Innovation – Why Bezos Succeeded, While Lampert Failed at Sears

Innovation – Why Bezos Succeeded, While Lampert Failed at Sears

Last week Sears announced sales and earnings.  And once again, the news was all bad.  The stock closed at a record, all time low.  One chart pretty much sums up the story, as investors are now realizing bankruptcy is the most likely outcome.

Chart Source: Yahoo Finance 5/13/16

Chart Source: Yahoo Finance 5/13/16

Quick Rundown:  In January, 2002 Kmart is headed for bankruptcy.  Ed Lampert, CEO of hedge fund ESL, starts buying the bonds.  He takes control of the company, makes himself Chairman, and rapidly moves through proceedings.  On May 1, 2003, KMart begins trading again.  The shares trade for just under $15 (for this column all prices are adjusted for any equity transactions, as reflected in the chart.)

Lampert quickly starts hacking away costs and closing stores.  Revenues tumble, but so do costs, and earnings rise.  By November, 2004 the stock has risen to $90.  Lampert owns 53% of Kmart, and 15% of Sears.  Lampert hires a new CEO for Kmart, and quickly announces his intention to buy all of slow growing, financially troubled Sears.

In March, 2005 Sears shareholders approve the deal.  The stock trades for $126.  Analysts praise the deal, saying Lampert has “the Midas touch” for cutting costs. Pumped by most analysts, and none moreso than Jim Cramer of “Mad Money” fame (Lampert’s former roommate,) in 2 years the stock soars to $178 by April, 2007.  So far Lampert has done nothing to create value but relentlessly cut costs via massive layoffs, big inventory reductions, delayed payments to suppliers and store closures.

Homebuilding falls off a cliff as real estate values tumble, and the Great Recession begins.  Retailers are creamed by investors, and appliance sales dependent Sears crashes to $33.76 in 18 months.  On hopes that a recovering economy will raise all boats, the stock recovers over the next 18 months to $113 by April, 2010.  But sales per store keep declining, even as the number of stores shrinks.  Revenues fall faster than costs, and the stock falls to $43.73 by January, 2013 when Lampert appoints himself CEO.  In just under 2.5 years with Lampert as CEO and Chairman the company’s sales keep falling, more stores are closed or sold, and the stock finds an all-time low of $11.13 – 25% lower than when Lampert took KMart public almost exactly 13 years ago – and 94% off its highs.

What happened?

Sears became a retailing juggernaut via innovation.  When general stores were small and often far between, and stocking inventory was precious, Sears invented mail order catalogues.  Over time almost every home in America was receiving 1, or several, catalogues every year.  They were a major source of purchases, especially by people living in non-urban communities.  Then Sears realized it could open massive stores to sell all those things in its catalogue, and the company pioneered very large, well stocked stores where customers could buy everything from clothes to tools to appliances to guns.  As malls came along, Sears was again a pioneer “anchoring” many malls and obtaining lower cost space due to the company’s ability to draw in customers for other retailers.

To help customers buy more Sears created customer installment loans. If a young couple couldn’t afford a stove for their new home they could buy it on terms, paying $10 or $15 a month, long before credit cards existed.  The more people bought on their revolving credit line, and the more they paid Sears, the more Sears increased their credit limit. Sears was the “go to” place for cash strapped consumers.  (Eventually, this became what we now call the Discover card.)

In 1930 Sears expanded the Allstate tire line to include selling auto insurance – and consumers could not only maintain their car at Sears they could insure it as well.  As its customers grew older and more wealthy, many needed help with financia advice so in 1981 Sears bought Dean Witter and made it possible for customers to figure out a retirement plan while waiting for their tires to be replaced and their car insurance to update.

To put it mildly, Sears was the most innovative retailer of all time.  Until the internet came along.  Focused on its big stores, and its breadth of products and services, Sears kept trying to sell more stuff through those stores, and to those same customers.  Internet retailing seemed insignificantly small, and unappealing.  Heck, leadership had discontinued the famous catalogues in 1993 to stop store cannibalization and push people into locations where the company could promote more products and services. Focusing on its core customers shopping in its core retail locations, Sears leadership simply ignored upstarts like Amazon.com and figured its old success formula would last forever.

But they were wrong. The traditional Sears market was niched up across big box retailers like Best Buy, clothiers like Kohls, tool stores like Home Depot, parts retailers like AutoZone, and soft goods stores like Bed, Bath & Beyond.  The original need for “one stop shopping” had been overtaken by specialty retailers with wider selection, and often better pricing.  And customers now had credit cards that worked in all stores.  Meanwhile, for those who wanted to shop for many things from home the internet had taken over where the catalogue once began.  Leaving Sears’ market “hollowed out.”  While KMart was simply overwhelmed by the vast expansion of WalMart.

