trend-promoting products and solutions you can capture the customer and avoid head-to-head competition with the "old guard" titans selling the increasingly outdated solutions. Don't build better brick-and-mortar, make brick-and-mortar obsolete.
So, what's stopping you from growing your business like Apple or Amazon? What keeps you from being the next Steve Jobs, or Jeff Bezos? Can you spot trends and provide trend-supporting solutions for customers? Or are you stymied because you're spending too much time trying to defend and extend your old business in the face of game changing trends.
I nominate McDonald's for the 2012 Dickens' Award as the most Scrooge-est business behavior this season.
"Christmas is but an excuse for workers to pick their employer's pockets every 25th December" is I believe how Charles Dickens put it in "A Christmas Carol." Poor Bob Cratchet couldn't even have 1 day off per year. And in McDonald's case the company founder actually made it corporate policy to never be open on Thanksgiving or Christmas days so employees could be with family.
Bah! Humbug!
Now, there are a lot of trends McDonald's could legitimately cite when making a case for being open on Christmas – a case that could actually shed a positive light on the company:
The number of single people has risen over the last decade. This trend means that many more people now have a need for at least one meal not in a family setting on 25 December.
America has a large and storied Jewish community for whom 25 December does not have a special religious meaning. For these people enjoying their habitual norms such as eating at McDonald's would indicate an open-minded company supports all faiths.
America is a nation of immigrants. While the founders were European Christians, today America has a very diverse group of immigrants, especially from Asia and the Indian sub-continent, who follow Islam and other faiths for which 25 December has, again, no particular meaning. Offering them a place to eat on their day off could show a connection with their growing importance to America's future. An act of understanding to their impact on the country.
These are just 3, and there are likely more and better ones (please offer your thoughts in the comments section.) But truthfully, this is not why McDonald's is urging franchisees to toil on this national holiday. Instead, it is just to make a buck.
But then again, what trend has McDonald's successfully leveraged in the last… let's say 2 decades? Despite the rapid growth of high end coffee, the "McCafe" concept was a decade late, and so missed the mark that it has made no impact when competing against Caribou Coffee, Peet's or Starbucks. And it has had minimal benefit for McDonald's.
To understand the dearth of new products just go to McDonald's web site where you'll see an animated ad for the "101 reasons to eat a McRib" – that mystery meat product which is at least 30 years old and rotated on and off the menu in the guise of "something new."
McDonald's had a very rough last quarter. It's sales per store declined versus a year ago. The number of stores has stagnated, sales are stagnant, new products are non-existent. Even Ronald McDonald has aged, and apparently moved on to the nursing home. What can you think about that is exciting about McDonald's?
Desperate to do something, McDonald's fired the head of North America. But that doesn't fix the growth problem at McDonald's, it just demonstrates the company is internally fixated on blame rather understanding external market shifts and taking action. McDonald's keeps doing more of the same, year after year; such as opening more stores in emerging markets, staying open longer hours at existing locations and even opening on Thanksgiving and Christmas in the U.S.
McDonald's Ghost of Christmas past was its great strength, from its origin, of consistency. In the 1960s when people traveled away from home they could never be quite sure what a restaurant offered. McDonald's offered a consistent product, that people liked, at a consistent (and affordable) price. This success formula launched tremendous growth, and a revolution in America's restaurant industry, creating a great string of joyous past Christmases.
But the Ghost of Christmas present is far more bleak. 50 years have passed, and now people have a lot more options – and much higher expectations – regarding dining. But McDonald's really has failed to adapt. So now it is struggling to grow, struggling to meet goals, struggling to be a kind and gentle employer. Now asking its employees to work on Christmas – and ostensibly eat Big Macs.
What is the Ghost of Christmas Future for McDonald's? Not surprisingly, if it cannot adapt to changing markets things are likely to worsen. No company can hope to succeed by simply doing more of the same forever. Constantly focusing on efficiency, and beating on franchisees and employees to stay open longer, is a downward spiral. Eventually every business HAS to innovate; adapt to changing market conditions, or it will die. Just look at the tombstones – Kodak, Hostess, Circuit City, Bennigan's ….
