by Adam Hartung | Feb 24, 2014 | Current Affairs, Defend & Extend, In the Rapids, Leadership, Transparency, Web/Tech
Facebook is acquiring WhatsApp, a company with at most $300M revenues, and 55 employees, for $19billion. That’s billion – with a “b.” An astonishing figure that is second only to HP’s acquisition of market leader Compaq, which had substantial revenues and profits, as tech acquisitions. $19B is 13 times Facebook’s (not WhatsApp’s) entire 2013 net income – and almost 2.5 times Facebook’s (again, not WhatsApp’s) 2013 gross revenues!
On the mere face of it this valuation should make the most dispassionate analyst swoon. In today’s world very established, successful companies sell for far, far lower valuations. Apple is valued at about 13 times earnings. Microsoft about 14 times earnings. Google 33 times. These are small fractions of the nearly infinite P/E placed on WhatsApp.
But there is a leadership lesson offered here by CEO Zuckerberg’s team that is well worth learning.
Irrelevancy can happen remarkably quickly. True in any industry, but especially in digital technology. Examples: Research-in-Motion/Blackberry. Motorola. Dell. HP all lost relevancy in months and are struggling. (For those who want non-tech examples think of Circuit City, Best Buy, Sears, JCPenney, Abercrombie and Fitch.) Each of these companies was an industry leader that lust its luster, most of its customers, a big chunk of its employees and much of its market valuation in months when the company missed a market shift.
Although leadership knew what it had historically done to sell products profitably, in a very short time market trends reduced the value of the company’s historical success formula leaving investors, as well as management, wondering how it was going to compete.
Facebook is not immune to changing market trends. Although it has been the benchmark for social media, it only achieved that goal after annihilating early leader MySpace. And although Facebook was built by youthful folks, trends away from using laptops and toward mobile devices have challenged the Facebook platform. Simultaneously, changing communication requirements have altered the use, and impact, of things like images, photos, charts and text. All of these have the potential impact of slowly (or not so slowly) eroding the value (which is noticably lofty) of Facebook.
Most leaders address these kinds of challenges by launching new products to leverage the trend. And Facebook did just that. Facebook not only worked on making the platform more mobile friendly, but developed its own platform apps for photos and texting and all kinds of new features.
But, and this is critical, external companies did a better job. Two years ago Instagram emerged as a leader in image sharing. And WhatsApp has developed a superior answer for messaging.
Historically leadership usually said “we need to find a way to beat these new guys.” They would make it hard to integrate new solutions with their dominant platform in an effort to block growth. They would spend huge amounts on marketing and branding to try overcoming the emerging leader. Often they filed intellectual property litigation in an effort to cause short-term business interuption and threaten viability. They might even try hiring the emerging company’s tech leader away to stop development.
All of these actions were efforts to defend & extend the early leader’s market position. Even though the market is shifting, and trends are developing externally from the company, leadership will tend to look inside for an answer. It will often ignore the trend, disparage the competition, keep promising improvements to its historical products and services and blanket the media with PR as to its stated superiority.
But, as that list (above) of companies that lost relevancy demonstrates, this rarely works. In a highly interconnected, fast-paced, globally competitive marketplace customers go where they want. Quickly. Often leaving the early leader with a management team (and Board of Directors) scratching its head and wondering how it lost so much market position, and value, so quickly.
Hand it to Mr. Zuckerberg’s team. Instead of ignoring trends in its effort to defend & extend its early lead, they reached out and brought the leader to them. $1B for Instagram was a big investment, especially so close to launching an IPO. But, it kept Facebook relevant in mobile platforms and imaging.
And making a nosebleed-creating $19B deal for WhatsApp focuses on maintaining relevancy as well. WhatsApp already processes almost as many messages as the entire telecom industry. It has 450million users with 70% active daily, which is already 60% the size of Facebook’s daily user community (550million.) By bringing these people into the Facebook corporate family it assures the company of continued relevancy as the market shifts. It doesn’t matter if these are the same people, or different people. The issue is that it keeps Facebook relevant, rather than losing relevance to a competitor.
How will this all be monetized into $19B? The second brilliant leadership call by Facebook is to not answer that question.
Facebook didn’t know how to monetize its early leadership in users, but management knew it had to find a way. Now the company has grown from almost no revenues in 2008 to almost $8B in just 5 years. (Does your company have a plan to add $8B/year of organic revenue growth by 2019?)
