Facebook’s Path To Communication Domination

Facebook’s Path To Communication Domination

Facebook shareholders should be cheering. And if you don’t own FB, you should be asking yourself why not. The company’s platform investments continue to draw users, and advertisers, in unprecedented numbers.

sms messaging is declining

With permission: Statista

People over 40 still might text. But for most younger people, messaging happens via FB Messenger or WhatsApp. Text messages have thus been declining in the USA. Internationally, where carriers still frequently charge for text messages, the use of both Facebook products dominates over texting. Both Facebook products now are leaders in internet usage.

And as their use grows, so do the ad dollars.

digital advertising now greater than tv

With permission: Statista

As this chart shows, in 2017 ad spending on digital outpaced money spent on TV ads. And TV spending, like print and radio, is flat to declining. While digital spending accelerates. And the big winner here is the platform getting the most eyeballs – which would be Facebook (and Google.)

Looking at the trends, Facebook investors should feel really good about future returns. And if you don’t own Facebook shares, why not?

Why Investors Should Support the Tesla, SolarCity Merger

Why Investors Should Support the Tesla, SolarCity Merger

In early August Tesla announced it would be buying SolarCity. The New York Times discussed how this combination would help CEO Elon Musk move toward his aspirations for greater clean energy use. But the Los Angeles Times took the companies to task for merging in the face of tremendous capital needs at both, while Tesla was far short of hitting its goals for auto and battery production.

Since then the press has been almost wholly negative on the merger. Marketwatch’s Barry Randall wrote that the deal makes no sense. He argues the companies are in two very different businesses that are not synergistic – and he analogizes this deal to GM buying Chevron. He also makes the case that SolarCity will likely go bankrupt, so there is no good reason for Tesla shareholders to “bail out” the company. And he argues that the capital requirements of the combined entities are unlikely to be fundable, even for its visionary CEO.

musk-tesla-solarcityFortune quotes legendary short seller Jim Chanos as saying the deal is “crazy.” He argues that SolarCity has an uneconomic business model based on his analysis of historical financial statements. And now Fortune is reporting that shareholder lawsuits to block the deal could delay, or kill, the merger.

But short-sellers are clearly not long-term investors. And there is a lot more ability for this deal to succeed and produce tremendous investor returns than anyone could ever glean from studying historical financial statements of both companies.

GM buying Chevron is entirely the wrong analogy to compare with Tesla buying SolarCity. Instead, compare this deal to what happened in the creation of television after General Sarnoff, who ran RCA, bought what he renamed NBC.

The world already had radio (just as we already have combustion powered cars.) The conundrum was that nobody needed a TV, especially when there were no TV programs. But nobody would create TV programs if there were no consumers with TVs. General Sarnoff realized that both had to happen simultaneously – the creation of both demand, and supply. It would only be by the creation, and promotion, of both that television could be a success. And it was General Sarnoff who used this experience to launch the first color televisions at the same time as NBC launched the first color programming – which fairly quickly pushed the industry into color.

Skeptics think Mr. Musk and his companies are in over their heads, because there are manufacturing issues for the batteries and the cars, and the solar panel business has yet to be profitable. Yet, the older among us can recall all the troubles with launching TV.

Early sets were not only expensive, they were often problematic, with frequent component failures causing owners to take the TV to a repairman. Often reception was poor, as people relied on poor antennas and weak network signals. It was common to turn on a set and have “snow” as we called it – images that were far from clear. And there was often that still image on the screen with the words “Technical Difficulties,” meaning that viewers just waited to see when programming would return. And programming was far from 24×7 – and quality could be sketchy. But all these problems have been overcome by innovation across the industry.

Yes, the evolution of electric cars will involve a lot of ongoing innovation. So judging its likely success on the basis of recent history would be foolhardy. Today Tesla sells 100% of its cars, with no discounts. The market has said it really, really wants its vehicles. And everybody who is offered electric panels with (a) the opportunity to sell excess power back to the grid and (b) financing, takes the offer. People enjoy the low cost, sustainable electricity, and want it to grow. But lacking a good storage device, or the inability to sell excess power, their personal economics are more difficult.

Electricity production, electricity storage (batteries) and electricity consumption are tightly linked technologies. Nobody will build charging stations if there are no electric cars. Nobody will build electric cars if there are not good batteries. Nobody will make better batteries if there are no electric cars. Nobody will install solar panels if they can’t use all the electricity, or store what they don’t immediately need (or sell it.)

This is not a world of an established marketplace, where GM and Chevron can stand alone. To grow the business requires a vision, business strategy and technical capability to put it all together. To make this work someone has to make progress in all the core technologies simultaneously – which will continue to improve the storage capability, quality and safety of the electric consuming automobiles, and the electric generating solar panels, as well as the storage capabilities associated with those panels and the creation of a new grid for distribution.