Take time between now and 2013 to ask yourself, what is your Ghost of Christmas past upon which your business was built? How does that compare to the Ghost of Christmas present? If there's a negative gap, what should you expect your Ghost of Christmas Future to look like? Are you adapting to changing markets, or just hoping things will improve while you resist putting enough coal on the fire to keep everyone warm?
Newspaper readership peaked around 2000. Since then printed media has declined, as readers shifted on-line. Magazines have folded, and newspapers have disappeared, quit printing, dramatically cut page numbers and even more dramatically cut staff.
Amazingly, almost no major print publisher prepared for this, even though the trend was becoming clear in the late 1990s.
Newspapers are no longer a viable business. While industry revenue grew for
almost 2 centuries, it collapsed in a mere decade.
This market shift created clear winners, and losers. On-line news sites like Marketwatch and HuffingtonPost were clear winners. Losers were traditional newspaper companies such as Tribune Corporation, Gannett, McClatchey, Dow Jones and even the New York Times Company. And investors in these companies either saw their values soar, or practically disintegrate.
In 2012 it is equally clear that television is on the brink of a major transition. Fewer people are content to have their entertainment programmed for them when they can program it themselves on-line. Even though the number of television channels has exploded with pervasive cable access, the time spent watching television is not growing. While simultaneously the amount of time people spend looking at mobile internet displays (tablets, smartphones and laptops) is growing at double digit rates.
It would be easy to act like newspaper defenders and pretend that television as we've known it will not change. But that would be, at best, naive. Just look around at broadband access, the use of mobile devices, the convenience of mobile and the number of people that don't even watch traditional TV any more (especially younger people) and the trend is clear. One-way preprogrammed advertising laden television is not a sustainable business.
So, now is the time to prepare. And change your business to align with impending new realities.
Losers, and winners, will be varied – and not entirely obvious. Firstly, a look at those trying to maintain the status quo, and likely to lose the most.
Giant consumer goods and retail companies benefitted from the domination of television. Only huge companies like P&G, Kraft, GM and Target could afford to lay out billions of dollars for television ads to build, and defend, a brand. But what advantage will they have when TV budgets no longer control brand building? They will become extremely vulnerable to more innovative companies that have better products and move on fast lifecycles. Their size, hierarchy and arcane business practices will lead to huge problems. Imagine a raft of new Hostess Brands experiences.
Even as the trends have started changing these companies have continued pumping billions into the traditional TV networks as they spend to defend their brand position. This has driven up the value of companies like CBS, Comcast (owns NBC) and Disney (owns ABC) over the last 3 years substantially. But don't expect that to last forever. Or even a few more years.
Just like newspaper ad spending fell off a cliff when it was clear the eyeballs were no longer there, expect the same for television ad spending. As giant advertisers find the cost of television harder and harder to justify their outlays will eventually take the kind of cliff dive observed in the chart (above) for newspaper advertising. Already some consumer goods and ad agency executives are alluding to the fact that the rate of return on traditional TV is becoming sketchy.
So far, we've seen little at the companies which own TV networks to demonstrate they are prepared for the floor to fall out of their revenue stream. While some have positions in a few internet production and delivery companies, most are clearly still doing their best to defend & extend the old business – just like newspaper owners did. Just as newspapers never found a way to replace the print ad dollars, these television companies look very much like businesses that have no apparent solution for future growth. I would not want my 401K invested in any major network company.
And there will be winners.
For smaller businesses, there has never been a better time to compete. A company as small as Tesla or Fisker can now create a brand on-line at a fraction of the old cost. And that brand can be as powerful as Ford, and potentially a lot more trendy. There are very low entry barriers for on-line brand building using not only ad words and web page display ads, but also using social media to build loyal followers who use and promote a brand. What was once considered a niche can become well known almost overnight simply by applying the new dynamics of reaching customers on-line, and increasingly via mobile. Look at the success of Toms Shoes.
Zappos and Amazon have shown that with almost no television ads they can create powerhouse retail brands. The new retailers do not compete just on price, but are able to offer selection, availability and customer service at levels unachievable by traditional brick-and-mortar retailers. They can suggest products and prices of things you're likely to need, even before you realize you need them. They can educate better, and faster, than most retail store employees. And they can offer great prices due to less overhead, along with the convenience of shipping the product right into your home.
