The Ever Adaptable Netflix

The Ever Adaptable Netflix

Netflix Redefines The Pivot

Last week Netflix announced it was going to enter gaming . Interestingly, the analyst reaction was, at best, mixed. Most didn’t think it was a great idea. My favorite is this quote in AdAge came from a pair of Bernstein analysts.

“Bernstein analysts Todd Juenger and Gini Zhang said in a note that they were “tepid” about Netflix getting into gaming, partly because it would mean a lesser focus on the core business. They worry about creating a distraction.”

These untalented analysts went on to say:
“It’s hard not to imagine that if Netflix were to launch its own video games, the majority of the company’s energy would be focused on the success of that new, different, exciting thing (even among employees who aren’t involved in it),” according to the note. It’s also unclear how the company can capitalize on the video-game content without raising prices—and potentially turning away some users unwilling to pay extra, they said.”

A History of Pivoting to Meet Customer Needs

Wow, I’ve heard that before. Remember how Netflix started? Back when we all went to Blockbuster or another video store to rent a tape or dvd overnight, Netflix offered to send them to our house. And let us keep them as long as we wanted. This convenience was so powerful Netflix drove Blockbuster, Family Video and all other traditional video rental stores bankrupt.

After this big win analysts thought that Netflix should take on Amazon in general merchandise e-commerce. After all, Netflix was the largest customer of UPS, USPS and Fedex at the time. Most analysts thought Netflix had the infrastructure to ship things, so they wanted to build on that infrastructure. But Netflix didn’t to that at all. Keeping its eyes on its Value Proposition of “Delivering Entertainment” Netflix instead went headlong into video streaming. And the stock tumbled dramatically as analysts said streaming wasn’t the “core” of Netflix. Netflix wasn’t a tech company, or a telecom or cable company and streaming would be a huge distraction for people lacking proper skills. Netflix’ Value Delivery System was dominated by logistics expertise, and the analysts were focused on milking more out of the Value Delivery System.

Of course Netflix knew its value was in keeping customers happy, not milking its invested assets. Netflix’ “core” was in knowing entertainment, so it had to develop the skills in streaming, or its customers would drift away. Further, Netflix knew it had nowhere near the savvy of Amazon for general merchandise marketing and sales. If it followed Amazon it would fritter away its Value Proposition, and probably never make any money chasing Amazon by trying to devote more energy to its logistics Value Delivery System.

Of course, Netflix was right. Leadership jettisoned the physical distribution Value Delivery System and built a new one around streaming technology. Just as the Bernstein analysts feared, Netflix had to raise prices. Which it did on physical distribution in order to raise the money to invest in streaming, which turned out to be the shot allowing Netflix to dominate globally, not just in the USA. It was enormous win for gaining customers, selling more stuff, and making more money.

About 5 years ago, Netflix realized it yet again had to change its Value Delivery System if it was to maintain its customer Value Proposition. So it scaled back investing in streaming, as that technology was becoming available to everyone. And it invested heavily in content production. Even though it had long distributed other people’s content, Netflix saw that to be a leader in “Delivering Entertainment” it had to create its own. So the money was shifted into making “House of Cards,” which was a huge hit, and “Orange is the New Black.” Now Netflix is the most prolific video content creator in North America. So much good content Netflix has jeopardized the future of TV networks, major movie studios and even entire theatre chains.

Where once the big employment center, and resource hog, in Netflix was logistics, Netflix leadership pivoted its Value Delivery System into streaming technology. Then it pivoted again into content creation. And now, as gaming has become “the next big thing” Netflix is once again pivoting its resources — into fast growing gaming.

Given this is the third pivot, and 4th Value Delivery System, in Netflix, would you bet against CEO Reed Hastings and his leadership team? The negative analysts are as dead wrong now as they were before. Netflix has demonstrated a keen understanding of their Value Proposition, and demonstrated the skill set to adapt their Value Delivery System to meeting emerging customer needs. I believe it is almost a certainty Netflix will find its way in on-line gaming as the trend keeps growing exponentially. And like all the other pivots, they’ll attract even more customers, and sell more product, and make more money.

Are you adaptable to new Value Delivery Systems as technology makes them available?

Do you clearly know your Value Proposition, and are you focused on it — or are you focused on running your Value Delivery System. Are you trying to maximize your old business, or are you seeing how emerging trends are creating new opportunities to grow by entering new businesses, with new Value Delivery Systems? Netflix has demonstrated how to grow very large, very fast. Are your eyes open to Trends and Market Shifts – and are you adaptable to take advantage of emerging market needs? Now is a good time to learn from Netflix.