This is why Mr. Musk says that combining Tesla and SolarCity is obvious. Yes, he will have to raise huge sums of money. So did such early pioneers as Vanderbilt (railways,) Rockefeller (oil,) Ford (autos,) and Watson (computers.) More recently, Steve Jobs of Apple became heroic for figuring out how to simultaneously create an iPhone, get a network to support the phone (his much maligned exclusive deal with AT&T,) getting developers to write enough apps for the phone to make it valuable, and creating the retail store to distribute those apps (iTunes.) Without all those pieces, the ubiquitous iPhone would have been as successful as the Microsoft Zune.

It is fair for investors to worry if Tesla can raise enough money to pull this off. But, we don’t know how creative Mr. Musk may become in organizing the resources and identifying investors. So far, Tesla has beaten all the skeptics who predicted failure based on price of the cars (Tesla has sold 100% of its production,) lack of range (now up to nearly 300 miles,) lack of charging network (Tesla built one itself) and charging time (now only 20 minutes.) It would be shortsighted to think that the creativity which has made Tesla a success so far will suddenly disappear. And thus remarkably thoughtless to base an analysis on the industry as it exists today, rather than how it might well look in 3, 5 and 10 years.

The combination of Tesla and SolarCity allows Tesla to have all the components to pursue greater future success. Investors with sufficient risk appetite are justified in supporting this merger because they will be positioned to receive the future rewards of this pioneering change in the auto and electric utility industries.

Netflix Valuation is Not a “House of Cards”

Netflix Valuation is Not a “House of Cards”

The Netflix hit series “House of Cards” was released last night.  Most media reviewers and analysts are expecting huge numbers of fans will watch the show, given its tremendous popularity the last 2 years.  Simultaneously, there are already skeptics who think that releasing all episodes at once “is so last year” when it was a newsworthy event, and no longer will interest viewers, or generate subscribers, as it once did.  Coupled with possible subscriber churn, some think that “House of Cardsmay have played out its hand.

So, the success of this series may have a measurable impact on the valuation of Netflix.  If the “House of Cards” download numbers, which are up to Netflix to report, aren’t what analysts forecast many may scream for the stock to tumble; especially since it is on the verge of reaching new all-time highs.  The Netflix price to earnings (P/E) multiple is a lofty 107, and with a valuation of almost $29B it sells for just under 4x sales.

Netflix House of CardsBut investors should ignore any, and in fact all, hype about “House of Cards” and whatever analysts say about Netflix.  So far, they’ve been wildly wrong when making forecasts about the company.  Especially when projecting its demise.

Since Netflix started trading in 2002, it has risen from (all numbers adjusted) $8.5 to $485.  That is a whopping 57x increase.  That is approximately a 40% compounded rate of return, year after year, for 13 years!

But it has not been a smooth ride. After starting (all numbers rounded for easier reading) at $8.50 in May, 2002 the stock dropped to $3.25 in October – a loss of over 60% in just 5 months.  But then it rallied, growing to $38.75, a whopping 12x jump, in just 14 months (1/04!) Only to fall back to $9.80, a 75% loss, by October, 2004 – a mere 9 months later.  From there Netflix grew in value by about 5.5x – to $55/share – over the next 5 years (1/10.)  When it proceeded to explode in value again, jumping to $295, an almost 6-fold increase, within 18 months (7/11).  Only to get creamed, losing almost 80% of its value, back down to $63.85, in the next 4 months (11/11.)  The next year it regained some loss, improving in value by 50% to $91.35 (12/12,) only to again explode upward to $445 by February, 2014 a nearly 5-fold increase, in 14 months.  Two months later, a drop of 25% to $322 (4/14).  But then in 4 months back up to $440 (8/14), and back down 4 months later to $341 (12/14) only to approach new highs reaching $480 last week – just 2 months later.

That is the definition of volatility.

Netflix is a disruptive innovator.  And, simply put, stock analysts don’t know how to value disruptive innovators. Because their focus is all on historical numbers, and then projecting those historicals forward.  As a result, analysts are heavily biased toward expecting incumbents to do well, and simultaneously being highly skeptical of any disruptive company.  Disruptors challenge the old order, and invalidate the giant excel models which analysts create.  Thus analysts are very prone to saying that incumbents will remain in charge, and that incumbents will overwhelm any smaller company trying to change the industry model.  It is their bias, and they use all kinds of historical numbers to explain why the bigger, older company will project forward well, while the smaller, newer company will stumble and be overwhelmed by the entrenched competitor.

