In early August Tesla announced it would be buying SolarCity. The New York Times discussed how this combination would help CEO Elon Musk move toward his aspirations for greater clean energy use. But the Los Angeles Times took the companies to task for merging in the face of tremendous capital needs at both, while Tesla was far short of hitting its goals for auto and battery production.
Since then the press has been almost wholly negative on the merger. Marketwatch’s Barry Randall wrote that the deal makes no sense. He argues the companies are in two very different businesses that are not synergistic – and he analogizes this deal to GM buying Chevron. He also makes the case that SolarCity will likely go bankrupt, so there is no good reason for Tesla shareholders to “bail out” the company. And he argues that the capital requirements of the combined entities are unlikely to be fundable, even for its visionary CEO.
Fortune quotes legendary short seller Jim Chanos as saying the deal is “crazy.” He argues that SolarCity has an uneconomic business model based on his analysis of historical financial statements. And now Fortune is reporting that shareholder lawsuits to block the deal could delay, or kill, the merger.
But short-sellers are clearly not long-term investors. And there is a lot more ability for this deal to succeed and produce tremendous investor returns than anyone could ever glean from studying historical financial statements of both companies.
GM buying Chevron is entirely the wrong analogy to compare with Tesla buying SolarCity. Instead, compare this deal to what happened in the creation of television after General Sarnoff, who ran RCA, bought what he renamed NBC.
The world already had radio (just as we already have combustion powered cars.) The conundrum was that nobody needed a TV, especially when there were no TV programs. But nobody would create TV programs if there were no consumers with TVs. General Sarnoff realized that both had to happen simultaneously – the creation of both demand, and supply. It would only be by the creation, and promotion, of both that television could be a success. And it was General Sarnoff who used this experience to launch the first color televisions at the same time as NBC launched the first color programming – which fairly quickly pushed the industry into color.
Skeptics think Mr. Musk and his companies are in over their heads, because there are manufacturing issues for the batteries and the cars, and the solar panel business has yet to be profitable. Yet, the older among us can recall all the troubles with launching TV.
Early sets were not only expensive, they were often problematic, with frequent component failures causing owners to take the TV to a repairman. Often reception was poor, as people relied on poor antennas and weak network signals. It was common to turn on a set and have “snow” as we called it – images that were far from clear. And there was often that still image on the screen with the words “Technical Difficulties,” meaning that viewers just waited to see when programming would return. And programming was far from 24×7 – and quality could be sketchy. But all these problems have been overcome by innovation across the industry.
Yes, the evolution of electric cars will involve a lot of ongoing innovation. So judging its likely success on the basis of recent history would be foolhardy. Today Tesla sells 100% of its cars, with no discounts. The market has said it really, really wants its vehicles. And everybody who is offered electric panels with (a) the opportunity to sell excess power back to the grid and (b) financing, takes the offer. People enjoy the low cost, sustainable electricity, and want it to grow. But lacking a good storage device, or the inability to sell excess power, their personal economics are more difficult.
Electricity production, electricity storage (batteries) and electricity consumption are tightly linked technologies. Nobody will build charging stations if there are no electric cars. Nobody will build electric cars if there are not good batteries. Nobody will make better batteries if there are no electric cars. Nobody will install solar panels if they can’t use all the electricity, or store what they don’t immediately need (or sell it.)
This is not a world of an established marketplace, where GM and Chevron can stand alone. To grow the business requires a vision, business strategy and technical capability to put it all together. To make this work someone has to make progress in all the core technologies simultaneously – which will continue to improve the storage capability, quality and safety of the electric consuming automobiles, and the electric generating solar panels, as well as the storage capabilities associated with those panels and the creation of a new grid for distribution.
This is why Mr. Musk says that combining Tesla and SolarCity is obvious. Yes, he will have to raise huge sums of money. So did such early pioneers as Vanderbilt (railways,) Rockefeller (oil,) Ford (autos,) and Watson (computers.) More recently, Steve Jobs of Apple became heroic for figuring out how to simultaneously create an iPhone, get a network to support the phone (his much maligned exclusive deal with AT&T,) getting developers to write enough apps for the phone to make it valuable, and creating the retail store to distribute those apps (iTunes.) Without all those pieces, the ubiquitous iPhone would have been as successful as the Microsoft Zune.
It is fair for investors to worry if Tesla can raise enough money to pull this off. But, we don’t know how creative Mr. Musk may become in organizing the resources and identifying investors. So far, Tesla has beaten all the skeptics who predicted failure based on price of the cars (Tesla has sold 100% of its production,) lack of range (now up to nearly 300 miles,) lack of charging network (Tesla built one itself) and charging time (now only 20 minutes.) It would be shortsighted to think that the creativity which has made Tesla a success so far will suddenly disappear. And thus remarkably thoughtless to base an analysis on the industry as it exists today, rather than how it might well look in 3, 5 and 10 years.
The combination of Tesla and SolarCity allows Tesla to have all the components to pursue greater future success. Investors with sufficient risk appetite are justified in supporting this merger because they will be positioned to receive the future rewards of this pioneering change in the auto and electric utility industries.
Most of the time “diversity” is a code word for adding women or minorities to an organization. But that is only one way to think about diversity, and it really isn’t the most important. To excel you need diversity in thinking. And far too often, we try to do just the opposite.
“Mythbusters” was a television series that ran 14 seasons across 12 years. The thesis was to test all kinds of things people felt were facts, from historical claims to urban legends, with sound engineering approaches to see if the beliefs were factually accurate – or if they were myths. The show’s ability to bust, or prove, these myths made it a great success.