And as people quit watching preprogrammed TV, where will they go for content? Anybody streaming will have an advantage – so think Netflix (which recently contracted for all the Disney content,) Amazon, Pandora, Spotify and even AOL. But, this will also benefit those companies providing content access such as Apple TV, Google TV, YouTube (owned by Google) to offer content channels and the increasingly omnipresent Facebook will deliver up not only friends, but content — and ads.
As for content creation, the deep pockets of traditional TV production companies will likely disappear along with their ability to control distribution. That means fewer big-budget productions as risk goes up without revenue assurances.
But that means even more ability for newer, smaller companies to create competitive content seeking audiences. Where once a very clever, hard working Seth McFarlane (creator of Family Guy) had to hardscrabble with networks to achieve distribution, and live in fear of a single person controlling his destiny, in the future these creative people will be able to own their content and capture the value directly as they build a direct audience. A phenomenon like George Lucas will be more achievable than ever before as what might look like chaos during transition will migrate to a much more competitive world where audiences, rather than network executives, will decide what content wins – and loses.
So, with due respects to Don McLean, will today be the day TV Died? We will only know in historical context. Nobody predicted newspapers had peaked in 2000, but it was clear the internet was changing news consumption behavior. And we don't know if TV viewership will begin its rapid decline in 2013, or in a couple more years. But the inevitable change is clear – we just don't know exactly when.
So it would be foolish to not think that the industry is going to change dramatically. And the impact on advertising will be even more profound, much more profound, than it was in print. And that will have an even more profound impact on American society – and how business is done.
The web lit up yesterday when people started sharing a Fortune quote from Marissa Mayer, CEO of Yahoo, "We are literally moving the company from BlackBerrys to smartphones." Why was this a big deal? Because, in just a few words, Ms. Mayer pointed out that Research In Motion is no longer relevant. The company may have created the smartphone market, but now its products are so irrelevant that it isn't even considered a market participant.
Ouch. But, more importantly, this drove home that no matter how good RIM thinks Blackberry 10 may be, nobody cares. And when nobody cares, nobody buys. And if you weren't convinced RIM was headed for lousy returns and bankruptcy before, you certainly should be now.
But wait, this is certainly a good bit of the pot being derogatory toward the kettle. Because, other than the highly personalized news about Yahoo's new CEO, very few people care about Yahoo these days as well. After being thoroughly trounced in ad placement and search by Google, it is wholly unclear how Yahoo will create its own relevancy. It may likely be soon when a major advertiser says "When placing our major internet ad program we are focused on the split between Google and Facebook," demonstrating that nobody really cares about Yahoo anymore, either.
And how long will Yahoo survive?
The slip into irrelevancy is the inflection point into failure. Very few companies ever return. Once you are no longer relevant, customer quickly stop paying attention to practically anything you do. Even if you were once great, it doesn't take long before the slide into no-growth, cost cutting and lousy financial performance happens.
Consider:
Garmin once led the market for navigation devices. Now practically everyone uses their mobile phone for navigation. The big story is Apple's blunder with maps, while Google dominates the marketplace. You probably even forgot Garmin exists.
Radio Shack once was a consumer electronics powerhouse. They ran superbowl ads, and had major actresses parlaying with professional sports celebrities in major network ads. When was the last time you even thought about Radio Shack, much less visited a store?
Sears was once America's premier, #1 retailer. The place where everyone shopped for brands like Craftsman, DieHard and Kenmore. But when did you last go into a Sears? Or even consider going into one? Do you even know where one is located?
Kodak invented amateur photography. But when that market went digital nobody cared about film any more. Now Kodak is in bankruptcy. Do you care?
Motorola Razr phones dominated the last wave of traditional cell phones. As sales plummeted they flirted with bankruptcy, until Motorola split into 2 pieces and the money losing phone business became Google – and nobody even noticed.
When was the last time you thought about "building your body 12 ways" with Wonder bread? Right. Nobody else did either. Now Hostess is liquidating.
Being relevant is incredibly important, because markets shift quickly today. As they shift, either you are part of the trend going forward – or you are part of the "who cares" past. If you are the former, you are focused on new products that customers want to evaluate. If you are the latter, you can disappear a whole lot faster than anyone expected as customers simply ignore you.
