“Another one bites the dust” (or 2) – Blockbuster, Nokia, Movie Gallery/Hollywood video


Summary:

  • Video retailer Blockbuster (and competitor Hollywood Video) are now bankrupt
  • Video rentals/sales are at an all time high – but via digital downloads not DVDs
  • Nokia, once the cell phone industry leader, is in deep trouble and risk of failure
  • Yet mobile use (calls, texts, internet access, email) is at an all time high
  • These companies are victims of locking-in to old business models, and missing a market shift
  • Commitment to defending your old business can cause failure, even when participating in high growth markets, if you don’t anticipate, embrace and participate in market shifts
  • Lock-in is deadly.  It can cause you to ignore a market shift. 

According to YahooNews,Blockbuster Video to File Chapter 11.”  In February, Movie Gallery – the owner of primary in-kind competitor Hollywood Video – filed for bankruptcy.  It’s now decided to liquidate.

The cause is market shift.  Netflix made it possible to rent DVDs without the cost of a store – as has the kiosk competitor Red Box.  But everyone knows that is just a stopgap, because Netflix and Hulu are leading us all toward a future where there is no physical product at all.  We’ll download the things we want to watch.  The market is shifting from physical items – video cassettes then DVDs – to downloads.  And both Blockbuster and Hollywood Video missed the shift. 

Blockbuster (or Hollywood) could have gotten into on-line renting, or kiosks, like its competition.  It even could have used profits to be an early developer of downloadable movies.  Nothing stopped Blockbuster from investing in YouTube.  Except it’s commitment to its Success Formula – as a brick-and-mortar retailer that rented or sold physically reproduced entertainment. Lock-in.  And for that commitment to its historical Success Formula the investors now will get a great big goose egg – and employees will get to be laid off – and the thousands of landlords will be left in the lurch, unprepared. 

As predictable as Blockbuster was, we can be equally sure about the future of former powerhouse Nokia.  Details are provided in the BusinessWeek.com article “How Nokia Fell from Grace.” As the cell phone business exploded in the 1990s Nokia was a big winner.  Revenues grew fivefold between 1996 and 2001 as people around the globe gobbled up the new devices.  Another example of the fact that when you enter a high growth market you don’t have to be good – just in the right market at the right time.

But the cell phone business has become the mobile device business.  And Nokia didn’t anticipate, prepare for or participate in the market shift.  From market dominance, it has become an also-ran.  The article author blames the failure, and decline, on complacent management.  Weak explanation.  You can be sure the leadership and management at Nokia was doing all it possibly could to Defend & Extend its cell phone business.  The problem is that D&E management doesn’t work when customers simply walk away to a new technology.  It may take a few years, and government subsidies may extend Nokia’s life even longer, but Nokia has about as much chance of surviving its market shift as Blockbuster did.

When companies stumble management sees the problems.  They know results are faltering.  But for decades management has been trained to think that the proper response is to “knuckle down, cut costs, defend the current business at all cost.”  Yet, there are more movies rented now than ever – and Blockbuster is failing despite enormous market growth.  There are more mobile telephony minutes, text messages, remote emails and mobile internet searches than ever in history – yet Nokia is doing remarkably poorly.  It’s not a market problem, it’s a problem of Lock-in to a solution that is now outdated.  When the old supplier didn’t give the market what it wanted, the customers went elsewhere.  And unwillingness to go with them has left these companies in tatters.

These markets are growing, yet the purveyors of old solutions are failing primarily because they stuck to defending their old business too long. They did not embrace the market shift, and cannibalize historical product sales to enter the new, higher growth markets.  Because they chose to protect their “core,” they failed.  New victims of Lock-in.

Don’t Fear Cannibalization – Embrace Future Solutions – NetFlix, Apple iPad, Newspapers


Summary:

  • Businesses usually try defending an old solution in the face of an emerging new solution
  • Status Quo Police use “cannibalization” concerns to stop the organization from moving to new solutions and new markets
  • If you don’t move early, you end up with a dying business – like newspapers – as new competitors take over the customer relationship – like Apple is doing with news subscriptions
  • You can adapt to shifting markets, profitably growing
  • You must disrupt your lock-ins to the old success formula, including stopping the Status Quo Police from using the cannibalization threat
  • You should set up White Space teams early to embrace the new solutions and figure out how to profitably grow in the new market space

When Sony saw MP3 technology emerging it worked hard to defend sales of CDs and CD Players.  It didn’t want to see a decline in the pricing, or revenue, for its existing business.  As a result, it was really late to MP3 technology, and Apple took the lead.  This is the classic “Innovator’s Dilemma” as described by Professor Clayton Christenson of Harvard.  Existing market leaders get so hung up on defending and extending the current business, they fear new solutions, until they become obsolete.  

In the 1980s Pizza Hut could see the emergence of Domino’s Pizza.  But Pizza Hut felt that delivered pizza would cannibalize the eat-in pizza market management sought to dominate.  As a result Pizza Hut barely participated in what became a multi-biliion dollar market for Domino’s and other delivery chains.

The Status Quo Police drag out their favorite word to fight any move into new markets.  Cannibalization.  They say over and over that if the company moves to the new market solution it will cannibalize existing sales – usually at a lower margin.  Sure, there may someday be a future time to compete, but today (and this goes on forever) management should keep close to the existing business model, and protect it.

That’s what the newspapers did.  All of them could see the internet emerging as a route to disseminate news.  They could see Monster.com, Vehix.com, eBay, CraigsList.com and other sites stealing away their classified ad customers.  They could see Google not only moving their content to other sites, but placing ads with that content.  Yet, all energy was expended trying to maintain very expensive print advertising, for fear that lower priced internet advertising would cannibalize existing revenues.

Now, bankrupt or nearly so, the newspapers are petrified.  The San Jose Mercury News headlines “Apple to Announce Subscription Plan for Newspapers.”  As months have passed the newspapers have watched subscriptions fall, and not built a viable internet distribution system.  So Apple is taking over the subscription role – and will take a cool third of the subscription revenue to link readers to the iPad on-line newspaper.  Absolute fear of cannibalization, and strong internal Status Quo Police, kept the newspapers from embracing the emerging solution.  Now they will find themselves beholden to the device providers – Apple’s iPad, Amazon’s Kindle, or a Google Android device. 

But it doesn’t have to be that way.  Netflix built a profitable growth business delivering DVDs to subscribers. Streaming video clearly would cannibalize revenues, because the price is lower than DVDs.  But Netflix chose to embrace streaming – to its great betterment!  The Wrap headlines “Why Hollywood should be Afraid of Netfilx – Very Afraid.”  As reported, Netflix is now growing even FASTER with its streaming video – and at a good margin.  The price per item may be lower – but the volume is sooooo much higher!

Had Netflix defended its old model it was at risk of obsolescence by Hulu.com, Google, YouTube or any of several other video providers.  It could have tried to slow switching to streaming by working to defend its DVD “core.”  But by embracing the market shift Netflix is now in a leading position as a distributor of streaming content.  This makes Netfilx a very powerful company when negotiating distribution rights with producers of movie or television content (thus the Hollywood fear.)  By embracing the market shift, and the future solution, Netflix is expanding its business opportunity AND growing revenue profitably.

Don’t let fear of cannibalization, pushed by the Status Quo Police, stop your business from moving with market shifts.  Such fear will make you like the proverbial deer, stuck on the road, staring at the headlights of an oncoming auto — and eventually dead.  Embrace the market shift, Disrupt your Locked-in thoughts (like “we distribute DVDs”) and set up White Space teams to figure out how you can profitably grow in the new market!