by Adam Hartung | Sep 7, 2017 | Defend & Extend, Leadership
Months ago Trian’s Nelson Peltz began buying Procter & Gamble (P&G) shares. He invested about $3.5 billion, making Trian’s ownership 1.5%. Since then he has been lobbying, unsuccessfully, for a seat on P&G’s board of directors. He has said that although P&G already has 10 outside directors on its 11 member board, adding him would make a tremendous difference increasing P&G’s market valuation. P&G is now the largest company ever to engage in a proxy battle between the existing board and an outside investor.
P&G is dead set against adding Peltz, saying he would disrupt the board, and the company, in negative ways. CNBC.com reported Peltz’ claims the company is spending $100 million on the proxy fight to keep him off the board. P&G’s proxy statement puts that sum at $35 million. Either number indicates P&G is spending a lot of money to stop the appointment of Peltz.
Nelson Peltz, Founder Trian Partners, LLC
The company defended itself, saying leadership has been growing EPS (earnings per share,) making productivity improvements, growing sales organically at 2%/year and returning huge value to shareholders. They accuse Peltz of simply planning a split of the company into 3 parts so each can go public on its own – adding little value to shareholders while damaging the company’s ability to operate.
Unfortunately, P&G’s leadership has pretty much set itself up for this battle. And shareholders may have good reason to add Peltz to the board in hopes of additional change.
P&G’s financial performance has been poor
Firstly, in the last 10 years the value of P&G has risen about 44%. But the S&P 500 has grown by 154.5%. Shareholders would have done better owning the average than owning P&G. Claims about how well P&G have done since the CEO arrived 2 years ago overlook the fact that just prior to his arrival, in November, 2014 P&G shares traded at $90-$93.85/share, which is just about where they are now. So all that’s happened is a recovery to where things were previously, not a great success. Shareholders have a right to be frustrated.
EPS has risen, but that has everything to do with share buybacks rather than earnings growth. EPS has risen about 11%. But since 2nd quarter of 2007 P&G has spent ~$61billion on share repurchases, reducing the number of shares from 3.32 billion to 2.74 billion, or 17.5%. Rather than growing earnings, leadership has been making the capital structure smaller – and thus EPS has risen while earnings have not. This is actually a program that goes all the way back to 1995, which indicates a long-term approach of focusing on EPS, which are manipulated, rather than earnings.
P&G has favored divestitures and share repurchases over innovation and acquisitions for growth
Meanwhile, P&G’s buyback program has been financed by a dramatic divestiture program, selling off very large businesses to raise cash. Over the last decade major sales included:
2009 – selling the P&G pharma business
2012 – selling the water filtration business including Pur
2012 – selling Pringles (along with several other iconic brands)
2014 – selling the dog food business
2016 – selling the Duracell battery business
2016 – selling the beauty brand business
Management tried in its response to say that innovation was just fine at P&G. But what it cited were line extensions like Tide PODs, GAIN Flings, Pampers Pants, and Oral B power toothbrush. None of these are great new innovations launching significant sales. None are new product platforms for high growth. Rather they are typical sustaining innovations applied to brands that are long in the tooth.
This is typical of the long-term lack of valuable innovation at P&G. Do you recall in 2009 when the company lauded its development of the “P&G Public Toilet Database App?” Not exactly on the top 20 iTunes list. Or do you remember in 2014 when P&G launched its “Basic” line of products, where it literally sold a less-good quality product hoping to attract a brand-conscious but quality uncaring targeted niche? Peltz is making a good point, that leadership at P&G really has forgotten what good, long-term profit producing innovation is, while succumbing to the strategy of selling major business units (reducing revenue) then using the money to buy back shares rather than investing in future growth.
P&G has not shown it understands how trends are quickly changing its business
Meanwhile, the consumer goods industry is changing dramatically, and it is not clear that P&G’s leadership is really preparing for future changes. P&G still relies heavily on television advertising to sell its products. But that approach had stopped generating profitable growth as far back as 2010. Back then Colgate was holding its market share, and growing revenues, on all its brands that compete with P&G while spending 25% less, and often much less, on advertising.