The show was led by 2 engineers who worked together on the tests and props. Interestingly, these two fellows really didn’t like each other. Despite knowing each other for 20 years, and working side-by-side for 12, they never once ate a meal together alone, or joined in a social outing. And very often they disagreed on many aspects of the show. They often stepped on each others toes, and they butted heads on multiple issues. Here’s their own words:
“We get on each other’s nerves and everything all the time, but whenever that happens, we say so and we deal with it and move on,” he explained. “There are times that we really dislike dealing with each other, but we make it work.”
The pair honestly believed it is their differences which made the show great. They challenged each other continuously to determine how to ask the right questions, and perform the right tests, and interpret the results. It was because they were so different that they were so successful. Individually each was good. But together they were great. It was because they were of different minds that they pushed each other to the highest standards, never had an integrity problem, and achieved remarkable success.
Yet, think about how often we select people for exactly the opposite reason. Think about “knock-out” comments and questions you’ve heard that were used to keep from increasing the diversity:
- I wouldn’t want to eat lunch with that person, so why would I want to work with them?
- We find that people with engineering (or chemical, or fine arts, etc.) backgrounds do well here. Others don’t.
- We like to hire people from state (or Ivy League, etc) colleges because they fit in best
- We always hire for industry knowledge. We don’t want to be a training ground for the basics in how our industry works
- Results are not as important as how they were obtained – we have to be sure this person fits our culture
- Directors on our Board need to be able to get along or the Board cannot be effective
- If you weren’t trained in our industry, how could you be helpful?
- We often find that the best/top graduates are unable to fit into our culture
- We don’t need lots of ideas, or challenges. We need people that can execute our direction
- He gets things done, but he’s too rough around the edges to hire (or promote.) If he leaves he’ll be someone else’s problem.
In 2011 I wrote in Forbes “Why Steve Jobs Couldn’t Find a Job Today.” The column pointed out that hiring practices are designed for the lowest common denominator, not the best person to do a job. Personalities like Steve Jobs would be washed out of almost any hiring evaluation because he was too opinionated, and there would be concerns he would cause too much tension between workers, and be too challenging for his superiors.
Simply put, we are biased to hire people that think like us. It makes us comfortable. Yet, it is a myth that homogeneous groups, or cultures, are the best performing. It is the melding of diverse ways of thinking, and doing, that leads to the best solutions. It is the disagreement, the arguing, the contention, the challenging and the uncomfortableness that leads to better performance. It leads to working better, and smarter, to see if your assumptions, ideas and actions can perform better than your challengers. And it leads to breakthroughs as challenges force us to think differently when solving problems, and thus developing new combinations and approaches that yield superior returns.
What should we do to hire better, and develop better talent that produces superior results?
- Put results and accomplishments ahead of culture or fit. Those who succeed usually keep succeeding, and we need to build on those skills for everyone to learn how to perform better
- Don’t let ego into decisions or discussions. Too many bad decisions are made because someone finds their assumptions or beliefs challenged, and thus they let “hurt feelings” keep them from listening and considering alternatives.
- Set goals, not process. Tell someone what they need to accomplish, and not how they should do it. If how someone accomplishes their goals offends you, think about your own assumptions rather than attacking the other person. There can be no creativity if the process is controlled.
- Set big goals, and avoid the desire to set a lot of small goals. When you break down the big goal into sub-goals you effectively kill alternative approaches – approaches that might not apply to these sub-goals. In other words, make sure the big objective is front and center, then “don’t sweat the small stuff.”
- Reward people for thinking differently – and be very careful to not punish them. It is easy to scoff at an idea that sounds foreign, and in doing so kill new ideas. Often it’s not what they don’t know that is material, but rather what you don’t know that is most important.
- Be blind to gender, skin color, historical ancestry, religion and all other elements of background. Don’t favor any background, nor disfavor another. This doesn’t mean white men are the only ones who need to be aware. It is extremely easy for what we may call any minority to favor that minority. Assumptions linked to physical attributes and history run deep, and are hard to remove from our bias. But it is not these historical physical and educational elements that matter, it is how people think that matters – and the results they achieve.
Netflix has been a remarkable company. Because it has accomplished something almost no company has ever done. It changed its business model, leading to new growth and higher profits.
Almost nobody pulls that off, because they remain stuck defending and extending their old model until they become irrelevant, or fail. Think about Blackberry, that gave us the smartphone business then lost it to Apple and its creation of the app market. Consider Circuit City, that lost enough customers to Amazon it could no longer survive. Sun Microsystems disappeared after PC servers caught up to Unix servers in capability. Remember the Bell companies and their land-line and long distance services, made obsolete by mobile phones and cable operators? These were some really big companies that saw their market shifts, but failed to “pivot” their strategy to remain competitive.
Netflix built a tremendous business delivering physical videos on tape and CD to homes, wiping out the brick-and-mortar stores like Blockbuster and Hollywood Video. By 2008 Netflix reached $1B revenues, reducing Blockbuster by a like amount. By 2010 Blockbuster was bankrupt. Netflix’ share price soared from $50/share to almost $300/share during 2011. By the end of 2012 CD shipments were dropping precipitously as streaming viewership was exploding. People thought Netflix was missing the wave, and the stock plummeted 75%. Most folks thought Netflix couldn’t pivot fast enough, or profitably, either.
But in 2013 Netflix proved the analysts wrong, and the company built a very successful – in fact market leading – streaming business. The shares soared, recovering all that lost value. By 2015 the company had more than doubled its previous high valuation.
