by Adam Hartung | Mar 9, 2015 | Current Affairs, In the Rapids, Leadership, Television
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.
by Adam Hartung | Jun 5, 2014 | Current Affairs, Leadership
Charlie Sheen, Chandler Massey, Johnny Depp, Paula Abdul, Zac Efron, Rob Lowe, John Davidson, Dick van Patten… This is just a short, partial list of the people Jeff Ballard works with, and has worked with in some cases for nearly 30 years, as one of the top publicists in the entertainment industry.
Often CEOs will say that leading people is like herding cats. And too often, many leaders are unable to help some of their most talented managers reach full potential. Highly capable people can have insights that are hard to understand, and can be impatient to take action. In far too many cases organizations lose highly talented people because the leaders are unable to maintain long-term relationships and coach/assist those people productively. Or, even worse, the highly talented people are misunderstood and the organization pushes them out rather than figuring out how to get the most out of them.
Think of Steve Jobs. Fired by Apple, he later went on to great success at Pixar. And returned to save Apple from bankruptcy. Yet, few leaders – or organizations – would even have considered hiring him. Because they don’t know how to get the most of someone so highly talented.
As a publicist for some of the top actors in Los Angeles, Jeff Ballard has worked with, assisted the growth of, and become long-term friends with some very talented people. And layered on top of this is the impact of celebrity, and chronic media frenzies that can position and reposition these people in the public eye – as well as the eye of producers. What most CEOs would consider a once-in-a-decade set of issues for helping a developing high-performer move their career forward is literally daily activity for Jeff Ballard.
And through all of this he maintains some of the longest known relationships in what is widely considered one of the most fickle industries in America. In the fast changing entertainment industry people are often dropped like chattel as trends shift. Yet, Jeff Ballard’s clients stick with him for decades, and wax eloquently about how he has helped them to grow as people, and move their careers forward. While you’ve probably never heard of him (unless you are in the entertainment business,) Jeff Ballard has developed some of the sharpest leadership skills anywhere.
Charlie Sheen, Conner Greene, Jeff Ballard on set of “Anger Management”
How does he do it? How does he help highly talented people to achieve even greater results year after year?
1 – Be helpful. Seriously. Don’t just hang around. Don’t wait to be asked to do something. Be helpful. Every interaction is an opportunity to help someone. Think about how you are creating opportunities to help people. Think about their capabilities and their goals and always be helpful.
Too often leaders take their relationships for granted. Or worse, they see people in their network as a route for the leader to accomplish his goals. They see others as someone who can help them. One of Jeff’s great skills as a leader is seeing his role as helping others. The more he helps others, the better things work out.
When Chandler Massey lost his phone, and he needed to do some interviews, Jeff ran to a store, bought a phone and a plan, and got the technology in Chandler’s hands in time for the interviews. This seemingly small thing was critical to the success of that event. But it demonstrated that by focusing on how to help, Jeff was willing to do what was necessary – whether big or small. And that builds long-lasting relationships. Chandler thanked Jeff by giving him his Emmy award.
Part and parcel with this, make sure you are only building relationships with clients, and your ecosystem, where you can add value. Too often leaders will take any business. Explore any relationship. But if you over-reach and take on a client, acquisition, merger, new product, new project, etc. where you are unable to really add value – unable to really help accomplish the goal – bad things will happen. So think ahead, and understand how you can be helpful.
2 – Add value fast. Every chance you can. Fix things – even things that may seem unimportant to you our outside your wheelhouse.
Dick van Patten once asked Jeff Ballard what to do about a broken sauna. Although far from his job, Jeff quickly took a look and then actually fixed the sauna. When producers are looking for actor A to be on a show, like Entertainment Tonight, for a variety of reasons this may not be a good fit. But rather than saying “no” – or worse, just letting requests go unanswered – Jeff will look quickly to understand the producer or media person’s needs and come up with a value added answer. Jeff constantly thinks about recommendations where all parts of his ecosystem could possibly help meet their needs.
When you constantly think about how to add value – and immediately – then people respect you. And they learn to trust you. When you are helping people reach their goals they listen to what you say. They are open to discuss alternative solutions. Far too often too many leaders think of themselves as “great deciders.” Or as the person responsible for making a “yes” or “no” answer and then moving on – leaving those around them to solve problems for themselves. But great leaders listen, and think about how to add value. Quickly.
3 – Separate talent from the person. Everyone is unique. Not everything a person does is on the direct path to greater success. But that doesn’t mean they aren’t talented – and able to continue to perform at superior levels despite something that didn’t go so well. Don’t be so foolish as to let the talent slip away because you are having issues with the person.
For actors, or sports celebrities, this can be easy to see. The media reports on something they say, or do, and it is easy to become negative about that individual. But, the next great performance (a movie, TV show, concert, CD, home run, winning goal, etc.) demonstrates that the person has talent. Leaders have the job of getting the most out of the talent – and not trying to manage the person – or worse, losing the talent because of “personal issues.”