P&G is still stuck using marketing strategies that have been outdated for almost a decade. Comcast lost 90,000 subscribers in Q2, and the stock lost 7% today when Comcast management alerted investors it expects to lose 150,000 more in Q3. And while viewership is declining, ad pricing is going up, making TV advertising a less effective and more expensive marketing tactic for consumer goods. As P&G brands have fallen further behind competitors in Instagram followers, and lack good social media programs like Wendy’s, Peltz has proposed a substantial increase in digitally savvy marketers.
Simultaneously, distribution is changing dramatically. Once P&G could rely on its product dominance to dictate space usage in grocery stores and discounters. But the rise of e-commerce has dramatically affected these historical distribution channels. Today the fastest growing grocer is Aldi, which eschews brands like P&G’s in favor of its own private label. And after stunting the growth of discounters like WalMart, the leading e-commerce company, Amazon.com, has now purchased Whole Foods. This is leading everyone to expect greater growth in on-line grocery shopping and additional at-home delivery, which undercuts the former strength P&G had in traditional brick-and-mortar stores with warehouse delivery models.
Management bragged of its $3 billion in e-commerce sales, but that is a drop in the bucket. Is P&G ready to compete for sales in future markets where social media is more important than advertising? Where mobile ads have more power than print, TV, radio and traditional internet banners? Where social media groups drive more consumption behavior than company-sponsored social media pages with coupons and use recommendations? Will P&G dominate product volume when it has to rely on Amazon.com and other sites to sell and deliver its products? If people move to daily home deliveries, and less stock-up purchasing what will happen to P&G’s former brand advantage via high numbers of SKUs (stock keeping units) and large packaging options?
This will be an interesting proxy battle. There is no doubt Peltz wants to shake up the board’s behavior, compensation plans, hiring programs, targets and many of the ways management runs the company. Simultaneously, the P&G board believes it is moving in the right direction. Large shareholders are conservative, and don’t like to create problems (P&G’s largest shareholders are Vanguard, Blackrock, State Street, BofA, Capital World, Trian, Northern Trust – which combined control 24% of P&G stock.)
But this isn’t about a complete change in the board. It’s just a vote to add one additional member who is not happy with things the way they are. Will these large shareholders see a need for someone to shake things up, or will they accept current leadership’s claims that things are on the right track?
It will be interesting to watch, because Peltz isn’t without some objective concerns about P&G’s future, given its performance the last decade and the amount of change facing the industry.
by Adam Hartung | Nov 19, 2014 | Current Affairs, Leadership
Warren Buffett is the famous head of Berkshire Hathaway. Famous because he has made himself a billionaire several times over, and made his investors excellent returns.
Berkshire Hathaway doesn’t really make anything. Rather, it owns companies that make things, or supply services. So when you buy a share of BRK you are actually buying a piece of the companies it owns, and a piece of the over $116B it invests in equities of other public companies from the cash flow of its owned entities.
Over the last decade the value of a share of BRK has increased 149%. Pretty darn good, considering the DJIA (Dow Jones Industrial Average) has only increased 64%, and the S&P 500 69%, in the same time period. So for long-term investors, putting your money with Mr. Buffett would have done more than twice as good as buying one of these leading indices.
For this reason, many investors recommend looking at what Berkshire Hathaway buys in its equity portfolio, and then buying those same stocks. On the face of it, seems smart. “Invest like Warren Buffet” one might say.
But that would be a bad idea. Berkshire Hathaway’s value has little to do with the publicly traded equities it owns. In fact, those holdings may well be a damper on BRKs valuation.
Of that giant portfolio, 4 equities make up 58% of the total holdings. Let’s look at how those have done the last decade:
- American Express (AXP,) about 10% of the portfolio, is up 83%
- Coke (KO,) about 15% of the portfolio, is up 109%
- IBM (IBM,) about 10% of the portfolio, is up 64%
- Wells Fargo (WFC,) nearly 25% of the portfolio) is up 71%
Note – not one of these stocks is up anywhere near as much as Berkshire Hathaway. There is no mathematical formula which one can use to multiply the gains on these stocks and interpret that into an overall value increase of 149%!