So just as Facebook had to find its revenue model (which it is still exploring,) Zuckerberg’s team allows the leadership of Instagram and WhatsApp to remain independent, operating in their own White Space, to grow their user base and learn how to monetize what is an extraordinarily large group of happy folks. When looking to grow in new markets, and you find a team with the skills to understand the trends, it is independence rather than integration that makes the most sense organizationally.
Thirdly, back to that valuation issue. $19B is a huge amount of money. Unless you don’t really spend $19B. Facebook has the blessed ability to print its own. Private money that it can use for such acquisitions. As long as Facebook has a very high market valuation it can make acquisitions with shares, rather than real money.
In the case of both Instagram and WhatsApp the acquisition is being made in a mix of cash, Facebook stock and restricted Facebook stock for employees. The latter two of these three items are not real money. They are simply pieces of paper giving claims to ownership of Facebook, which itself is valued at 22 times 2013 revenue and 116 times 2013 earnings. The price of those shares are all based on expectations; expectations which now require the performance of Instagram and WhatsApp to make happen.
By making acquisitions with Facebook shares the leadership team is able to link the newly acquired managers to the same overall goals as Facebook, while offering an extremely high price but without actually having to raise any money – or spend all that money.
All companies risk of becoming irrelevant. New technologies, customer behavior patterns, regulations, inventions and innovations constantly challenge old success formulas. Most leaders fall into a pattern of trying to defend & extend their old business in the face of market shifts, hastening the fall into irrelevancy. Or they try to acquire a new business, then integrate it into the old business which strips away the new business value and leads, inevitably, to irrelevancy.
The leaders of Facebook are giving us a lesson in an alternative approach. (1) Recognize the market shift. Accept it. If there is a better solution, rush toward it rather than ignoring it. (2) Bring it into the company, and leave it independent. Eschew integration and efforts to find “synergy.” (You never know, in 3 years the company may need to be renamed WhatsApp to reflect a new market paradigm.) (3) And as long as you can convince investors that you are maintaining your relevancy use your highly valued stock as currency to keep the company moving forward.
These are 3 great lessons for all leadership teams. And I continue to think Facebook is the one stock to own in 2014.
by Adam Hartung | Nov 3, 2011 | Innovation, Leadership, Lock-in, Web/Tech
How much access do your employees have to Facebook, Twitter, Linked-in, GroupOn, FourSquare, and texting in their daily work, on their daily technology devices? Do you encourage use, or do you in fact block access, in the search for greater security, and on the belief that you achieve higher productivity by killing access to these “work cycle stealers?” Do you implement policies keeping employees from using their own technology tools (smartphone or tablet) on the job?
In 1984 the PC revolution was still quite young. Pizza Hut was then a division of PepsiCo (now part of Yum Brands,) and the company was fully committed to a set of mainframe applications from IBM. Mainframe applications, accessed via a “green screen” terminal were used for all document creation, financial analysis, and even all printing. The CIO was very proud of his IBM mainframe data center, and his tight control over the application base and users.
In what seemed like an almost overnight series of events, headquarters employees started bringing small PC’s to work in order to build spreadsheets, create documents and print miscellaneous memos. They found the new technology so much easier to use, and purchase cost so cheap, that their productivity soared and they were able to please their bosses while leaving work on time. A good trade-off.
The CIO went ballistic. “These PCs are popping up like popcorn around here – and we have to kill this trend before it gains any additional momentum!” he decried in an executive meeting. PCs were “toys” that lacked the “robustness” of his mainframe applications. If users wanted higher productivity, then they simply needed to spend more time in training.
Additionally, if he didn’t control access to computing cycles, and activities like printing, employees would go berserk using unnecessary resources on projects they probably should never undertake. He was servicing the corporation by keeping people on a narrow tool set – and it gave the company control over what employees could do as well as how they could do it making sure nothing frivolous was happening. For all these reasons, plus the fact that he could assure security on his mainframe, he felt it important that the CEO and executive team commit with him that PCs would not be allowed in Pizza Hut.
Retrospectively, he looks foolish (and his efforts were unsuccessful.) PCs unleashed a wave of personal productivity that benefitted all early adopters. They not only let employees do their work faster, but it allowed employees to develop innovative solutions to problems – often dramatically lowering overhead costs for many management tasks. PCs, of course, swept through the workplace and in only a decade most mainframes, and their high cost, air conditioned data centers, were gone.