My calls on Netflix have historically been quite good. Check out these links to previous articles:
How Netflix became the King of Strategic Pivots, 4/2018
Predicting Netflix Would Dominate Entertainment Content, 4/2016
Explaining Why and How Netflix content creation would be good for investors, 3/2015
Explaining why investors should buy Netflix stock when it crashed after announcing its move into streaming, 10/2011
Explaining why you should buy Netflix, predicting it would be the next Apple or Google, 11/2010

Netflix ended last week at $530/share. Had you bought it when I recommended in 11/2010 the stock was $25. You would have had a 25X gain. Had you added to your position in October, 2011 the stock was $16.75. You would have a gain of 31.6X. Had you added in 3/2015 when I recommended higher valuation for investors from content you would have bought at $62, for a gain of 8.5X in 6 years.


Don’t Miss Adam’s Recent Podcasts!

Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners.  We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business.  Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com

Give us a call or send an email.  Adam@sparkpartners.com 847-726-8465.

What Radio Flyer and Harley-Davidson Have in Common

What Radio Flyer and Harley-Davidson Have in Common

The Slow Decline of Two Famous Brands

Demographics have been causing the slow death of 2 very famous brands. Radio Flyer and Harley-Davidson. Now they are reacting, and maybe it won’t be too little too late for them. Here’s the story and a small dose of innovation theory for you to implement in your business.

Radio Flyer for 100 years has been famous for its little red wagons. Since before the Great Depression, children have enjoyed these wagons (and scooters, etc.) for recreation. But family formation has fallen precipitously the last decade, and the birth rate has fallen even faster. Further, lots of competitors have entered the market for small pull wagons and scooters. The net impact is fewer babies, and a big drop in demand for the traditional metal wagons. For a company manufacturing in Chicago, it looked like another slow slide into irrelevancy and failure.

But now, Radio Flyer has announced its new e-bike and e-scooter products. This opens the door to an entirely new market and new customers. People of all ages have started purchasing e-bikes. They ride for pleasure, to run errands and even commuting. In some cities, electric scooter ride sharing rentals have soared faster than bicycle rentals. Sales have skyrocketed. Seeing the underlying trend in demographics, and the changing consumer behavior Radio Flyer is entering the market with new products – priced squarely in the market sweet spot – which just might make the company relevant again.

An even older company is Harley-Davidson. For years, Harley has dominated the market for large engine cruiser style motorcycles. In the 1970s and 1980s, this served the company well as motorcycle sales grew and customers would up-size to Harley bikes from smaller Japanese manufacturers. But the brand image wore old a long time ago. Images of “Hells Angels”, “Easy Rider” and accountants turned HOG (for Harley Owners Group) were not attractive to younger buyers. The average age of Harley buyers kept rising, until now it is almost 60 years old! The reality is that Harley’s market simply started dying off, aging out of buying new motorcycles (or any motorcycle for that matter.) And younger buyers were far less interested in the old-style cruiser in favor of the smaller sized, easier handling and mostly faster sport bikes made in Japan.

For years Harley-Davidson ignored the demographic trends and the impact on its business. Harley made an effort to update its product, and image, introducing the V-Rod with a Porsche manufactured engine. But dealers didn’t like it, and Harley never put in the promotion to bring in the new, younger rider the bike was designed to attract. Now, Harley-Davidson has launched its own e-bike, called the Serial 1. At $5,000 it’s a top-priced e-bike, I guess aligned with the company reputation for premium pricing. But the Serial 1 has garnered good reviews, and like the Radio Flyer e-bike it gives Harley a new technology and a new market with new customers. And most important, a chance to slow its slide into irrelevancy.

 

Will these products turn these companies around?

It’s hard to say. They aren’t creating a new market like Netflix did in streaming, or Apple did with apps on iPhones. They aren’t early to market. One could say they are a late entry into a crowded marketplace. And neither appear to be introducing any new technology, or enhanced functionality not already available. And the brands are outdated, loaded with nostalgia – which might be good, or bad. But at least they are reacting to trends.

Innovation Theory in Practice

Ansoff "L" Innovation stepsBoth Radio Flyer and Harley-Davidson have responded to trends by introducing electric personal transportation products. Both also have loyal core customer segments and strong brand awareness in non-customer segments. The new products allow both companies to launch to existing customers which is the lowest risk choice because the segments are well-known. From there, the brands can expand to new customer segments via word-of-mouth, visibility and ad campaigns. This follows the Ansoff matrix from Current Market/New Product to New Market/New Product.