What should Lampert have done?

There was no way a cost cutting strategy would save KMart or Sears.  All the trends were going against the company.  Sears was destined to keep losing customers, and sales, unless it moved onto trends.  Lampert needed to innovate.  He needed to rapidly adopt the trends.  Instead, he kept cutting costs. But revenues fell even faster, and the result was huge paper losses and an outpouring of cash.

To gain more insight, take a look at Jeff Bezos.  But rather than harp on Amazon.com’s growth, look instead at the leadership he has provided to The Washington Post since acquiring it just over 2 years ago. Mr. Bezos did not try to be a better newspaper operator.  He didn’t involve himself in editorial decisions.  Nor did he focus on how to drive more subscriptions, or sell more advertising to traditional customers.  None of those initiatives had helped any newspaper the last decade, and they wouldn’t help The Washington Post to become a more relevant, viable and profitable company.  Newspapers are a dying business, and Bezos could not change that fact.

Mr. Bezos focused on trends, and what was needed to make The Washington Post grow.  Media is under change, and that change is being created by technology.  Streaming content, live content, user generated content, 24×7 content posting (vs. deadlines,) user response tracking, readers interactivity, social media connectivity, mobile access and mobile content — these are the trends impacting media today.  So that was where he had leadership focus.  The Washington Post had to transition from a “newspaper” company to a “media and technology company.”

So Mr. Bezos pushed for hiring more engineers – a lot more engineers – to build apps and tools for readers to interact with the company.  And the use of modern media tools like headline testing.  As a result, in October, 2015 The Washington Post had more unique web visitors than the vaunted New York Times.  And its lead is growing.  And while other newspapers are cutting staff, or going out of business, the Post is adding writers, editors and engineers. In a declining newspaper market The Washington Post is growing because it is using trends to transform itself into a company readers (and advertisers) value.

CEO Lampert could have chosen to transform Sears Holdings.  But he did not.  He became a very, very active “hands on” manager.  He micro-managed costs, with no sense of important trends in retail.  He kept trying to take cash out, when he needed to invest in transformation.  He should have sold the real estate very early, sensing that retail was moving on-line.  He should have sold outdated brands under intense competitive pressure, such as Kenmore, to a segment supplier like Best Buy.  He then should have invested that money in technology.  Sears should have been a leader in shopping apps, supplier storefronts, and direct-to-customer distribution.  Focused entirely on defending Sears’ core, Lampert missed the market shift and destroyed all the value which initially existed in the great retail merger he created.

Impact?

Every company must understand critical trends, and how they will apply to their business.  Nobody can hope to succeed by just protecting the core business, as it can be made obsolete very, very quickly.  And nobody can hope to change a trend.  It is more important than ever that organizations spend far less time focused on what they did, and spend a lot more time thinking about what they need to do next.  Planning needs to shift from deep numerical analysis of the past, and a lot more in-depth discussion about technology trends and how they will impact their business in the next 1, 3 and 5 years.

Sears Holdings was a 13 year ride.  Investor hope that Lampert could cut costs enough to make Sears and KMart profitable again drove the stock very high.  But the reality that this strategy was impossible finally drove the value lower than when the journey started.  The debacle has ruined 2 companies, thousands of employees’ careers, many shopping mall operators, many suppliers, many communities, and since 2007 thousands of investor’s gains. Four years up, then 9 years down. It happened a lot faster than anyone would have imagined in 2003 or 2004.  But it did.

And it could happen to you.  Invert your strategic planning time.  Spend 80% on trends and scenario planning, and 20% on historical analysis.  It might save your business.

Why Everyone Knows TV is Dying, Yet Marketing Leaders Over-spend on TV

Why Everyone Knows TV is Dying, Yet Marketing Leaders Over-spend on TV

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.

screen shot 2013-01-31 at 10.42.21 am

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.

Herding Cats – 4 Leadership Lessons from Top Publicist Jeff Ballard

Herding Cats – 4 Leadership Lessons from Top Publicist Jeff Ballard

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"

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.

 

And the Winner Is – Netflix!!

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:

  1. 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.
  2. 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:

  1. 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.
  2. 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!!
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Don’t Buy Yahoo – At Least Not Yet

With great public fanfare Yahoo hired a Google executive as CEO this week. 

The good news is that by all accounts Ms. Marissa Mayer is very hard working, very smart and deeply knowledgeable about all things internet.  Ms. Mayer also was extremely successful at Google, which is a powerful recommendation for her skills.  This has pleased a lot of people.  Some have practically gushed with excitement, and have already determined this is a pivotal event destined to save Yahoo.