Yet, to this day companies continue to use “best practices” as a tool to stop technology, and productivity improvement, adoption. Managers will say:
- We need to control employee access to information
- We need to keep employees focused on their job, without distractions
- We must control how employees do their jobs so we minimize errors and improve quality
- We need to control employee access externally for security reasons
- We need consistency in our tool set and how it is used
- We made a big investment in how we do things, and we need to leverage that [sunk cost] by forcing greater use
- We need to remember that management are the experts, and it is our job to tell people how to do their jobs. We don’t want the patients running the hospital!
It all sounds quite logical, and good management practice. Yet, it is exactly the road to productivity reduction, innovation assassination and limited growth! Only by allowing employees to apply their skills and best thinking can any company hope to continuously improve its productivity and competitiveness.
But, moving from history and theoretical to today’s behavior, what is happening in your company? Do you have a clunky, hard to use, expensive ERP, CRM, accounting, HR, production, billing, vendor management, procurement or other system (or factory, distribution center or headquarters site) that you still expect people to use? Do you demand people use it – largely for some selection of the 7 items above? Do you require they carry a company PC or Blackberry to access company systems, even as the employee carries their own Android smartphone or iPad with them 24×7?
Recently, technology provider IFS Corporation did a survey on ERP users (Does ERP Mean Excel Runs Production?) Their surprising results showed that new employees (especially under age 40) were very unlikely to take a job with a company if they had to use a complex (usually vendor supplied) interface to a legacy application. In fact, 75% of today’s users are actively seeking – and using – cloud based apps or home grown spreadsheets to manage the business rather than the expensive applications the corporation supplied! Additionally, between 1/3 and 2/3 of employees (depending upon age) were actively seeking to quit and take another job simply because they found the technology of their company hard to use! (CIO Magazine: Employees Refusing to Use Clunky Enterprise Software.)
Unlike managers invested in historical decisions, and legacy assets, employees understand that without productivity their long-term employment is at risk. They recognize that constantly shifting markets, with global competitors, requires the flexibility to apply novel thinking and test new solutions constantly. To succeed, the workforce – all the workforce – needs to be informed, interacting with potential new solutions, thinking and applying their best thoughts to creating new solutions that advance the company’s competitiveness.
That’s why Fast Company recently published something all younger managers know, yet shocks older ones: “Half of Young Professionals Value Facebook Access, Smartphone Options Over Salary.” It surprised a lot of people to learn that employees would actually select access over more pay!
While most older leaders and managers think this is likely because employees want to screw off on the job, and ignore company policies, the article cites a Cisco Connected World Technology Report which describs how these employees value productivity, and realize that in today’s world you can’t really be productive, innovative and generate growth if you don’t have access – and the ability to use – modern tools.
Today’s young workers aren’t any less diligent about work than the previous generation, they are simply better informed and more technology savvy! They think even more long-term about the company’s survivability, as well as their ability to make a difference in the company’s success.
In other words, in 2011 tools like Linked-in, Facebook, Twitter et. al. accessed via a tablet or smartphone are the equivalent of the PC 30 years ago. They give rapid access to what customers, competitors and others in the world are doing. They allow employees to quickly answer questions about current problems, and find new solutions. As well as find people who have tried various options, and learn from those experiences. And they allow the employee to connect with a company problem fast – whether at work or away – and start to solve it! They can access those within their company, vendors, customers – anyone – rapidly in order to solve problems as quickly as possible.
At a recent conference I asked IT leaders for several major airlines if they allowed employees to access these tools. Uniformly, the answer was no. That may be the reason we all struggle with the behavior of airlines, I bemoaned. It might explain why the vast majority of customers were highly sympathetic with the flight attendant that jettisoned a plane through the emergency exit with a beer in hand! At the very least, it is a symptom of the internal focus that has kept the major airlines from pleasing 85% of their customers, while struggling to be profitable. If nobody has external access, how can anybody make anything better?
The best practices of 1975 don’t cut it in 2012. The world has changed. It is more important now than ever that employees have the access to modern tools, and the freedom to use them. Good management today is not about telling people how to do their job, but rather letting them figure out how to do the job best. Implement that practice and productivity and innovation will show themselves, and you’re highly likely to find more growth!
by Adam Hartung | Sep 7, 2010 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Web/Tech
Summary:
- Not even dominant industry leaders are immune to decline from market shifts
- It’s easy to focus on what made you great, and miss a market shift
- Competitors drive market shifts, not customers – so pay attention to competitors!