There are several other large, well known companies in the Berkshire Hathaway portfolio which have large (millions of shares being held) but lesser percentage positions:
- ExxonMobil (XOM) up 86%
- General Electric (GE) down <26%>
- Proctor & Gamble (PG) up 61%
- USBancorp (USB) up 40%
- USG (USG) down <30%>
- UPS up 24%
- Verizon up 38%
- Walmart up 61%
This is not to say that Berkshire Hathaway has owned all these stocks for 10 years. And, this is not all the portfolio. But it is well known that Mr. Buffett is a long-term investor who eschews short-term trading. And, these are at least randomly representative of the portfolio holdings. So by buying and selling shares at different times, and using various trading strategies, BRK’s returns could be somewhat better than the performance of these stocks. But, again, there is no arithmetic which exists that can turn the returns on these common stocks into the 149% gain which Berkshire Hathaway has achieved.
Simply put, Berkshire Hathaway makes money by doing things that no individual investor could ever accomplish. The cash flow is so enormous that Mr. Buffett is able to make deals that are not available to you, me or any other investor with less than $1B (or more likely $10B.)
When the banks looked ready to melt down in 2008 GE was in a world of hurt for money to shore up problems in its GE Capital unit. When GE went out to raise $12B via a common stock sale it turned to Mr. Buffett to lead the investment. And he did, taking a $6B position. For being so gracious, in addition to GE shares Berkshire Hathaway was able to buy $3B in preferred shares with a guaranteed dividend of 10%! Additionally, Mr. Buffett was given warrants allowing him to buy up to $3B of GE shares for a fixed price of $22.25 per share regardless of the price at which GE was trading. These are what are called “sweeteners” in the financial trade. They greatly reduce the risk on the common stock purchase, and simultaneously dramatically improve the returns.
These “sweeteners” are not available to us average, ordinary investors. And this is critical to understand. Because if someone thought that Mr. Buffett made all that money by being a good stock picker, that someone would be operating on the wrong assumption. Mr. Buffett is a very good deal maker who gets a lot more when making his investments than we get. He can do that because he can move so much money, so quickly. Faster even than any large bank.
Take, for example, the recent deal for Berkshire Hathaway to acquire the Duracell battery business from P&G. Where most of us (individuals or corporations) would have to fork over the $3B that P&G wanted, Berkshire Hathaway can simply give back P&G shares it has long held. By exchanging those shares for Duracell, Berkshire avoids paying any tax on the stock gains – thus using P&G shares in its portfolio as a currency to buy the battery business with pre-tax dollars rather than the after-tax dollars the rest of us would have to put up. In a nutshell, that saves at least 35%. But, beyond that, the deal also allows P&G to sell Duracell without having to pay tax on the assets from their end of the transaction, saving P&G 35% as well. To make the same deal, any other buyer would have been required to pay a lot more money.
Acquiring Duracell Berkshire gets 100% of another slow-growth but very good cash flow company (like Dairy Queen, Burlington Northern Rail, etc.) and does so at a very favorable price. This deal adds more cash flow to BRK, more assets to BRK, and has nothing to do with whether or not the stocks in its public equity portfolio are outperforming the DJIA or S&P.
This in no way diminishes Berkshire Hathaway, or Mr. Buffett. But it points out that many people have very bad assumptions when it comes to understanding how Mr. Buffett, or rather Berkshire Hathaway, makes money. Berkshire Hathaway is not a mutual fund, and no investor can make a fortune by purchasing common shares in the companies where Mr. Buffett invests.
Berkshire Hathaway is an extremely complicated company, and deep in its core it is an institution that has a tremendous understanding of financial instruments, financial markets, tax laws and risk. It has long owned insurance companies, and its leaders understand actuarial tables as well as how to utilize complex financial instruments and sophisticated tax opportunities to reduce risk, and raise returns, on deals that no one else could make.