So now take a look at a few other easy-to-spot companies losing relevancy:
HP headlines are dominated by write offs of its investments in services and software, causing people to doubt the viability of its CEO, Meg Whitman. Who wants to buy products from a company that would spend billions on Palm, business services and Autonomy ERP software only to decide they overspent and can never make any money on those investments? Once a great market leader, HP is rapidly becoming a company nobody cares about; except for what appears to be a bloody train wreck in the making. In tech – lose customesr and you have a short half-life.
Similarly Dell. A leader in supply chain management, what Dell product now excites you? As you think about the money you will spend this holiday, or in 2013, on tech products you're thinking about mobile devices — and where is Dell?
Best Buy was the big winner when Circuit City went bankrupt. But Best Guy didn't change, and now margins have cratered as people showroom Amazon while in their store to negotiate prices. How long can Best Buy survive when all TVs are the same, and price is all that matters? And you download all your music and movies?
Wal-Mart has built a huge on-line business. Did you know that? Do you care? Regardless of Wal-mart's on-line efforts, the company is known for cheap looking stores with cheap merchandise and customers that can't maintain credit cards. When you look at trends in retailing, is Wal-Mart ever the leader – in anything – anymore? If not, Wal-mart becomes a "default" store location when all you care about is price, and you can't wait for an on-line delivery. Unless you decide to go to the even cheaper Dollar General or Aldi.
And, the best for last, is Microsoft. Steve Ballmer announced that Microsoft phone sales quadrupled! Only, at 4 million units last quarter that is about 10% of Apple or Android. Truth is, despite 3 years of development, a huge amount of pre-release PR and ad spending, nobody much cares about Win8, Surface or new Microsoft-based mobile phones. People want an iPhone or Samsung product.
After its "lost decade" when Microsoft simply missed every major technology shift, people now don't really care about Microsoft. Yes, it has a few stores – but they dwarfed in number and customers by the Apple stores. Yes, the shifting tiles and touch screen PCs are new – but nobody real talks about them; other than to say they take a lot of new training. When it comes to "game changers" that are pushing trends, nobody is putting Microsoft in that category.
So the bad news about a $6 billion write-down of aQuantive adds to the sense of "the gang that can't shoot straight" after the string of failures like Zune, Vista and early Microsoft phones and tablets. Not to mention the lack of interest in Skype, while Internet Explorer falls to #2 in browser market share behind Chrome.
When a company is seen as never able to take the lead amidst changing
trends, investors see accquisitions like $1.2B for Yammer as a likely future write down. Customers lose interest and simply spend money elsewhere.
As investors we often hear about companies that were once great brands, but selling at low multiples, and therefore "value plays." But the truth is these are death traps that wipe out returns. Why? These companies have lost relevancy, and that puts them one short step from failure.
As company managers, where are you investing? Are you struggling to be relevant as other competitors – maybe "fringe" companies that use "voodoo solutions" you don't consider "enterprise ready" or understand – are obtaining a lot more interest and media excitment? You can work all you want to defend & extend your past glory, but as markets shift it is amazingly easy to lose relevancy. And it's a very, very tough job to play catch- up.
Just look at the money being spent trying at RIM, Microsoft, HP, Dell, Yahoo…………
In 1978 Dan White killed San Francisco's mayor George Moscone and city supervisor Harvey Milk. The press labeled his defense the "Twinkie Defense" because he claimed eating sugary junk food – like Twinkies – caused diminished capacity. Amazingly the jury bought it, and convicted him of manslaughter instead of murder saying he really wasn't responsible for his own actions. An outraged city rioted.
Nobody is rioting, but management's claim that unions caused Hostess failure is just as outrageous.
Founded in 1930 as Interstate Bakeries Co. (IBC) the company did fine for years. But changing consumer tastes, including nutrition desires, changed how much Wonder Bread, Twinkies, HoHos and Honey Buns people would buy — and most especially affected the price – which was wholly unable to keep up with inflation. This trend was clear in the early 1980s, as prices were stagnant and margins kept declining due to higher costs for grain and petroleum to fuel the country's largest truck fleet delivering daily baked goods to grocers.
IBC kept focusing on operating improvements and better fleet optimization to control rising costs, but the company was unwilling to do anything about the product line. To keep funding lower margins the company added debt, piling on $450M by 2004 when forced to file bankruptcy due to its inability to pay bills. For 5 years financial engineers from consultancies and investment banks worked to find a way out of bankruptcy, and settled on adding even MORE debt, so that – perversely – in 2009 the renamed Hostess had $670M of debt – at least 2/3 the total asset value!