- AOL lost industry domination to competitors with new solutions, and now new technologies, even though it executed its Success Formula really well
- You can become obsolete really quickly when fringe competitors introduce new solutions
- Do more competitor analysis
- Keep White Space teams experimenting with emerging solutions and competing in shifting markets
Do you remember when AOL (an acronym, and updated name, for America On-Line) dominated our perception of the internet? Fifteen years ago AOL was one of the leading companies introducing Americans to the wonders of the web. Providing dial-up access (remember that?) AOL offered users its own interface, and a series of apps that helped its customers discover how the world wide web could make their lives easier – and better. At its peak, AOL had over 30 million subscribers! AOL was so commercially strong, and investors were so optimistic, that a merger with powerhouse publisher Time/Warner, which already owned CNN and HBO, was organized so AOL’s young leader, Steve Case, could take the helm and push the company forward into the digital frontier.
Along the way, something went very wrong. In an example of what happened to AOL and its products, as seen below, after pioneering Instant Messaging as an internet application AOL’s AIM user base has declined precipitously – by more than 50% – in the last 3 years:
Source: BusinessInsider.com
Of course, the same thing that once drove AOL growth is now apparent somewhere else. New markets are emerging. Instead of using PCs with instant messaging, most people today text via their mobile device! Texting isn’t just a youthful activity. According to Pew Research, on PewInternet.org in “Cell Phones and American Adults” 72% of American adults now text – up from 65% a year ago. 87% of teens text. And I’m willing to bet a lot of those teens don’t even have an instant messaging account – on any platform. The amount of “instant messaging” has grown dramatically – just not using “instant messaging” software. It’s now happening via mobile device texting.
Where AOL once dominated the landscape for digital communication, it is now becoming almost insignificant. But it wasn’t because AOL didn’t know how to execute its strategy. AOL was an industry leader, with savvy management, and a blue-ribbon Board of Directors. AOL even bought Netscape in its effort to remain the best server and client technology for a proprietary internet platform.
AOL became obsolete because the market shifted – while AOL tried holding on to its initial Success Formula. AOL did not shift as the market shifted, it has remained Locke-in to its early Identity, original Strategy and all those product Tactics that once made it great! AOL didn’t do anything wrong. It just kept doing what it knew how to do, rather than recognizing the impact of competitors and changing markets.
Shortly after AOL emerged as the market leader, competitors sprang up. First they offered dial-up access, often more cheaply. Eventually dial-up was replaced with high-speed internet access from multiple providers. Instead of using a proprietary interface, competitors Netscape and Microsoft brought out their own internet browsers, making it possible for users to surf the web directly and easily. Instead of using an AOL directory to find things, search engines such as Ask Jeeves, Alta Vista and Yahoo! Search came along that would find things across the web for users based upon their query. Email alternatives emerged, such as Hotmail and Yahoo! Mail. Eventually, one piece at a time, all the proprietary packaged products that AOL provided – including instant messaging – was offered by a competitor. And the value of the AOL packaging declined. As competitor products improved, for most users being an AOL subscriber simply had little advantage.
And now entirely new apps are coming along. As the market quickly shifts to mobile data and applications, devices like smartphones and tablets are replacing PCs. And the apps that made internet companies rich and famous are poised for decline – as users shift to the new way of doing things.
Whether the currently popular internet companies will make the next step, or end up like AOL, will be determined by whether they remain stuck on defending & extending their “core” business, or if they can shift with the market. There is no doubt that the amount of “instant messaging” is skyrocketing. It’s just not happening on the PC. Like many tasks, the demand is growing very fast. But it is via a new, and different solution. If the company sees itself as providing a PC type of internet solution, then the company will likely decline. But, alternatively, the leadership could see that demand is exploding and they need to shift – with the market – to the new solution environment to maintain growth.
Whether you are the market leader or not, you know you don’t want to end up like AOL. Once rich with resources, and a commanding market lead, AOL is now irrelevant to the latest market trends – and growth. AOL stuck to what it knew how to do. It has not shifted with changing market requirements – including changes in technology. For your company to succeed it must be (1) aware of competitors and how they are constantly changing the market – especially fringe competitors, and (2) enlisting White Space teams that are participating in the new markets, learning what works and how to migrate to capture the ongoing growth.
Postscript: I want to thank a pair of colleagues for some great mentions over the weekend. Firstly, to FMI Daily for posting to its readership about my blog on The Power of Myth. Secondly, a big thank you to Management Consulting News for referring its newsletter readers to this blog as notable, and my recent posting on the failure of Fast Follower strategy. I encourage readers to follow the links here to these sites and sign up for future information from both!!
by Adam Hartung | Sep 2, 2010 | Current Affairs, Defend & Extend, In the Rapids, Television, Web/Tech
Summary:
- Market shifts create losers, and winners
- Demand doesn’t decline, it just changes form – and usually grows!