By maximizing cash flow from its private holdings the Berkshire Hathaway constantly maintains a very large cash pool (currently some $60B) which it can move very, very quickly to make deals nobody, other than some of the largest private equity pools, could obtain.
The process by which Berkshire Hathaway decides to buy, hold or sell any security is unique to Berkshire Hathaway. The size of its transactions are enormous, and where we as individuals buy shares by the hundreds (the old “round lot,”) Berkshire buys millions. What stocks Berkshire Hathaway chooses to buy, hold or sell has much more to do with the unique situation of Berkshire Hathaway than stock price forecasts for those companies.
It is a myth for an individual investor to think they could invest like Mr. Buffett, and trying to emulate his returns by emulating the Berkshire portfolio is simply unwise.
by Adam Hartung | Oct 15, 2014 | Current Affairs, Defend & Extend, Innovation, Leadership
The Dow Jones Industrial Average (DJIA) is down 400 points today. Down 8% since its high 3 weeks ago, and now showing no gains for the entire year.
Oh my!
There seems little immediate explanation for the fast drop. When major financial news outlets say it is caused by Ebola fears you can be assured those being asked “why” are clutching at straws. They have no clear explanation. This could be nothing more than a 10% correction, a short-term break in the long-term bull which has gone on for a remarkable 3 years.
But, investors are not out of the woods. Will the market continue to even greater highs? Will this Bull market continue for many more months?
There is at least one good reason investors should be concerned.
For the last decade, corporations have been about the biggest buyers of equities. Since 1998 85% of all corporate earnings have gone into share buyback programs. Buybacks do not add value to a company, they merely reduce the number of shares. By reducing the number of outstanding shares, earnings per share (EPS) can go up, even if earnings do not go up. But reducing the denominator the answer increases, even if the numerator does not change – or goes up only slightly. Thus per share earnings have increased, on average, 6.2% quarterly – more than double the revenue increase of only 2.6%. All artificial growth – not a true increase in corporate performance.
In 2014 95% of S&P 500 corporate earnings will go toward buybacks and dividends – in effect increasing investor returns while doing nothing to make the companies better. In the 1st quarter money paid to investors exceeded S&P 500 profits, and likely will do so again in the 3rd quarter. All of which props up stocks in the short-term, but removes cash from the companies. Cash which could be used to invest in growing revenues long-term.
This is not new. In the last decade, cash for buybacks has doubled. Today, 30% of free cash flow goes into stock repurchases, a rate double that of 2002.
Meanwhile investment in plant and equipment has declined from over 50% of cash flow to under 40%. Today the average age of plant and equipment in the USA is 22 years – the oldest it has been since 1956! In an era of almost free money – with interest rates in low single digits and often less than inflation – corporations are taking on debt NOT to invest in growth, but rather to simply pay out more to shareholders in efforts to prop up stock prices. And they’ve done it now for so long – over a decade – that the short-term has become the long-term, and there is precious little invested base from which future revenues and profits can grow.
Leaders for the past several years have failed their investors by not investing cash flow in innovation for long-term growth. Instead of new products creating new markets, the only innovations being funded have been focused solely on defending and extending past product sales. With an inordinate fear of risk, and a complete lack of future vision, what passes for innovation are attempts to sustain the old stuff rather than create something new.
For example, P&G’s leaders gave investors the “Basic” line of products. These were literally less good products, a throwback to earlier quality levels, repackaged and sold at a lower price. The last really “new” product from P&G was the Swiffer mop – and that was back in 1999. Since then we’ve had what seems to be infinite variations of that product, all intended to extend its life. Where’s the new “great thing” that will jump revenues and sustain profits for years into the future?
There are exceptions to this generalization. Of course Facebook is changing media and advertising, while Netflix is redeveloping how we enjoy entertainment. Amazon has us buying on-line instead of in retail stores, and wondering if we’ll someday receive same-day shipping via drones. And Apple has moved us into the world of apps encouraging us to buy smartphones and tablets while dumping land-lines, cell phones and PCs. So there are some serious innovators out there.