But Netflix may be breaking entirely new ground in 2016. It is becoming a market leader in original programming. Something we long attributed to broadcasters and/or cable distributors like HBO and Showtime.
Today’s broadcast companies, like NBC, CBS and ABC, are offering less and less original programming. Overall there are 3 hours/night of prime time television which broadcasters used to “own” as original programming hours. Over the course of a year, allowing for holidays and one open night per week, that meant about 900 hours of programming for each network (including reruns as original programming.) But that was long ago.
These days most of those hours are filled with sports – think evening games of football, basketball, baseball including playoffs and “March Madness” events. Sports are far cheaper to program, and can fill a lot of hours. Next think reality programming. Showing people race across countries, or compete to survive a political battlefield on an island, or even dancing or dieting, uses no expensive actors or directors or sets. It is far, far less expensive than writing, casting, shooting and programming a drama (like Blacklist) or comedy (like Big Bang Theory.) Plan on showing every show twice in reruns, plus intermixing with the sports and reality shows, and most networks get away with around 200-250 hours of original programming per year.
Against that backdrop, Netflix has announced it will program 600 hours of original programming this year. That will approximately double any single large broadcast network. In a very real way, if you don’t want to watch sports or reality TV any more you probably will be watching some kind of “on demand” program. Either streamed from a cable service, or from a provider such as Netflix, Hulu or Amazon.
When it comes to original programming, the old broadcast networks are losing their relevancy to streaming technology, personal video devices and the customer’s ability to find what they want, when they want it – and increasingly at a quality they prefer – from streaming as opposed to broadcast media.
To complete this latest “pivot,” from a video streaming company to a true media company with its own content, Morgan Stanley has published that Netflix is now considered by customers as the #1 quality programming across streaming services. 29% of viewers said Netflix was #1, followed by long-time winner HBO now #2 with 21% of customers saying their programming is best. Amazon, Showtime and Hulu were seen as the best quality by 4%-5% of viewers.
So a decade ago Netflix was a CD distribution company. The largest customer of the U.S. Postal Service. Signing up folks to watch physical videos in their homes. Now they are the largest data streaming company on the planet, and one of the largest original programming producers and programmers in the USA – and possibly the world. And in this same decade we’ve watched the network broadcast companies become outlets for sports and reality TV, while cutting far back on their original shows. Sounds a lot like a market shift, and possibly Netflix could be the game changer, as it performs the first strategy double pivot in business history.
The Netflix hit series “House of Cards” was released last night. Most media reviewers and analysts are expecting huge numbers of fans will watch the show, given its tremendous popularity the last 2 years. Simultaneously, there are already skeptics who think that releasing all episodes at once “is so last year” when it was a newsworthy event, and no longer will interest viewers, or generate subscribers, as it once did. Coupled with possible subscriber churn, some think that “House of Cards” may have played out its hand.
So, the success of this series may have a measurable impact on the valuation of Netflix. If the “House of Cards” download numbers, which are up to Netflix to report, aren’t what analysts forecast many may scream for the stock to tumble; especially since it is on the verge of reaching new all-time highs. The Netflix price to earnings (P/E) multiple is a lofty 107, and with a valuation of almost $29B it sells for just under 4x sales.
But investors should ignore any, and in fact all, hype about “House of Cards” and whatever analysts say about Netflix. So far, they’ve been wildly wrong when making forecasts about the company. Especially when projecting its demise.
Since Netflix started trading in 2002, it has risen from (all numbers adjusted) $8.5 to $485. That is a whopping 57x increase. That is approximately a 40% compounded rate of return, year after year, for 13 years!
But it has not been a smooth ride. After starting (all numbers rounded for easier reading) at $8.50 in May, 2002 the stock dropped to $3.25 in October – a loss of over 60% in just 5 months. But then it rallied, growing to $38.75, a whopping 12x jump, in just 14 months (1/04!) Only to fall back to $9.80, a 75% loss, by October, 2004 – a mere 9 months later. From there Netflix grew in value by about 5.5x – to $55/share – over the next 5 years (1/10.) When it proceeded to explode in value again, jumping to $295, an almost 6-fold increase, within 18 months (7/11). Only to get creamed, losing almost 80% of its value, back down to $63.85, in the next 4 months (11/11.) The next year it regained some loss, improving in value by 50% to $91.35 (12/12,) only to again explode upward to $445 by February, 2014 a nearly 5-fold increase, in 14 months. Two months later, a drop of 25% to $322 (4/14). But then in 4 months back up to $440 (8/14), and back down 4 months later to $341 (12/14) only to approach new highs reaching $480 last week – just 2 months later.
That is the definition of volatility.
Netflix is a disruptive innovator. And, simply put, stock analysts don’t know how to value disruptive innovators. Because their focus is all on historical numbers, and then projecting those historicals forward. As a result, analysts are heavily biased toward expecting incumbents to do well, and simultaneously being highly skeptical of any disruptive company. Disruptors challenge the old order, and invalidate the giant excel models which analysts create. Thus analysts are very prone to saying that incumbents will remain in charge, and that incumbents will overwhelm any smaller company trying to change the industry model. It is their bias, and they use all kinds of historical numbers to explain why the bigger, older company will project forward well, while the smaller, newer company will stumble and be overwhelmed by the entrenched competitor.