Far too often organizations end up losing highly talented people because of the “black mark” syndrome. An up-and-comer does well for several years, but then something misses. For example, passionate effort to launch a new product or business creates conflict in the organization, and he shouts or otherwise acts out. HR is called in, and the manager is rebuked and forewarned — but worse he is now “marked” as problematic. All that talent is forgotten, undeveloped – or it simply goes to a competitor.
People are people. Some are easier to work with than others. But what’s important is whether they have talent, and whether as a leader you can bring out the most of that talent. Leaders don’t have the job of “changing people” (which far too often they really try to do,) but rather of helping people around them cultivate, develop and demonstrate their talents. If we focus on the talent we achieve far superior results while helping the person achieve their personal goals.
4 – Stay relevant, and keep those around you relevant. The world changes quickly. It is easy for leaders to expect those in their network – and especially their inner circle – to become complacent. To rest on their laurels of past success. Which all too quickly leads to problems. So it is critical that leaders constantly look around for what is emerging, and keep reminding their network of what is necessary to remain relevant. A pat on the back lasts one second, but helping someone stay relevant sustains their success far into the future.
Leaders can become so fixated on “performance” that they dehumanize those they coach. If, instead, they focus on providing guiding lights to people they can encourage them to adapt to change. They can help those they work with to stay current and growing. Too much time is spent reacting to what just happened, rather than figuring out how to achieve the long-term goal.
Jeff works constantly with his clients to understand what the market is seeking now, and will be seeking in the near future. Rather than reacting to events Jeff and his talented clients spends considerable time discussing what outcomes are desired, and whether or not a planned activity will lead to that outcome. By focusing on future relevancy Jeff leads clients to become proactive about achieving their goals. He helps them to make decisions today which are directed toward a future goal, rather than reacting to an historical event.
Over and again famous clients and top producers compliment Jeff Ballard for his honesty, integrity and loyalty. But these are not simply attributes. Many of us have these attributes. Rather, these are outcomes from Jeff Ballard’s long history of constantly helping people in his network, adding value quickly toward solving their problems, constantly focusing on bringing out the talent rather than chastising (or managing) the individual, and keeping everyone relevant and proactive rather than falling into patterns of reacting to something that already happened.
Jeff Ballard’s publicity firm is far from the largest in Los Angeles or New York. Yet, he helps clients who are famous, as well as new talent such as Conner Greene who you probably do not know. And no competitor can offer the long-term track record of performance Jeff has provided. Regularly clients who move to large publicity firms return to Jeff, seeking his counsel and advice in recognition of his leadership – generally absent from his competitors. Repeat business that all leaders seek, but don’t often achieve.
The next time you find yourself struggling to lead the people in your organization think of Jeff Ballard. His insights about leadership, rooted in the complex and difficult world of media publicity for celebrities, could help you be a far better leader in your organization.
by Adam Hartung | Nov 22, 2013 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Television
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.
by Adam Hartung | Jan 29, 2013 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Television, Web/Tech
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 CEO Reed 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.
by Adam Hartung | Nov 29, 2010 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness, Television, Web/Tech
Summary:
- Most leaders optimize their core business
- This does not prepare the business for market shifts
- Motorola was a leader with Razr, but was killed when competitors matched their features and the market shifted to smart phones
- Netflix's leader is moving Netflix to capture the next big market (video downloads)
- Reed Hastings is doing a great job, and should be emulated
- Netflix is a great growth story, and a stock worth adding to your portfolio
"Reed Hastings: Leader of the Pack" is how Fortune magazine headlined its article making the Netflix CEO its BusinessPerson of the Year for 2010. At least part of Fortune's exuberance is tied to Netflix's dramatic valuation increase, up 200% in just the last year. Not bad for a stock called a "worthless piece of crap" in 2005 by a Wedbush Securities stock analyst. At the time, popular wisdom was that Blockbuster, WalMart and Amazon would drive Netflix into obscurity. One of these is now gone (Blockbuster) the other stalled (WalMart revenues unmoved in 2010) and the other well into digital delivery of books for its proprietary Kindle eReader.
But is this an honor, or a curse? It was 2004 when Ed Zander was given the same notice as the head of Motorola. After launching the Razr he was lauded as Motorola's stock jumped in price. But it didn't take long for the bloom to fall off that rose. Razr profits went negative as prices were cut to drive share increases, and a lack of new products drove Motorola into competitive obscurity. A joint venture with Apple to create Rokr gave Motorola no new sales, but opened Apple's eyes to the future of smartphone technology and paved the way for iPhone. Mr. Zander soon ran out of Chicago and back to Silicon Valley, unemployed, with his tale between his legs.