But, for long-term investors overall, there is a big reason to worry. This DJIA drop may be merely a “normal 10% correction.” But, equities cannot go up forever on declining cash flow from ancient investments of previous leaders and interest-free debt accumulation. For equities to continue their upward trajectory at some time companies have to launch new products, create new markets and generate sustainable long-term profits. In other than a handful of noteworthy companies, there isn’t much of this kind of investment happening today – or over the last 10-15 years.
Eventually, costs of capital will go up. And cash flow from old investments will go down. If there aren’t real sales growth opportunities there could be declining real profits. Without buybacks to feed the bull, a raging bear could overtake the scene.
Oh my.
by Adam Hartung | Feb 5, 2013 | Current Affairs, Food and Drink, Innovation, Leadership, Sports, Television
Reading reviews of Super Bowl ads I was struck by two observations:
- The reviewers got the value of most ads backwards
- They missed the most important ad of all – on Twitter
Super Bowl ads cost $1M+ to make. Then they cost $2M+ to air. So it is an expensive proposition. This isn't fine art, like a Picasso, with a long shelf life to create a rate of return. These ads need to pay off fast. They need to build the brand with existing and/or new customers to drive sales and make back that money now.
So let's start with one of the best reviewed ads – Chrysler's "God Made a Farmer". Reviewers liked the home-spun approach of using a dead conservative radio commentator voicing over pictures of farmers in pick-ups. Unfortunately, from a rate of return perspective my bet is this ad will end up near the very bottom.
- Firstly, the 50 year trend is to urbanization. In 1900 9 out of 10 Americans had something to do with agriculture. Now it is fewer than 1 in 20. Trucks are used for lots of things, but farming makes up a small percentage. It has been a full generation since most 2nd generation Americans had anything to do with a farm. Showing people using a product in ways that almost nobody uses it, and with a message most of your target market doesn't even recognize, leaves most people confused rather than ready to buy.
- Secondly, first generation Americans are changing the demographics of America quickly. First generation Americans (can I say immigrant?) proved large enough, and powerful enough, to play a spoiler role in Mitt Romney's run for the Presidency. To them, farming in America has no history, appeal or meaning to their lives.
- Thirdly, no one under the age of 35 has any idea who Paul Harvey is. Perhaps Chrysler could have used Bill O'Reilly and achieved its message mission. But as it was, there were two of us +50 people who spent 5 minutes trying to tell the group watching the game at my home who Paul Harvey even was – and why he was being quoted.
A 24 year old boy watching the game with me in suburban Chicago listened to my explanation about Paul Harvey and farming. He drives a Ford F-250 4×4 pick-up. After I finished he looked me square in the eyes and said "Swing, and a miss." And that's what I'd say to Chrysler. Whoever made this ad had more money than market research and common sense.
Simultaneously, reviewers hated GoDaddy.com's "Perfect Match, Bar Rafieli's Big Kiss." This portrayed a very stereotypical engineer enjoying a long kiss with a pretty girl – referring to how the company's products well serve client needs. Reviewers found the ad in bad taste. My bet is this ad will have immediate payback for GoDaddy.com
Have you ever heard of the monstrously successful situation comedy "The Big Bang Theory?" At just about any time you can find this in reruns on at least one, if not more than one, cable channel. The show is so successful that to pull people viewers to its Monday night schedule CBS actually chose to rerun "Big Bang" episodes amidst new episodes of its other programs in January. The show thrives on the tension of male technical professionals seeking to solve the age old question of how a man can appeal to desirable ladies. Politically correct or not, the show is successful because it is a timeless message. Most boys want to be liked by girls.
Today the world of people who have technical, or quasi-technical jobs, is HUGE. GoDaddy's target audience of people buying, and servicing, web domains just happens to be mostly male under-40 men with technical or quasi-technical backgrounds. This little, tasteless demonstration may have upset the high ethics of ad execs (or has "Mad Men" unraveled that myth?) but to its target group this ad was pure gold. And same for GoDaddy.com.