And that leads to volatility. As each quarter and year comes along, analysts make radically different assumptions about the business model they don’t understand, which is the disruptor. Constantly changing their assumptions about the newer kid on the block, they make mistake after mistake with their projections and generally caution people not to buy the disruptor’s stock. And, should the disruptor at any time not meet the expectations that these analysts invented, then they scream for shareholders to dump their holdings.
Netflix first competed in distribution of VHS tapes and DVDs. Netflix sent them to people’s homes, with no time limit on how long folks could keep them. This model was radically different from market leader Blockbuster Video, so analysts said Blockbuster would crush Netflix, which would never grow. Wrong. Not only did Blockbuster grow, but it eventually drove Blockbuster into bankruptcy because it was attuned to trends for convenience and shopping from home.
As it entered streaming video, analysts did not understand the model and predicted Netflix would cannibalize its historical, core DVD business thus undermining its own economics. And, further, much larger Amazon would kill Netflix in streaming. Analysts screamed to dump the stock, and folks did. Wrong. Netflix discovered it was a good outlet for syndication, created a huge library of not only movies but television programs, and grew much faster and more profitably than Amazon in streaming.
Then Netflix turned to original programming. Again, analysts said this would be a huge investment that would kill the company’s financials. And besides that people already had original programming from historical market leaders HBO and Showtime. Wrong. By using analysis of what people liked from its archive, Netflix leadership hedged its bets and its original shows, especially “House of Cards” have been big hits that brought in more subscribers. HBO and Showtime, which have depended on cable companies to distribute their programming, are now increasingly becoming additional programming on the Netflix distribution channel.
Investors should own Netflix because the company’s leadership, including CEO Reed Hastings, are great at disruptive innovation. They identify unmet customer needs and then fulfill those needs. Netflix time and again has demonstrated it can figure out a better way to give certain user segments what they want, and then expand their offering to eat away at the traditional market. Once it was retail movie distribution, increasingly it is becoming cable distribution via companies like ComCast, AT&T and Time Warner.
And investors must be long-term. Netflix is an example of why trading is a bad idea – unless you do it for a living. Most of us who have full time day jobs cannot try timing the ups and downs of stock movements. For us, it is better to buy and hold. When you’re ready to buy, buy. Don’t wait, because in the short term there is no way to predict if a stock will go up or down. You have to buy because you are ready to invest, and you expect that over the next 3, 5, 7 years this company will continue to drive growth in revenues and profits, thus expanding its valuation.
Netflix, like Apple, is a company that has mastered the skills of disruptive innovation. While the competition is trying to figure out how to sustain its historical position by doing the same thing better, faster and cheaper Netflix is figuring out “the next big thing” and then delivering it. As the market shifts, Netflix is there delivering on trends with new products – and new business models – which push revenues and profits higher.
That’s why it would have been smart to buy Netflix any time the last 13 years and simply held it. And odds are it will continue to drive higher valuations for investors for many years to come. Not only are HBO, Showtime and Comcast in its sites, but the broadcast networks (ABC, CBS, NBC) are not far behind. It’s a very big media market, which is shifting dramatically, and Netflix is clearly the leader. Not unlike Apple has been in personal technology.
The trend toward the death of broadcast TV as we’ve known it keeps moving forward. This trend may not happen as fast as the death of desktop computers, but it is a lot faster than glacier melting.
This television season (through October) Magna Global has reported that even the oldest viewers (the TV Generation 55-64) watched 3% less TV. Those 35-54 watched 5% less. Gen Xers (25-34) watched 8% less, and Millenials (18-24) watched a whopping 14% less TV. Live sports viewing is not even able to maintain its TV audience, with NFL viewership across all networks down 10-19%.
Everyone knows what is happening. People are turning to downloaded entertainment, mostly on their mobile devices. With a trend this obvious, you’d think everyone in the media/TV and consumer goods industries would be rethinking strategy and retooling for a new future.
But, you would be wrong. Because despite the obviousness of the trend, emotional ties to hoping the old business sticks around are stronger than logic when it comes to forecasting.
CBS predicted at the beginning of 2014 TV ad revenue would grow 4%. Oops. Now CBS’s lead forecaster is admitting he was way off, and adjusted revenues were down 1% for the year. But, despite the trend in viewer behavior and ad expenditures in 2014, he now predicts a growth of 2% for 2015.
That, my young friends, is how “hockey stick” forecasts are created. A lot of old assumptions, combined with a willingness to hope trends will be delayed, and you can ignore real data while promising people that the future will indeed look like the past – even when it defies common sense.
To compensate for fewer ads the networks have raised prices on all ads. But how long can that continue? This requires a really committed buyer (read more about CMO weaknesses below) who simply refuses to acknowledge the market has shifted and the dollars need to shift with it. That cannot last forever.
Meanwhile, us old folks can remember the days when Nielsen ratings determined what was programmed on TV, as well as what advertisers paid. Nielsen had a lock on measuring TV audience viewing, and wielded tremendous power in the media and CPG world.
But now AC Nielsen is struggling to remain relevant. With TV viewership down, time shifting of shows common and streaming growing like the proverbial weed Nielsen has no idea what entertainment the public watches. They don’t know what, nor when, nor where. Unwilling to move quickly to develop tools for catching all the second screen viewing, Nielsen has no plan for telling advertisers what the market really looks like – and the company looks to become a victim of changing markets.
Which then takes us to looking at those folks who actually buy ads that drive media companies. The Chief Marketing Officers (CMOs) of CPG companies. Surely these titans of industry are on top of these trends, and rapidly shifting their spending to catch the viewers with the most ads placed for the lowest cost.
You would wish.