Netflix is a far different story from Motorola, and although its valuation is high looks like a company you should have in your portfolio.
Ed Zander simply took Motorola further out the cell phone curve that Motorola had once pioneered. He brought out the next version of something that had long been "core" to Motorola. It was easy for competitors to match the "features and functions" of Razr, and led to a price war. Mr. Zander failed because he did not recognize that launching smartphones would change the game, and while it would cannibalize existing cell phone sales it would pave the way for a much more profitable, and longer term greater growth, marketplace.
Looking at classic "S Curve" theory, Mr. Zander and Motorola kept pushing the wave of cell phones, but growth was plateauing as the technology was doing less to bring in new users (in the developed world):
Meanwhile, Research in Motion (RIM) was pioneering a new market for smartphones, which was growing at a faster clip. Apple, and later Google (with Android) added fuel to that market, causing it to explode. The "old" market for cell phones fell into a price war as the growth, and profits, moved to the newer technology and product sets:
The Motorola story is remarkably common. Companies develop leaders who understand one market, and have the skills to continue optimizing and exploiting that market. But these leaders rarely understand, prepare for and implement change created by a market shift. Inability to see these changes brought down Silicon Graphics and Sun Microsystems in 2010, and are pressuring Microsoft today as users are rapidly moving from laptops to mobile devices and cloud computing. It explains how Sony lost the top spot in music, which it dominated as a CD recording company and consumer electronics giant with Walkman, to Apple when the market moved people from physical CDs to MP3 files and Apple's iPod.
Which brings us back to what makes Netflix a great company, and Mr. Hastings a remarkable leader. Netflix pioneered the "ship to your home" DVD rental business. This helped eliminate the need for brick-and-mortar stores (along with other market trends such as the very inexpensive "Red Box" video kiosk and low-cost purchase options from the web.) Market shifts doomed Blockbuster, which remained locked-in to its traditional retail model, made obsolete by competitors that were cheaper and easier with which to do business.
But Netflix did not remain fixated on competing for DVD rentals and sales – on "protecting its core" business. Looking into the future, the organization could see that digital movie rentals are destined to be dramatically greater than physical DVDs. Although Hulu was a small competitor, and YouTube could be scoffed at as a Gen Y plaything, Netflix studied these "fringe" competitors and developed a superb solution that was the best of all worlds. Without abandoning its traditional business, Netflix calmly moved forward with its digital download business — which is cheaper than the traditional business and will not only cannibalize historical sales but make the traditional business completely obsolete!
Although text books talk about "jumping the curve" from one product line to another, it rarely happens. Devotion to the core business, and managing the processes which once led to success, keeps few companies from making the move. When it happens, like when IBM moved from mainframes to services, or Apple's more recent shift from Mac-centric to iPod/iPhone/iPad, we are fascinated. Or Google's move from search/ad placement company to software supplier. While any company can do it, few do. So it's no wonder that MediaPost.com headlines the Netflix transition story "Netflix Streams Its Way to Success."
Is Netflix worth its premium? Was Apple worth its premium earlier this decade? Was Google worth its premium during the first 3 years after its Initial Public Offering? Most investors fear the high valuations, and shy away. Reality is that when a company pioneers a growth business, the value is far higher than analysts estimate. Today, many traditionalists would say to stay with Comcast and set-top TV box makers like TiVo. But Comcast is trying to buy NBC in order to move beyond its shrinking subscriber base, and "TiVo Widens Loss, Misses Street" is the Reuters' headline. Both are clearly fighting the problems of "technology A" (above.)
What we've long accepted as the traditional modes of delivering entertainment are well into the plateau, while Netflix is taking the lead with "technology B." Buying into the traditionalists story is, well, like buying General Motors. Hard to see any growth there, only an ongoing, slow demise.
On the other hand, we know that increasingly young people are abandoning traditional programing for 100% entertainment selection by download. Modern televisions are computer monitors, capable of immediately viewing downloaded movies from a tablet or USB drive – and soon a built-in wifi connection. The growth of movie (and other video) watching is going to keep exploding – just as the volume of videos on YouTube has exploded. But it will be via new distribution. And nobody today appears close to having the future scenarios, delivery capability and solutions of Netflix. 24×7 Wall Street says Netflix will be one of "The Next 7 American Monopolies." The last time somebody used that kind of language was talking about Microsoft in the 1980s! So, what do you think that makes Netflix worth in 2012, or 2015?
Netflix is a great story. And likely a great investment as it takes on the market leadership for entertainment distribution. But the bigger story is how this could be applied to your company. Don't fear revenue cannibalization, or market shift. Instead, learn from, and behave like, Mr. Hastings. Develop scenarios of the future to which you can lead your company. Study fringe competitors for ways to offer new solutions. Be proactive about delivering what the market wants, and as the shift leader you can be remarkably well positioned to capture extremely high value.