But most importantly, none of these ads will have the payback of 9 words a marketer tweeted when the lights went out at the game. Because it had blown a huge wad of money on a traditional game ad the Oreo brand folks at Mondelez were watching the game with their media agency 360i. Thinking quickly the creatives came up with an idea, and the brand guys approved it – so out went the tweet from Oreo Cookies "No problem. You can still dunk in the dark."
"Booya" as my young friends say. 10,000 retweets and an entire Monday news cycle devoted to the quick thinking folks who posted this tweet. ROI? Given that the incremental cost was zero, pretty darn high. If I was investing, I'd take the tweet over the video. The equivalent of a kick return for a TD.
The world has changed. We now live in a 24×7, real-time, always-on world. We no longer wait for the weekly magazine for analysis, or the daily newspaper for information. Or even the 11:00 television daily recap. We pick up alerts on our mobile devices constantly. Receive highlights from friends on Facebook and Twitter. We want our information NOW. And those who connect to this new way of living for providing us information are not only accepted, but admired by those thriving on the social networks.
This year's Super Bowl social media postings were triple last year's; over 30million. This is the world of immediate feedback. Immediate discussion. And the place were ads need to be immediate as well. Those who understand this, and connect to it, will succeed. Others, who spend too much to make and then distribute ads on traditional media, will not. Just as newspaper ads have lost of their relevance – TV ads are destined for the same conclusion.
The good news is that Mondelez and its Oreos team was ready, and willing, to take advantage. Where were most of the other advertisers? Audi, VW and P&G's Tide also jumped in. But of all those millions spent on once-run ads, these major corporate advertisers – and their extremely highly paid ad agencies – were absent. When the easy money was to be made, they simply weren't there. Off drinking beer and watching the game when they should have been working!
Today we learned Twitter is buying Bluefin to make its information on who is tweeting, about what, in real time even better. This will be helpful for any smart advertiser. And not just the multi-billion dollar giants. The good news is anyone, anywhere in any size company can play in this real-time, on-line social media world. You don't have to be huge, or rich.
Where were you when the lights went out? Were you taking advantage of what we may later call a "once in a lifetime" opportunity?
Where will you be the next time? Are you ready to invest in the new world of social media advertising? Or are you stuck spending too much to come in too late?
by Adam Hartung | Dec 10, 2012 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Television
Remember when almost everyone read a daily newspaper?
Newspaper readership peaked around 2000. Since then printed media has declined, as readers shifted on-line. Magazines have folded, and newspapers have disappeared, quit printing, dramatically cut page numbers and even more dramatically cut staff.
Amazingly, almost no major print publisher prepared for this, even though the trend was becoming clear in the late 1990s.
Newspapers are no longer a viable business. While industry revenue grew for
almost 2 centuries, it collapsed in a mere decade.
Chart Source: BusinessInsider.com
This market shift created clear winners, and losers. On-line news sites like Marketwatch and HuffingtonPost were clear winners. Losers were traditional newspaper companies such as Tribune Corporation, Gannett, McClatchey, Dow Jones and even the New York Times Company. And investors in these companies either saw their values soar, or practically disintegrate.
In 2012 it is equally clear that television is on the brink of a major transition. Fewer people are content to have their entertainment programmed for them when they can program it themselves on-line. Even though the number of television channels has exploded with pervasive cable access, the time spent watching television is not growing. While simultaneously the amount of time people spend looking at mobile internet displays (tablets, smartphones and laptops) is growing at double digit rates.
Chart Source: Silicone Alley Insider Chart of the Day 12/5/12
It would be easy to act like newspaper defenders and pretend that television as we've known it will not change. But that would be, at best, naive. Just look around at broadband access, the use of mobile devices, the convenience of mobile and the number of people that don't even watch traditional TV any more (especially younger people) and the trend is clear. One-way preprogrammed advertising laden television is not a sustainable business.
So, now is the time to prepare. And change your business to align with impending new realities.
Losers, and winners, will be varied – and not entirely obvious. Firstly, a look at those trying to maintain the status quo, and likely to lose the most.