Unfortunately, because these senior executives are in the oldest age groups, they are a victim of their own behavior. They still watch TV, so assume others must as well. If there is cyber-data saying they are wrong, well they simply discount that data. The Nielsen’s aren’t accurate, but these execs still watch the ratings “because it’s the best info we have” – a blatant untruth by the way. But Nielsen does conveniently reinforce their built in assumptions, and their hope that they won’t have to change their media spend plans any time soon.
Further, very few of these CMOs actually use social media. The vast majority watch their children, grandchildren and young employees use mobile devices constantly – and they bemoan all the activity on YouTube, Facebook, Instagram and Twitter – or for the most part even Linked-in. But they don’t actually USE these products. They don’t post information. They don’t set up and follow channels. They don’t connect with people, share information, exchange photos or tell stories on social media. Truthfully, they ignore these trends in their own lives. Which leaves them woefully inept at figuring out how to change their company marketing so it can be more relevant.
The trend is obvious. The answer, equally so. Any modern marketer should be an avid user of social media. Most network heads and media leaders are farther removed from social media than the Pope! They don’t constantly download entertainment, and exchanging with others on all the platforms. They can’t manage the use of these channels when they don’t have a clue how they work, or how other people use them, or understand why they are actually really valuable tools.
Are you using these modern tools? Are you actually living, breathing, participating in the trends? Or are you, like these outdated execs, biding your time wasting money on old programs while you look forward to retirement? And likely killing your company.
When trends emerge it is imperative we become part of that trend. You can’t simply observe it, because your biases will lead you to hope the trend reverts as you continue doing more of the same. A leader has to adopt the trend as a leader, be a practicing participant, and learn how that trend will make a substantial difference in the business. And then apply some vision to remain relevant and successful.
I’m a “Boomer,” and my generation could have been called the Coke generation. Our parents started every day with a cup of coffee, and they drank either coffee or water during the day. Most meals were accompanied by either water, or iced tea.
But our generation loved Coca-Cola. Most of our parents limited our consumption, much to our frustration. Some parents practically refused to let the stuff in the house. In progressive homes as children we were usually only allowed one, or at most two, bottles per day. We chafed at the controls, and when we left home we started drinking the sweet cola as often as we could.
It didn’t take long before we supplanted our parent’s morning coffee with a bottle of Coke (or Diet Coke in more modern times.) We seemingly could not get enough of the product, as bottle size soared from 8 ounces to 12 to 16 and then quarts and eventually 2 liters! Portion control was out the window as we created demand that seemed limitless.
Meanwhile, Americans exported our #1 drink around the world. From 1970 onward Coke was THE iconic American brand. We saw ads of people drinking Coke in every imaginable country. International growth seemed boundless as people from China to India started consuming the irresistible brown beverage.
My how things change. Last week Coke announced third quarter earnings, and they were down 14%. The CEO admitted he was struggling to find growth for the company as soda sales were flat. U.S. sales of carbonated beverages have been declining for a decade, and Coke has not developed a successful new product line – or market – to replace those declines.
Coke is a victim of changing customer preferences. Once a company that helped define those preferences, and built the #1 brand globally, Coke’s leadership shifted from understanding customers and trends in order to build on those trends towards defending & extending sales of its historical product. Instead of innovating, leadership relied on promotion and tactics which had helped the brand grow 30 years ago. They kept to their old success formula as trends shifted the market into new directions.
Coke began losing its relevancy. Trends moved in a new direction. Healthfulness led customers to decide they wanted a less calorie rich, nutritionally starved drink. And concerns grew over “artificial” products, such as sweeteners, leading customers away from even low calorie “diet” colas.
Meanwhile, younger generations started turning to their own new brands. And not just drinks. Instead of holding a Coke, increasingly they hold an iPhone. Where once it was hip to hang out at the Coke machine, or the fountain stand, now people would rather hang out at a Starbucks or Peet’s Coffee. Where once Coke was identified and matched the aspirations of the fast growing Boomer class, now it is replaced with a Prada handbag or other accessory from an LVMH branded luxury product.
Where once holding a Coke was a sign of being part of all that was good, now the product is largely passe. Trends have moved, and Coke didn’t. Coke leadership relied too much on its past, and failed to recognize that market shifts could affect even the #1 global brand. Coke leaders thought they would be forever relevant, just do more of what worked before. But they were wrong.
Unfortunately, CEO Muhtar Kent announced a series of changes that will most likely further hurt the Coca-Cola company rather than help it.
First, and foremost, like almost all CEOs facing an earnings problem the company will cut $3B in costs. The most short-term of short-term actions, which will do nothing to help the company find its way back toward being a prominent brand-leading icon. Cost cuts only further create a “hunker-down” mindset which causes managers to reduce risk, rather than look for breakthrough products and markets which could help the company regain lost ground. Cost cutting will only further cause remaining management to focus on defending the past business rather than finding a new future.
Second, Coca-Cola will sell off its bottlers. Interestingly, in the 1980s CEO Roberto Goizueta famously bought up the distributorships, and made a fortune for the company doing so. By the year 2000 he was honored, along with Jack Welch of GE, as being one of the top 2 CEOs of the century for his ability to create shareholder value. But now the current CEO is selling the bottling operations – in order to raise cash. Once again, when leadership can’t run a business that makes money they often sell off assets to generate cash and make the company smaller – none of which benefits shareholders.