And that leads to volatility.  As each quarter and year comes along, analysts make radically different assumptions about the business model they don’t understand, which is the disruptor.  Constantly changing their assumptions about the newer kid on the block, they make mistake after mistake with their projections and generally caution people not to buy the disruptor’s stock.  And, should the disruptor at any time not meet the expectations that these analysts invented, then they scream for shareholders to dump their holdings.

Netflix first competed in distribution of VHS tapes and DVDs.  Netflix sent them to people’s homes, with no time limit on how long folks could keep them.  This model was radically different from market leader Blockbuster Video, so analysts said Blockbuster would crush Netflix, which would never grow.  Wrong.  Not only did Blockbuster grow, but it eventually drove Blockbuster into bankruptcy because it was attuned to trends for convenience and shopping from home.

As it entered streaming video, analysts did not understand the model and predicted Netflix would cannibalize its historical, core DVD business thus undermining its own economics.  And, further, much larger Amazon would kill Netflix in streaming.  Analysts screamed to dump the stock, and folks did.  Wrong.  Netflix discovered it was a good outlet for syndication, created a huge library of not only movies but television programs, and grew much faster and more profitably than Amazon in streaming.

Then Netflix turned to original programming.  Again, analysts said this would be a huge investment that would kill the company’s financials. And besides that people already had original programming from historical market leaders HBO and Showtime.  Wrong.  By using analysis of what people liked from its archive, Netflix leadership hedged its bets and its original shows, especially “House of Cards” have been big hits that brought in more subscribers.  HBO and Showtime, which have depended on cable companies to distribute their programming, are now increasingly becoming additional programming on the Netflix distribution channel.

Investors should own Netflix because the company’s leadership, including CEO Reed Hastings, are great at disruptive innovation.  They identify unmet customer needs and then fulfill those needs.  Netflix time and again has demonstrated it can figure out a better way to give certain user segments what they want, and then expand their offering to eat away at the traditional market.  Once it was retail movie distribution, increasingly it is becoming cable distribution via companies like ComCast, AT&T and Time Warner.

And investors must be long-term.  Netflix is an example of why trading is a bad idea – unless you do it for a living.  Most of us who have full time day jobs cannot try timing the ups and downs of stock movements.  For us, it is better to buy and hold.  When you’re ready to buy, buy. Don’t wait, because in the short term there is no way to predict if a stock will go up or down.  You have to buy because you are ready to invest, and you expect that over the next 3, 5, 7 years this company will continue to drive growth in revenues and profits, thus expanding its valuation.

Netflix, like Apple, is a company that has mastered the skills of disruptive innovation.  While the competition is trying to figure out how to sustain its historical position by doing the same thing better, faster and cheaper Netflix is figuring out “the next big thing” and then delivering it.  As the market shifts, Netflix is there delivering on trends with new products – and new business models – which push revenues and profits higher.

That’s why it would have been smart to buy Netflix any time the last 13 years and simply held it.  And odds are it will continue to drive higher valuations for investors for many years to come.  Not only are HBO, Showtime and Comcast in its sites, but the broadcast networks (ABC, CBS, NBC) are not far behind.  It’s a very big media market, which is shifting dramatically, and Netflix is clearly the leader.  Not unlike Apple has been in personal technology.

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.

How Cable TV is Deaf to the Market Roar of Change

How Cable TV is Deaf to the Market Roar of Change

Do you really think in 2020 you’ll watch television the way people did in the 1960s?  I would doubt it.

In today’s world if you want entertainment you have a plethora of ways to download or live stream exactly what you want, when you want, from companies like Netflix, Hulu, Pandora, Spotify, Streamhunter, Viewster and TVWeb.  Why would you even want someone else to program you entertainment if you can get it yourself?

Additionally, we increasingly live in a world unaccepting of one-way communication.  We want to not only receive what entertains us, but share it with others, comment on it and give real-time feedback.  The days when we willingly accepted having information thrust at us are quickly dissipating as we demand interactivity with what comes across our screen – regardless of size.

These 2 big trends (what I want, when I want; and 2-way over 1-way) have already changed the way we accept entertaining.  We use USB drives and smartphones to provide static information.  DVDs are nearly obsolete.  And we demand 24×7 mobile for everything dynamic.

Yet, the CEO of Charter Cable company wass surprised to learn that the growth in cable-only customers is greater than the growth of video customers.  Really?

It was about 3 years ago when my college son said he needed broadband access to his apartment, but he didn’t want any TV.  He commented that he and his 3 roommates didn’t have any televisions any more. They watched entertainment and gamed on screens around his apartment connected to various devices.  He never watched live TV.  Instead they downloaded their favorite programs to watch between (or along with) gaming sessions, picked up the news from live web sites (more current and accurate he said) and for sports they either bought live streams or went to a local bar.