Giant consumer goods and retail companies benefitted from the domination of television. Only huge companies like P&G, Kraft, GM and Target could afford to lay out billions of dollars for television ads to build, and defend, a brand. But what advantage will they have when TV budgets no longer control brand building? They will become extremely vulnerable to more innovative companies that have better products and move on fast lifecycles. Their size, hierarchy and arcane business practices will lead to huge problems. Imagine a raft of new Hostess Brands experiences.
Even as the trends have started changing these companies have continued pumping billions into the traditional TV networks as they spend to defend their brand position. This has driven up the value of companies like CBS, Comcast (owns NBC) and Disney (owns ABC) over the last 3 years substantially. But don't expect that to last forever. Or even a few more years.
Just like newspaper ad spending fell off a cliff when it was clear the eyeballs were no longer there, expect the same for television ad spending. As giant advertisers find the cost of television harder and harder to justify their outlays will eventually take the kind of cliff dive observed in the chart (above) for newspaper advertising. Already some consumer goods and ad agency executives are alluding to the fact that the rate of return on traditional TV is becoming sketchy.
So far, we've seen little at the companies which own TV networks to demonstrate they are prepared for the floor to fall out of their revenue stream. While some have positions in a few internet production and delivery companies, most are clearly still doing their best to defend & extend the old business – just like newspaper owners did. Just as newspapers never found a way to replace the print ad dollars, these television companies look very much like businesses that have no apparent solution for future growth. I would not want my 401K invested in any major network company.
And there will be winners.
For smaller businesses, there has never been a better time to compete. A company as small as Tesla or Fisker can now create a brand on-line at a fraction of the old cost. And that brand can be as powerful as Ford, and potentially a lot more trendy. There are very low entry barriers for on-line brand building using not only ad words and web page display ads, but also using social media to build loyal followers who use and promote a brand. What was once considered a niche can become well known almost overnight simply by applying the new dynamics of reaching customers on-line, and increasingly via mobile. Look at the success of Toms Shoes.
Zappos and Amazon have shown that with almost no television ads they can create powerhouse retail brands. The new retailers do not compete just on price, but are able to offer selection, availability and customer service at levels unachievable by traditional brick-and-mortar retailers. They can suggest products and prices of things you're likely to need, even before you realize you need them. They can educate better, and faster, than most retail store employees. And they can offer great prices due to less overhead, along with the convenience of shipping the product right into your home.
And as people quit watching preprogrammed TV, where will they go for content? Anybody streaming will have an advantage – so think Netflix (which recently contracted for all the Disney content,) Amazon, Pandora, Spotify and even AOL. But, this will also benefit those companies providing content access such as Apple TV, Google TV, YouTube (owned by Google) to offer content channels and the increasingly omnipresent Facebook will deliver up not only friends, but content — and ads.
As for content creation, the deep pockets of traditional TV production companies will likely disappear along with their ability to control distribution. That means fewer big-budget productions as risk goes up without revenue assurances.
But that means even more ability for newer, smaller companies to create competitive content seeking audiences. Where once a very clever, hard working Seth McFarlane (creator of Family Guy) had to hardscrabble with networks to achieve distribution, and live in fear of a single person controlling his destiny, in the future these creative people will be able to own their content and capture the value directly as they build a direct audience. A phenomenon like George Lucas will be more achievable than ever before as what might look like chaos during transition will migrate to a much more competitive world where audiences, rather than network executives, will decide what content wins – and loses.
So, with due respects to Don McLean, will today be the day TV Died? We will only know in historical context. Nobody predicted newspapers had peaked in 2000, but it was clear the internet was changing news consumption behavior. And we don't know if TV viewership will begin its rapid decline in 2013, or in a couple more years. But the inevitable change is clear – we just don't know exactly when.
So it would be foolish to not think that the industry is going to change dramatically. And the impact on advertising will be even more profound, much more profound, than it was in print. And that will have an even more profound impact on American society – and how business is done.
What are you doing to prepare?