Third, fire the Chief Marketing Officer. Of course, somebody has to be blamed! The guy who has done the most to bring Coca-Cola’s brand out of traditional advertising and promote it in an integrated manner across all media, including managing successful programs for the Olympics and World Cup, has to be held accountable. What’s missing in this action is that the big problem is leadership’s fixation with defending its Coke brand, rather than finding new growth businesses as the market moves away from carbonated soft drinks. And that is a problem that requires the CEO and his entire management team to step up their strategy efforts, not just fire the leader who has been updating the branding mechanisms.
Coca-Cola needs a significant strategy shift. Leadership focused too long on its aging brands, without putting enough energy into identifying trends and figuring out how to remain relevant. Now, people care a lot less about Coke than they did. They care more about other brands, like Apple. Globally. Unless there is a major shift in Coke’s strategy the company will continue to weaken along with its primary brand. That market shift has already happened, and it won’t stop.
For Coke to regain growth it needs a far different future which aligns with trends that now matter more to consumers. The company must bring forward products which excite people ,and with which they identify. And Coke’s leaders must move much harder into understanding shifts in media consumption so they can make their new brands as visible to newer generations as TV made Coke visible to Boomers.
Coke is far from a failed company, but after a decade of sales declines in its “core” business it is time leadership realizes takes this earnings announcement as a key indicator of the need to change. And not just simple things like costs. It must fundamentally change its strategy and markets or in another decade things will look far worse than today.
Do you really think in 2020 you’ll watch television the way people did in the 1960s? I would doubt it.
In today’s world if you want entertainment you have a plethora of ways to download or live stream exactly what you want, when you want, from companies like Netflix, Hulu, Pandora, Spotify, Streamhunter, Viewster and TVWeb. Why would you even want someone else to program you entertainment if you can get it yourself?
Additionally, we increasingly live in a world unaccepting of one-way communication. We want to not only receive what entertains us, but share it with others, comment on it and give real-time feedback. The days when we willingly accepted having information thrust at us are quickly dissipating as we demand interactivity with what comes across our screen – regardless of size.
These 2 big trends (what I want, when I want; and 2-way over 1-way) have already changed the way we accept entertaining. We use USB drives and smartphones to provide static information. DVDs are nearly obsolete. And we demand 24×7 mobile for everything dynamic.
Yet, the CEO of Charter Cable company wass surprised to learn that the growth in cable-only customers is greater than the growth of video customers. Really?
It was about 3 years ago when my college son said he needed broadband access to his apartment, but he didn’t want any TV. He commented that he and his 3 roommates didn’t have any televisions any more. They watched entertainment and gamed on screens around his apartment connected to various devices. He never watched live TV. Instead they downloaded their favorite programs to watch between (or along with) gaming sessions, picked up the news from live web sites (more current and accurate he said) and for sports they either bought live streams or went to a local bar.
To save money he contacted Comcast and said he wanted the premier internet broadband service. Even business-level service. But he didn’t want TV. Comcast told him it was impossible. If he wanted internet he had to buy TV. “That’s really, really stupid” was the way he explained it to me. “Why do I have to buy something I don’t want at all to get what I really, really want?”
Then, last year, I helped a friend move. As a favor I volunteered to return her cable box to Comcast, since there was a facility near my home. I dreaded my volunteerism when I arrived at Comcast, because there were about 30 people in line. But, I was committed, so I waited.
The next half-hour was amazingly instructive. One after another people walked up to the window and said they were having problems paying their bills, or that they had trouble with their devices, or wanted a change in service. And one after the other they said “I don’t really want TV, just internet, so how cheaply can I get it?”
These were not busy college students, or sophisticated managers. These were every day people, most of whom were having some sort of trouble coming up with the monthly money for their Comcast bill. They didn’t mind handing back the cable box with TV service, but they were loath to give up broadband internet access.
Again and again I listened as the patient Comcast people explained that internet-only service was not available in Chicagoland. People had to buy a TV package to obtain broad-band internet. It was force-feeding a product people really didn’t want. Sort of like making them buy an entree in order to buy desert.
As I retold this story my friends told me several stories about people who banned together in apartments to buy one Comcast service. They would buy a high-powered router, maybe with sub-routers, and spread that signal across several apartments. Sometimes this was done in dense housing divisions and condos. These folks cut the cost for internet to a fraction of what Comcast charged, and were happy to live without “TV.”
But that is just the beginning of the market shift which will likely gut cable companies. These customers will eventually hunt down internet service from an alternative supplier, like the old phone company or AT&T. Some will give up on old screens, and just use their mobile device, abandoning large monitors. Some will power entertainment to their larger screens (or speakers) by mobile bluetooth, or by turning their mobile device into a “hotspot.”
And, eventually, we will all have wireless for free – or nearly so. Google has started running fiber cable in cities including Austin, TX, Kansas City, MO and Provo, Utah. Anyone who doesn’t see this becoming city-wide wireless has their eyes very tightly closed. From Albuquerque, NM to Ponca City, OK to Mountain View, CA (courtesy of Google) cities already have free city-wide wireless broadband. And bigger cities like Los Angeles and Chicago are trying to set up free wireless infrastructure.
And if the USA ever invests in another big “public works infrastructure” program will it be to rebuild the old bridges and roads? Or is it inevitable that someone will push through a national bill to connect everyone wirelessly – like we did to build highways and the first broadcast TV.
So, what will Charter and Comcast sell customers then?
It is very, very easy today to end up with a $300/month bill from a major cable provider. Install 3 HD (high definition) sets in your home, buy into the premium movie packages, perhaps one sports network and high speed internet and before you know it you’ve agreed to spend more on cable service than you do on home insurance. Or your car payment. Once customers have the ability to bypass that “cable cost” the incentive is already intensive to “cut the cord” and set that supplier free.