The second issue is that the market for electric personal transportation is past Early Adopters and into the Growth stage which is when new brands jump in and the market starts to fragment. There is plenty of market share for both Radio Flyer and Harley-Davidson to become established. One key question is- Can these brands offer the products and brand desire to make the jump to segments of new customers?

Are the Brands Structured to Succeed?

To succeed, they must COMMIT resources and focus to these new markets, and create new developments. I wish they would have launched with White Space teams that had permission to develop a new brand image, new distribution, new ad campaigns – an entirely new approach designed to seek out market leadership. Harley-Davidson did create a version of a “skunkworks” with the spinoff of Serial 1, LLC. For now the PR sounds more like they are doing it “on the sly” as something they aren’t really sure will succeed. So it’s really up to senior leadership now. They either commit to a new future allowing product teams to build on the e-bike opportunity to develop new technology, new customers and new markets – or they can slip back into the slide downward. We’ll have to wait and see if they can jump the re-invention gap.


Don’t Miss Adam’s Recent Podcasts!

Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners.  We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business.  Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com

Give us a call or send an email.  Adam@sparkpartners.com 847-726-8465.

Hallelujah! Microsoft Cancels Windows 10X

Hallelujah! Microsoft Cancels Windows 10X

Stuck on the Core

This week, to almost no fanfare, a Microsoft Vice President issued a statement saying that Windows 10X (planned for 2019) would not ship in 2021. In fact, it would never ship. The technology enhancements would be integrated into existing Windows, and other products. While this gained little press, it is great news for customers and investors.

CEO Satya Nadella has officially changed the course of Microsoft. Under former CEO Ballmer the behemoth kept pouring money into Windows and Office. While the world was moving from PCs and PC servers to mobile devices and the cloud, Ballmer just kept pouring billions into old products. His slavish insistence on trying to defend & extend an old “core product line,” which every year was losing importance as PC sales slowed, was killing Microsoft — leading me to call Mr. Ballmer the worst CEO in America (my Forbes column that was by far the most read of any I ever penned.) After more than a decade as CEO, Ballmer had spent a lot of Microsoft money on new versions of its ancient product and bad acquisitions like Skype and Nokia, but he entirely missed the market shift in his customer base. In my blog post, “Microsoft, What Next?”, I described the challenges ahead to pull Microsoft out of the Growth Stall.

This chart shows just how much Microsoft has changed since Nadella took over. During Ballmer’s 13+ year leadership Microsoft’s valuation barely budged. (From left to small blue box.) But, Nadella rapidly shifted investments from Windows and Office to software as a service and cloud computing. (Graph rapidly increases.) That radical redirection enlivened both sales and earnings – and the company’s future growth prospects. In short, where the company had been locked-in to defending & extending its past, Nadella redirected the company onto trends. By doing so, he improved sales per/share 85%, the price/sales ratio from 3.3x to 9.4x, and the PEG ratio from 1.4 to 2.5. The company’s “trend value” (market cap increase over assets due to aligning with trends) since Nadella took charge has grown from $172 billion to a staggering $1.53 trillion!!! Now that is wealth creation!!!

In the years leading up to Ballmer’s firing I was a very loud critic of Microsoft. In multiple Forbes columns, (republished as blogs on my web site) I pushed for his ouster. But even more importantly I gave the company little hope of long term viability. By over-investing in outdated products it seemed most likely Microsoft would go the way of Hostess Baking, Sears, DEC and Sun Microsystems – irrelevant leading to failure. I rabidly recommended not owning Microsoft.

microsoft stock results table

Microsoft Stock
2014-2021

The Impossible Just Takes a little Longer…

But Nadella achieved the improbable. Much like Jobs when he retook the reigns at Apple, Nadella quit looking (and investing) in the rear view mirror. Like Jobs, he dropped investing in PC’s. Instead he focused on the future, and where Jobs invested in mobility, Nadella has invested in the cloud. Very few companies make this kind of radical shift in resourcing projects, even when it is the obviously right thing to do. And Nadella deserves the credit for making this radical change in Microsoft, saving the company from near-oblivion while creating a very viable, valuable company in a short time. Where once I saw a company heading for infamy, now Microsoft shows all signs of leadership toward the next technology wave and longevity. Quietly saying the company has no plans for a new Windows version, which nobody cares about anyway, is a tremendous demonstration of looking forward rather than backward.