To save money he contacted Comcast and said he wanted the premier internet broadband service.  Even business-level service.  But he didn’t want TV.  Comcast told him it was impossible. If he wanted internet he had to buy TV.  “That’s really, really stupid” was the way he explained it to me. “Why do I have to buy something I don’t want at all to get what I really, really want?”

Then, last year, I helped a friend move.  As a favor I volunteered to return her cable box to Comcast, since there was a facility near my home.  I dreaded my volunteerism when I arrived at Comcast, because there were about 30 people in line.  But, I was committed, so I waited.

The next half-hour was amazingly instructive.  One after another people walked up to the window and said they were having problems paying their bills, or that they had trouble with their devices, or wanted a change in service.  And one after the other they said “I don’t really want TV, just internet, so how cheaply can I get it?”

These were not busy college students, or sophisticated managers.  These were every day people, most of whom were having some sort of trouble coming up with the monthly money for their Comcast bill.  They didn’t mind handing back the cable box with TV service, but they were loath to give up broadband internet access.

Again and again I listened as the patient Comcast people explained that internet-only service was not available in Chicagoland.  People had to buy a TV package to obtain broad-band internet. It was force-feeding a product people really didn’t want.  Sort of like making them buy an entree in order to buy desert.

As I retold this story my friends told me several stories about people who banned together in apartments to buy one Comcast service.  They would buy a high-powered router, maybe with sub-routers, and spread that signal across several apartments.  Sometimes this was done in dense housing divisions and condos.  These folks cut the cost for internet to a fraction of what Comcast charged, and were happy to live without “TV.”

But that is just the beginning of the market shift which will likely gut cable companies.  These customers will eventually hunt down internet service from an alternative supplier, like the old phone company  or AT&T.  Some will give up on old screens, and just use their mobile device, abandoning large monitors.  Some will power entertainment to their larger screens (or speakers) by mobile bluetooth, or by turning their mobile device into a “hotspot.”

And, eventually, we will all have wireless for free – or nearly so.  Google has started running fiber cable in cities including Austin, TX, Kansas City, MO and Provo, Utah.  Anyone who doesn’t see this becoming city-wide wireless has their eyes very tightly closed.  From Albuquerque, NM to Ponca City, OK to Mountain View, CA (courtesy of Google) cities already have free city-wide wireless broadband. And bigger cities like Los Angeles and Chicago are trying to set up free wireless infrastructure.

And if the USA ever invests in another big “public works infrastructure” program will it be to rebuild the old bridges and roads?  Or is it inevitable that someone will push through a national bill to connect everyone wirelessly – like we did to build highways and the first broadcast TV.

So, what will Charter and Comcast sell customers then?

It is very, very easy today to end up with a $300/month bill from a major cable provider.  Install 3 HD (high definition) sets in your home, buy into the premium movie packages, perhaps one sports network and high speed internet and before you know it you’ve agreed to spend more on cable service than you do on home insurance.  Or your car payment.  Once customers have the ability to bypass that “cable cost” the incentive is already intensive to “cut the cord” and set that supplier free.

Yet, the cable companies really don’t seem to see it.  They remain unimpressed at how much customers dislike their service. And respond very slowly despite how much customers complain about slow internet speeds.  And even worse, customer incredulous outcries when the cable company slows down access (or cuts it) to streaming entertainment or video downloads are left unheeded.

Cable companies say the problem is “content.”  So they want better “programming.”  And Comcast has gone so far as to buy NBC/Universal so they can spend a LOT more money on programming.  Even as advertising dollars are dropping faster than the market share of old-fashioned broadcast channels.

Blaming content flies in the face of the major trends.  There is no shortage of content today.  We can find all the content we want globally, from millions of web sites.  For entertainment we have thousands of options, from shows and movies we can buy to what is for free (don’t forget the hours of fun on YouTube!)

It’s not “quality programming” which cable needs.  That just reflects industry deafness to the roar of a market shift.  In short order, cable companies will lack a reason to exist.  Like land-line phones, Philco radios and those old TV antennas outside, there simply won’t be a need for cable boxes in your home.

Too often business leaders become deaf to big trends.  They are so busy executing on an old success formula, looking for reasons to defend & extend it, that they fail to evaluate its relevancy.  Rather than listen to market shifts, and embrace the need for change, they turn a deaf ear and keep doing what they’ve always done – a little better, with a little more of the same product (do you really want 650 cable channels?,) perhaps a little faster and always seeking a way to do it cheaper – even if the monthly bill somehow keeps going up.

But execution makes no difference when you’re basic value proposition becomes obsolete.  And that’s how companies end up like Kodak, Smith-Corona, Blackberry, Hostess, Continental Bus Lines and pretty soon Charter and Comcast.