Yet, the cable companies really don’t seem to see it. They remain unimpressed at how much customers dislike their service. And respond very slowly despite how much customers complain about slow internet speeds. And even worse, customer incredulous outcries when the cable company slows down access (or cuts it) to streaming entertainment or video downloads are left unheeded.
Cable companies say the problem is “content.” So they want better “programming.” And Comcast has gone so far as to buy NBC/Universal so they can spend a LOT more money on programming. Even as advertising dollars are dropping faster than the market share of old-fashioned broadcast channels.
Blaming content flies in the face of the major trends. There is no shortage of content today. We can find all the content we want globally, from millions of web sites. For entertainment we have thousands of options, from shows and movies we can buy to what is for free (don’t forget the hours of fun on YouTube!)
It’s not “quality programming” which cable needs. That just reflects industry deafness to the roar of a market shift. In short order, cable companies will lack a reason to exist. Like land-line phones, Philco radios and those old TV antennas outside, there simply won’t be a need for cable boxes in your home.
Too often business leaders become deaf to big trends. They are so busy executing on an old success formula, looking for reasons to defend & extend it, that they fail to evaluate its relevancy. Rather than listen to market shifts, and embrace the need for change, they turn a deaf ear and keep doing what they’ve always done – a little better, with a little more of the same product (do you really want 650 cable channels?,) perhaps a little faster and always seeking a way to do it cheaper – even if the monthly bill somehow keeps going up.
But execution makes no difference when you’re basic value proposition becomes obsolete. And that’s how companies end up like Kodak, Smith-Corona, Blackberry, Hostess, Continental Bus Lines and pretty soon Charter and Comcast.
Apple announced the new iPhones recently. And mostly, nobody cared.
Remember when users waited anxiously for new products from Apple? Even the media became addicted to a new round of Apple products every few months. Apple announcements seemed a sure-fire way to excite folks with new possibilities for getting things done in a fast changing world.
But the new iPhones, and the underlying new iPhone software called iOS7, has almost nobody excited.
Instead of the product launches speaking for themselves, the CEO (Tim Cook) and his top product development lieutenants (Jony Ive and Craig Federighi) have been making the media rounds at BloombergBusinessWeek and USAToday telling us that Apple is still a really innovative place. Unfortunately, their words aren't that convincing. Not nearly as convincing as former product launches.
CEO Cook is trying to convince us that Apple's big loss of market share should not be troubling. iPhone owners still use their smartphones more than Android owners, and that's all we should care about. Unfortunately, Apple profits come from unit sales (and app sales) rather than minutes used. So the chronic share loss is quite concerning.
Especially since unit sales are now growing barely in single digits, and revenue growth quarter-over-quarter, which sailed through 2012 in the 50-75% range, have suddenly gone completely flat (less than 1% last quarter.) And margins have plunged from nearly 50% to about 35% – more like 2009 (and briefly in 2010) than what investors had grown accustomed to during Apple's great value rise. The numbers do not align with executive optimism.
For industry aficianados iOS7 is a big deal. Forbes Haydn Shaughnessy does a great job of laying out why Apple will benefit from giving its ecosystem of suppliers a new operating system on which to build enhanced features and functionality. Such product updates will keep many developers writing for the iOS devices, and keep the battle tight with Samsung and others using Google's Android OS while making it ever more difficult for Microsoft to gain Windows8 traction in mobile.
And that is good for Apple. It insures ongoing sales, and ongoing profits. In the slog-through-the-tech-trench-warfare Apple is continuing to bring new guns to the battle, making sure it doesn't get blown up.
But that isn't why Apple became the most valuable publicly traded company in America.
We became addicted to a company that brought us things which were great, even when we didn't know we wanted them – much less think we needed them. We were happy with CDs and Walkmen until we discovered much smaller, lighter iPods and 99cent iTunes. We were happy with our Blackberries until we learned the great benefits of apps, and all the things we could do with a simple smartphone. We were happy working on laptops until we discovered smaller, lighter tablets could accomplish almost everything we couldn't do on our iPhone, while keeping us 24×7 connected to the cloud (that we didn't even know or care about before,) allowing us to leave the laptop at the office.
Now we hear about upgrades. A better operating system (sort of sounds like Microsoft talking, to be honest.) Great for hard core techies, but what do users care? A better Siri; which we aren't yet sure we really like, or trust. A new fingerprint reader which may be better security, but leaves us wondering if it will have Siri-like problems actually working. New cheaper color cases – which don't matter at all unless you are trying to downgrade your product (sounds sort of like P&G trying to convince us that cheaper, less good "Basic" Bounty was an innovation.)
More (upgrades) Better (voice interface, camera capability, security) and Cheaper (plastic cases) is not innovation. It is defending and extending your past success. There's nothing wrong with that, but it doesn't excite us. And it doesn't make your brand something people can't live without. And, while it keeps the battle for sales going, it doesn't grow your margin, or dramatically grow your sales (it has declining marginal returns, in fact.)
And it won't get your stock price from $450-$475/share back to $700.
We all know what we want from Apple. We long for the days when the old CEO would have said "You like Google Glass? Look at this……. This will change the way you work forever!!"
We've been waiting for an Apple TV that let's us bypass clunky remote controls, rapidly find favorite shows and helps us avoid unwanted ads and clutter. But we've been getting a tease of Dick Tracy-esque smart watches.