But, before we get carried away with ourselves, there are plenty of sound reasons to remain skeptical.  Check out this chart, and I concur completely with originator Jay Yarow of Business Insider – the #1 problem at Yahoo is revenue growth:

Yahoo revenue growth 7-2012
Source:  BusinessInsider.com reproduced with permission of Jay Yarow

Let's not forget, this problematic slide occurred under the last person who had great tech industry credentials, deep experience and a ton of smarts; Carol Bartz.  She was the last Yahoo CEO who was brought in with great fanfare and expectations of better things after being the wildly successful CEO of AutoCad.  Only things didn't go so well and she was unceremoniously fired amidst much acrimony.

So, like they say on financial documents, past performance is not necessarily an indicator of future performance.

What Yahoo needs is to become relevant again.  It has lost the competition in search, and search ads, to Google.  It is not really competitive in banner ads with leader Facebook, and strong competitor Google.  It is no longer leads in image sharing which has gone to Pinterest.  It has no game in local coupons and marketing which is being driven by GroupOn and Yelp.  For a company that pioneered the internet, and once led in so many ways, Yahoo has lost relevancy as new entrants have clobbered it on all fronts. 

Because it has fallen so far behind, it is ridiculous to think Yahoo will catch up and surpass the industry leaders in existing markets.  No CEO, regarless of their historical success and skills, can pull off that trick.  The only hope for Yahoo is to find entirely new markets where it can once again pioneer new solutions that do not go head-to-head with existing leaders.  Yahoo must meet emerging, unmet needs in new ways with new, innovative solutions that it can ride to success.  Like the turn to mobile that saved the nearly dead Mac-centric Apple in 2000.  Or the change to services from hardware that saved IBM in the 1990s.

Ms. Mayer's entire working career was at Google, so it is worth looking into Google's experience to see if that gives us indications of what Ms. Mayer may do.

Unfortunately, Google has been really weak at implementing new solutions which create high revenue, new markets.  Google has been a wild success at search, its first product, which still generates 90% of the company's revenue. 

  • Android is a very important mobile operating system.  But unfortunately giving away the product has done nothing to help sales and profits at Google.  Yahoo certainly cannot afford to develop something so sophisticated and give it away.
  • To try turning around the Android sales and profits Google bought market laggard Motorola Mobility for $12.5B.  With a total market cap of only $19.2B Yahoo is in no position to attempt buying its way out of trouble.
  • Chrome is a great product that has selectively won several head-to-head battles with other application environments.  However, again, it has not created meaningful revenues.  Despite a big investment.
  • Google+ has its advocates, but it was at least 3 years late to market allowing Facebook to develop a tremendous lead.  So far the product is still far behind in its gladiator battle with FB, and produces little revenue despite the enormous development and launch costs – which are still draining resources from Google.
  • Google has invested in an exciting, self-driving automobile.  But nobody knows when, or if, it will be sold.  So far, money spent and no plan for a return.
  • Google glasses are cool.  But the revenue model?  Launch date?  Manufacturing and distribution partners for commercialization?
  • Google innovated a number of exciting potential product markets, but because it failed at market implementation eventually it simply killed them.  Remember Wave?  Powermeter? Picnik? Google Checkout?  Google answers? Google Buzz? Fast Flip? Google Lively? Squared? 

If ever a company proved that there is a difference between innovating new products and launching successfully to create new markets  it has to be Google.

So is Yahoo destined to fail?  No.  As previously mentioned, Apple and IBM both registered incredibly successful turnarounds.  Bright people with flexible minds and leadership skills can do incredible things.  But it will be up to Ms. Mayer to actually shed some of that Google history – fast.

At Google Ms. Mayer was employee #20 on a veritable rocket ship.   The challenge at Google was to keep being better and better at search, and ads associated with search.  And developing products, like GMail, that continued to tie people to Google search.  It was hard work, but it was all about making Google better at what it had always done, executing sustaining innovations to keep Google ahead in a rapidly growing marketplace.

Yahoo is NOT Google, and has a very different set of needs.  

Yahoo is in far worse shape now than when Ms. Bartz came in as the technical wonderkind to turn it around last time. Ms. Mayer takes the reigns of a company going in the wrong direction (losing revenues) with fewer people, fewer resources, weaker market position on its primary products and a weakening brand.   Hopefully she's as smart as many people say she is and acts quickly to find those new markets with products fulfilling unmet needs.  Or she's likely to end up turning out the lights at the company where Ms. Bartz dimmed them significantly.