- We want more entertainment and communcation – but not the old fashioned way
- Losers keep trying to sell what they have, and know
- Winners supply solutions aligned with market needs regardless of old competencies
How would you react if your customers said your product really wasn’t something they needed? Would you work hard to convince them they are wrong? Maybe try to add some features hoping it would regain their attention? Or would you start looking for what they really do need/want?
Pew Research Center, at PewSocialTrends.org headlines “The Fading Glory of the Television and Telephone” describing how quickly people are walking away from what were very recently considered absolute necessities. As a “boomer” and member of the “TV generation” I was surprised to read that only 42% of Americans now think a television is a necessity! This has been a rapid, dramatic decline from 52% last year and 64% in 2006! 1 in 5 Americans have changed their point of view about television as a necessity in just 4 years! And TV as a necessity is in an accelerating decline! I can remember when my generation went from 1 TV in the house to 1 in every room! This trend does not bode well for broadcast television networks, affiliates, advertisers, traditional production companies, television newscasters, manufacturers of TV sets and TV equipment – or many other businesses linked to TV as we know it.
Simultaneously, demand for a land line telephone has declined. Again, my generation remembers the days with one phone in the house – in some areas on a shared “party” line where multiple families shared a single phone line. The phone was in a central area so it could be shared. In the 1970s we saw things change as telephones were added to every room! Now, according to Pew, folks who consider a land-line phone a necessity has declined to only 62%, a 10% decline from just last year (68 to 62) and barely 3 in 5 Americans! Wow!
Of course, for every decline there’s a winner. 47% see the cell phone as a necessity – that’s 5 percentage points greater than the TV score, indicating mobile phones are seen as more of a necessity than television by the general population. And 34% see high speed internet as a necessity – only 9 percentage points fewer than the TV number – and more than half who see the need for a land-line phone.
Demand for entertainment and communication have not declined! If you are in television or land lines you might think so. Rather, that demand is accelerating. But it is just shifting to a different solution. Instead of the old technology, and supplier industry, people are changing to something new. First with video cassetttes, then digital video recorders (DVRs), then the plethora of available cable channels and on-demand TV, and now with on-line entertainment from YouTube to Hulu people have been changing the way they consume entertainment. Demand has gone up, but not from traditional consumption of TV, especially as viewing has switched from the TV to the computer monitor – or the hand held device.
Clearly, access to the internet (facebook, twitter, et.al.), texting and anytime/anywhere calling has increased both our access and use of one-way (such as reading web pages) and two way communication. Communication is continuing to grow, but it will be in a different way. No longer do we need a “dial tone” to communicate – and in most instances people are finding a preference to asynchronous rather than real-time communication.
These are the kind of industry transitions that threaten so many businesses. What Clayton Christensen calls “The Innovator’s Dilemma” as new solutions increase demand while making old solutions obsolete. The tendency is for the supplier of traditional solutions to say “my market is in decline.” But really, the market is growing! Just like Kodak said the demand for film was declining, when demand for photography – now in digital format – was (and is) escalating! When market shifts happen, incumbents have to resist the temptation to try “keeping” the “old customers” by undertaking Defend & Extend efforts – like adding features and functionality, while cutting price. This inevitably leads to disaster! Instead, they have to understand the shift is only going to accelerate, and develop an approach to entering the new market.
As this research comes out, Apple launched a series of new products to augment its set-top box and iPod/iTouch product lines. (San Francisco Chronicle, SFGate.com “Steve JobsUnveils Upgraded Apple TV, New iPods“) by doing so Apple recognizes that people still want entertainment – but they are a whole lot less likely to accept sitting in front of a communal television, serially deploying programming at them. They want their entertainment to be on-demand, and personalized. Why should we all watch the same thing? And why watch what some programmer at CBS, HBO or TMC wants to deliver?
Apple is bringing out products that align with the direction the market is now heading. Ping is designed to help people share program information and identify the entertainment you would like to receive. iTunes is upgrading to bring you in bite-size chunks exactly the entertainment you want, as you want it, aurally or visually. These are products which will grow because they are aligned with what the market says it wants — even more entertainment. Those who are hidebound to the old supply mechanism will simply find themselves fighting for declining revenue as demand shifts – and grows – in the new solutions