Jump the Re-Invention Gap

Do you have the insight to know when you’re company is over-investing in past solutions as markets shift? Are you like Ballmer, always making the next version of what once made you great, or are you like CEO Nadella – ready to unload your past focus in order to seek future growth? Are you letting market trends guide your investing and solution development, allowing you to de-invest in outdated technologies and products? Like Reed Hastings at Netflix, do you see the need to pivot?  Netflix changed from an outdated business model (shipping DVDs and tapes) to a new model (streaming) in order to keep your company viable, and an industry leader. You must be if you want to thrive in the rapidly changing competitive marketplace of the 2020’s.


Don’t Miss Adam’s Recent Podcasts!

Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners.  We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business.  Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com

Give us a call or send an email.  Adam@sparkpartners.com 847-726-8465.

Verizon’s AOL/Yahoo Debacle – Think You Can Fix That?

Verizon’s AOL/Yahoo Debacle – Think You Can Fix That?

Do you have any idea how powerful AOL and Yahoo once were, and how much they were once worth? Do you know how much shareholder value has been destroyed in these 2 companies in just 20 years? $221 Billion of destroyed wealth.

AOL pioneered the web as we know it today. Long before wireless, or broadband, there was “dial up service.” For young readers, that meant using a physical modem to connect your computer to a land-line telephone in order to literally dial up a connection to an internet service provider. AOL pioneered using the internet, and was the #1 connection with almost the entire marketplace. The phrase that made AOL famous back then was when you connected to AOL and it gave us the now iconic “You’ve got mail.” After connecting America, in 2000 AOL merged with Time Warner media in a deal valuing AOL at $111B.

Yahoo pioneered giving internet users news. It accumulated news from around the world on Sports, Economy and many other topics, making the news available to readers for free because it sold ads to pay the bills. In 2000 a publicly traded Yahoo was valued at $125B.

So in 2000, amidst a very extended NASDAQ internet hype, AOL and Yahoo were valued at $226B.

Image Source

This week Verizon agreed to sell the two companies to a private equity firm for $5B. That’s a loss in value of $221B in 21 years.

How does a loss of this magnitude happen? A lot of focusing on tactics, ignoring market trends and failing to adapt the company strategy to meet changing competitive dynamics. Broadband and wireless eventually made dial-up irrelevant. And despite buying some media company to try and add new content to AOL, it lost all meaning. Time Warner spun it out to the public at a value of $3.5B in 2009.

Then, Verizon thought it could build a proprietary content company to get more Verizon customers so it bought AOL in 2015 for $4.4B. Only, nobody needed another content provider by then. Google served up general content just fine, Facebook gave us content we looked at frequently, and specialized content sites like Finance (Marketwatch) and Sports (ESPN) made it impossible that late in the game to launch a general purpose content accumulator and reposter. It was a strategy for 2005, not 2015. Meanwhile, Yahoo made one tactical decision after another to shore up its old model that didn’t work. Google became vastly better at search, and vastly better at delivering content. Tactical oriented CEOs Carol Bartz and Marissa Mayer had no strategy to meet emerging needs of the 2010 decade and beyond – leading Yahoo into complete irrelevancy.

Undeterred, the Verizon owned AOL bought Yahoo in 2017 for $4.5B. After all, it seemed cheap compared to its once $125B value – right? The idea was to merge the two companies, create “cost synergies” and “scale” in users to sell more advertising. Only, neither platform had enough original content to stop the user bleed to other sites. Netflix and Google’s YouTube took everyone who wanted new content away, and there was nothing left for AOL/Yahoo to deliver. It became the internal combustion engine repair shop in a world full of EVs

Now, after spending $9.9B on the entities plus much more in acquisitions, Verizon is selling both entities to Apollo Global Management private equity for $5B – a loss of $4.4B. And Apollo thinks this is a good deal because “a high tide raises all boats” and it will win merely because the world is increasingly using the internet. Really? More people are using the web, and more often, but they’ve already shown not via AOL nor Yahoo. Facebook, Instagram, Google, Pinterest, Twitter, and a raft of other sites are gaining the traffic. What was once irrelevant remains irrelevant.