Since then, still trying to sell the same products, margins continued declining. Hostess lost a combined $250M over the last 3 years.
The obvious problem is leadership kept trying to sell the same products, using roughly the same business model, long, long, long after the products had become irrelevant. "Demand was never an issue" a company spokesman said. Yes, people bought Twinkies but NOT at a price which would cover costs (including debt service) and return a profit.
In a last, desperate effort to keep the outdated model alive management decided the answer was another bankruptcy filing, and to take draconian cuts to wages and benefits. This is tanatamount to management saying to those who sell wheat they expect to buy flour at 2/3 the market price – or to petroleum companies they expect to buy gasoline for $2.25/gallon. Labor, like other suppliers, has a "market rate." That management was unable to run a company which could pay the market rate for its labor is not the fault of the union.
By constantly trying to defend and extend its old business, leadership at Hostess killed the company. But not realizing changing trends in foods made their products irrelevant – if not obsolete – and not changing Hostess leaders allowed margins to disintegrate. Rather than developing new products which would be more marketable, priced for higher margin and provide growth that covered all costs Hostess leadership kept trying to financial engineer a solution to make their horse and buggy competitive with automobiles.
And when they failed, management decided to scapegoat someone else. Maybe eating too many Twinkies made the do it. It's a Wonder the Ding Dongs running the company kept this Honey Bun alive by convincing HoHos to loan it money! Blaming the unions is simply an inability of management to take responsibility for a complete failure to understand the marketplace, trends and the absolute requirement for new products.
We see this Twinkie Defense of businesses everywhere. Sears has 23 consecutive quarters of declining same-store sales – but leadership blames everyone but themselves for not recognizing the shifting retail market and adjusting effectively. McDonald's returns to declining sales – a situation they were in 9 years ago – as the long-term trend to healthier eating in more stylish locations progresses; but the blame is not on management for missing the trend while constantly working to defend and extend the old business with actions like taking a slice of cheese off the 99cent burger. Tribune completey misses the shift to on-line news as it tries to defend & extend its print business, but leadership, before and afater Mr. Zell invested, refuses to say they simply missed the trend and let competitors make Tribune obsolete and unable to cover costs.
Businesses can adapt to trends. It is possible to stop the never-ending chase for lower costs and better efficiency and instead invest in new products that meet emerging needs at higher margins. Like the famous turnarounds at IBM and Apple, it is possible for leadership to change the company.
But for too many leadership teams, it's a lot easier to blame it on the Twinkies. Unfortunately, when that happens everyone loses.
This is an exciting time of year for tech users – which is now all of us. The biggest show is the battle between smartphone and tablet leader Apple – which has announced new products with the iPhone 5 and iPad Mini – and the now flailing, old industry leader Microsoft which is trying to re-ignite its sales with a new tablet, operating system and office productivity suite.
I’m reminded of an old joke. Steve the trucker drives with his pal Alex. Someone at the diner says “Steve, imagine you’re going 60 miles an hour when you start down a hill. You keep gaining speed, nearing 90. Then you realize your brakes are out. Now, you see one quarter mile ahead a turn in the road, because there’s a barricade and beyond that a monster cliff. What do you do?”
Steve smiles and says “Well, I wake up Alex.”
“What? Why?” asks the questioner.
“Because Alex has never seen a wreck like the one we’re about to have.”
Microsoft has played “bet the company” on its Windows 8 launch, updated office suite and accompanied Surface tablet. (More on why it didn’t have to do this later.) Now Microsoft has to do something almost never done in business. The company has to overcome a 3 year lateness to market and upend a multi-billion dollar revenue and brand leader. It must overcome two very successful market pioneers, both of which have massive sales, high growth, very good margins, great cash flow and enormous war chests (Apple has over $100B cash.)
Just on the face of it, the daunting task sounds unlikely to succeed.
But there is far more reason to be skeptical. Apple created these markets with new products about which people had few, if any conceptions. But today customers have strong viewpoints on both what a smartphone and tablet should be like to use – and what they expect from Microsoft. And these two viewpoints are almost diametrically opposed.