From the world's #1 tech brand (in market cap – and probably user opinion) we want something disruptive! Something that changes the game on old companies we less than love like Comcast and DirecTV. Something that helps us get rid of annoying problems like expensive and bad electric service, or routers in our basements and bedrooms, or navigation devices in our cars, or thumb drives hooked up to our flat screen TVs —- or doctor visits. We want something Game Changing!
Apple's new CEO seems to be great at the Sustaining Innovation game. And that pretty much assures Apple of at least a few more years of nicely profitable sales. But it won't keep Apple on top of the tech, or market cap, heap. For that Apple needs to bring the market something big. We've waited 2 years, which is an eternity in tech and financial markets. If something doesn't happen soon, Apple investors deserve to be worried, and wary.
Tribune Corporation finally emerged from a 4 year bankruptcy on the last day of 2012. Before the ink hardly dried on the documents, leadership has decided to triple company debt to double up the number of TV stations. Oh my, some people just never learn.
The media industry is now over a decade into a significant shift. Since the 1990s internet access has changed expectations for how fast, easily and flexibly we acquire entertainment and news. The result has been a dramatic decline in printed magazine and newspaper reading, while on-line reading has skyrocketed. Simultaneously, we're now seeing that on-line streaming is making a change in how people acquire what they listen to (formerly radio based) and watch (formerly television-based.)
Unfortunately, Tribune – like most media industry companies – consistently missed these shifts and underestimated both the speed of the shift and its impact. And leadership still seems unable to understand future scenarios that will be far different from today.
In 2000 newspaper people thought they had "moats" around their markets. The big newspaper in most towns controlled the market for classified ads for things like job postings and used car sales. Classified ads represented about a third of newspaper revenues, and 40% of profits. Simultaneously display advertising for newspapers was considered a cash cow. Every theatre would advertise their movies, every car dealer their cars and every realtor their home listings. Tribune leadership felt like this was "untouchable" profitability for the LA Times and Chicago Tribune that had no competition and unending revenue growth.
So in 2000 Tribune spent $8B to buy Times-Mirror, owner of the Los
Angeles Times. Unfortunately, this huge investment (75% over market
price at the time, by the way) was made just as people were preparing to
shift away from newspapers. Craigslist, eBay and other user sites killed the market for classified ads. Simultaneously movie companies, auto companies and realtors all realized they could reach more people, with more information, cheaper on-line than by paying for newspaper ads.
These web sites all existed before the acquisition, but Tribune leadership ignored the trend. As one company executive said to me "CraigsList!! You think that's competition for a newspaper? Craigslist is for hookers! Nobody would ever put a job listing on Craigslist." Like his compadres running newspapers nationwide, the new competitors and trends toward on-line were dismissed with simplistic statements and broad generalizations that things would never change.
The floor fell out from under advertising revenues in newspapers in the 2000s. There was no way Times-Mirror would ever be worth a fraction of what Tribune paid. Debt used to help pay for the acquisition limited the options for Tribune as cost cutting gutted the organization.
Then, in 2007 Sam Zell bailed out management by putting together a leveraged buyout to acquire Tribune company. Saying that he read 3 newspapers every day, he believed people would never stop reading newspapers. Like a lot of leaders, Mr. Zell had more money than understanding of trends and shifting markets. He added a few billion dollars more debt to Tribune. By the end of 2008 Tribune was unable to meet its debt obligations, and filed for bankruptcy.
Now, new leadership has control of Tribune. They are splitting the company in two, seperating the print and broadcast businesses. The hope is to sell the newspapers, for which they believe there are 40 potential buyers. Even though profits continued falling, from $156M to $89M, in just the last year. Why anyone would buy newspaper companies, which are clearly buggy whip manufacturers, is wholly unclear. But hope springs eternal!
The new stand-alone Tribune Broadcasting company has decided to go all-in on a deal to borrow $2.7B and buy 19 additional local television stations raising total under their control to 42.
Let's see, what's the market trend in entertainment and news? Where once we were limited to local radio and television stations for most content, now we can acquire almost anything we want – from music to TV, movies, documentaries or news – via the internet. Rather than being subjected to what some programming executive decides to give us, we can select what we want, when we want it, and simply stream it to our laptop, tablet, smartphone, or even our large-screen TV.
A long time ago content was controlled by distribution. There was no reason to create news stories or radio programs or video unless you had access to distribution. Obviously, that made distribution – owning newspapers, radio and TV stations – valuable.
But today distribution is free, and everywhere. Almost every American has access to all the news and entertainment they want from the internet. Either free, or for bite-size prices that aren't too high. Today the value is in the content, not distribution.
In the last 2 years the number of homes without a classical TV connection (the cable) has doubled. Sure, it's only 5% of homes now. But the trend is pretty clear. Even homes that have cable are increasingly not watching it as they turn to more and more streaming video. Instead of watching a 30 minute program once per week, people are starting to watch 8 or 10 half hour episodes back to back. And when they want to watch those episodes, where they want to watch them.
While it might be easy for Tribune to ignore Hulu, Netflix and Amazon, the trend is very clear. The need for broadcast stations like NBC or WGN or Food Network to create content is declining as we access content more directly, from more sources. And the need to have content delivered to our home by a local affiliate station is becoming, well, an anachronism.
Yet, Tribune's new TV-oriented leadership is doubling down on its bet for local TV's future. Ignoring all the trends, they are borrowing more money to buy more assets that show all signs of becoming about as valuable whaling ships. It's a big, dumb bet. Similar to overpaying for Times-Mirror. Some leaders just seem destined to never learn.
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?