It is crucial to understand why these to GIANTS of the internet are now part of history’s dustbin. While they pioneered the market, gaining huge revenues, share and valuation, they did NOT keep their eyes on disruptive innovators who could change the market they pioneered. Broadband killed dial-up, and because AOL moved too late it died. Google overtook search, delivering more content faster and better, and Yahoo simply waited too long to react. Not unlike how Research in Motion (Blackberry) failed to see the “app wave” in mobile coming and lost its enormous lead in mobile phones to Apple and Samsung. All thought their strength in pioneering was enough – and failed to keep their eyes on external trends and new market shifts that would change competition.

I wrote a raft of columns about the mistakes made by these company CEOs from 2009 through 2017 – constantly telling readers not to buy the stocks (just search the blogs my website adamhartung.com for AOL or Yahoo.) It is extremely rare for a corporation locked into its business model and cost cutting to adjust to a rapidly shifting market. When a company does so – like Jobs turned around Apple and Nadella at Microsoft – it is the exception to be well applauded. But that is very, very rare.

And this is NOT what PE companies do. They aren’t visionary investors who put in lots of money to change companies. They cut costs, streamline operations, and add debt to get their investment back. Apollo is no different. It has no vision of the internet future that will slow Facebook, Apple, Netflix, Alphabet/Google or even Amazon. It has purchased two irrelevant brands with outdated business models, no new technology, no new market approaches and no new insight to future unmet needs. There is no doubt Apollo will not turn these around. Apollo will unload this newest Yahoo! over-leveraged to a public debt market dominated by pension funds and it will soon enough file bankruptcy, finishing the coffin.

Do you think you could turn these around? First, are you ready to turn around your own business? Are you focused on how market shifts, happening today, will change your market? Are you seeing trends, and changing your business model and technology to adjust? Are you building a business around future scenarios you’ve created to compete in 2025 and beyond with different competitors offering different solutions? Or are you relying on past strengths to carry you through the future? If you’re planning with your eyes firmly in the rear view mirror I highly recommend you learn the lesson from AOL and Yahoo – that approach will not work.


Do you know your Value Proposition? Can you clearly state that Value Proposition without any linkage to your Value Delivery System? If not, you better get on that pretty fast. Otherwise, you’re very likely to end up like encyclopedias and newspaper companies. Or you’ll develop a neat technology that’s the next Segway. It’s always know your customer and their needs first, then create the solution. Don’t be a solution looking for an application. Hopefully Uber and Aurora will both now start heading in the right directions.

Don’t Miss Adam’s Recent Podcasts!

Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners.  We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.

TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business.  Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com

Give us a call or send an email.  Adam@sparkpartners.com 847-726-8465.

The Remarkable, Predictable Decline of TV

The Remarkable, Predictable Decline of TV

Seven years ago (12 December, 2012) I said it was “The Day TV Died.” There were a LOT of skeptics. At the time, TV was by far still the dominant medium. But the trends were absolutely clear – ad revenues were quickly moving toward on-line opportunities. Print was already well into the grave, and radio was sputtering along with no growth at all. Eyeball momentum had shifted on-line, and thus ads moved on-line, and it was obvious that programming dollars would soon follow – meaning that TV programming was already in Stage 4 termination.

Trends and Tech drove Netflix growth

Meanwhile, Netflix and its brethren were poised to have a fabulous, furious growth. These same trends led me to a full-throated pitch to buy Netflix nine years ago (Nov. 2010.) After Netflix made the decision to raise prices for DVD distribution in order to push people toward streaming the stock crashed, but trends indicated that customer preferences would lead Netflix to be the content winner so despite widespread despair, I called for people to buy the stock in Oct. 2011. In Jan. 2012, I made Netflix one of my top 4 picks for the year. So by Jan. 2013, I was making it clear that TV was has-been, and Netflix was the company to own.

Now, Statista has produced the numbers showing that in 2019 internet media consumption exceeded TV consumption – for the first time ever. And this trend will not stop. It was wholly predictable years ago – and the trends all say this will only accelerate. Where once the competition for entertainment was Netflix, now there is Amazon Prime, Disney+, Comcast Peacock, AT&T HBO Max and Apple TV+. The traditional networks simply don’t have a chance.

Impact of Trends

These trends are having an enormous impact on how we behave, how advertisers behave, what technology we buy, what entertainment we watch, how we use other technology like social media, how we absorb news — and more. So the question is, did you see the trends 7,8,9 years ago? Have you adjusted your strategy? Are you sure where trends are headed, and are you prepared for the future? Will you be a winner as the world changes – in a pretty predictable way – or will you lose out and say “you know, way back when……”