Since the initial product viewing, almost all professional reviewers have said the Surface is neat, but not fantastically so. It is different from iOS and Google’s Android products, but not superior. It has generated very little enthusiasm.
Tests by average users have shown the products to be non-intuitive. Especially when told they are Microsoft products. So the Apple-based interface intuition doesn’t come through for easy use, nor does historical Microsoft experience. Average users have been confused, and realize they now must learn a 3rd interface – the iOS or Android they have, the old Microsoft they have, and now this new thing. It might as well be Linux for all its similarity to Microsoft.
For those who were excited about having native office products on a tablet, the products aren’t the same as before – in feel or function. And the question becomes, if you really want the office suite do you really want a tablet or should you be using a laptop? The very issue of trying to use Office on the Surface easily makes people rethink the question, and start to realize that they may have said they wanted this, but it really isn’t the big deal they thought it would be. The tablet and laptop have different uses, and between Surface and Win8 they are seeing learning curve cost maybe isn’t worth it.
The new Win8 – especially on the tablet – does not support a lot of the “professional” applications written on older Windows versions. Those developers now have to redevelop their code for a new platform – and many won’t work on the new tablet processors.
Many have been banking on Microsoft winning the “enterprise” market. Selling to CIOs who want to preserve legacy code by offering a Microsoft solution. But they run into two problems. (1) Users now have to learn this 3rd, new interface. If they have a Galaxy tab or iPad they will have to carry another device, and learn how to use it. Do not expect happy employees, or executives, who expressly desire avoiding both these ideas. (2) Not all those old applications (drivers, code, etc) will port to the new platform so easily. This is not a “drop in” solution. It will take IT time and money – while CEOs keep asking “why aren’t you doing this for my iPad?”
All of this adds up to a new product set that is very late to market, yet doesn’t offer anything really new. By trying to defend and extend its Windows and Office history, Microsoft missed the market shift. It has spent several billion dollars trying to come up with something that will excite people. But instead of offering something new to change the market, it has given people something old in a new package. Microsoft they pretty much missed the market altogether.
Everyone knows that PC sales are going to decline. Unfortunately, this launch may well accelerate that decline. Remember how slowly people were willing to switch to Vista? How slowly they adopted Microsoft 7 and Office 2010? There are still millions of users running XP – and even Office XP (Office Professional 2003.) These new products may convince customers that the time and effort to “upgrade” simply means its time to switch.
Microsoft has fallen into a classic problem the Dean of innovation Clayton Christensen discusses. Microsoft long ago overshot the user need for PCs and office automation tools. But instead of focusing on developing new solutions – like Apple did by introducing greater mobility with its i products – Microsoft has diligently, for a decade, continued to dump money into overshooting the user needs for its basic products. They can’t admit to themselves that very, very, very few people are looking for a new spreadsheet or word processing application update. Or a new operating system for their laptop.
These new Microsoft products will NOT cause people to quit the trend to mobile devices. They will not change the trend of corporate users supplying their own devices for work (there’s now even an IT acronym for this movement [BYOD,] and a Wikipedia page.) It will not find a ready, excited market of people wanting to learn yet another interface, especially to use old applications they thought they already new!
Long-term, there is yet another great battle to be fought. What will be the role of monitors, scattered in homes and bars, and in train stations, lobbies and everywhere else? Who will control the access to monitors which will be used for everything from entertainment (video/music,) to research and gaming. The tablet and smartphones may well die, or mutate dramatically, as the ability to connect via monitors located nearly everywhere using —- xBox?
But, this week all discussion of the new xBox Live and music applications were overshadowed by the CEO’s determination to promote the dying product line around Windows8.
This was simply stupid. Ballmer should be fired.
The PC products should be managed for a cash hoarding transition into a smaller market. Investments should be maximized into the new products that support the next market transition. xBox and Kinect should be held up as game changers, and Microsoft should be repositioned as a leader in the family and conference room; an indespensible product line in an ever-more-connected world.
But that didn’t happen this week. And the CEO keeps heading straight for the cliff. Maybe when he takes the truck over the guard rail he’ll finally be replaced. Investors can only wake up and watch – and hope it happens sooner, rather than later.
UPDATE 16 April, 2019 – Android TV is a new emerging tech that could have a big impact on the overall marketplace. Read more about Android TV here.
