by Adam Hartung | Jul 15, 2016 | Defend & Extend, Entertainment, Games, Innovation, Lock-in, Mobile, Trends
Poke’Mon Go is a new sensation. Just launched on July 6, the app is already the #1 app in the world – and it isn’t even available in most countries. In less than 2 weeks, from a standing start, Nintendo’s new app is more popular than both Facebook and Snapchat. Based on this success, Nintendo’s equity valuation has jumped 90% in this same short time period.
Some think this is just a fad, after all it is just 2 weeks old. Candy Crush came along and it seemed really popular. But after initial growth its user base stalled and the valuation fell by about 50% as growth in users, time on app and income all fell short of expectations. And, isn’t the world of gaming dominated by the likes of Sony and Microsoft?
A bit of history
Nintendo launched the Wii in 2006 and it was a sensation. Gamers could do things not previously possible. Unit sales exceeded 20m units/year for 2006 through 2009. But Sony (PS4) and Microsoft (Xbox) both powered up their game consoles and started taking share from Nintendo. By 2011 Nintendo sale were down to 11.6m units, and in 2012 sales were off another 50%. The Wii console was losing relevance as competitors thrived.
Sony and Microsoft both invested heavily in their competition. Even though both were unprofitable at the business, neither was ready to concede the market. In fall, 2014 Microsoft raised the competitive ante, spending $2.5B to buy the maker of popular game Minecraft. Nintendo was becoming a market afterthought.
Meanwhile, back in 2009 Nintendo had 70% of the handheld gaming market with its 3DS product. But people started carrying the more versatile smartphones that could talk, text, email, execute endless apps and even had a lot of games – like Tetrus. The market for handheld games pretty much disappeared, dealing Nintendo another blow.
Competitor strategic errors
Fortunately, the bitter “fight to the death” war between Sony and Microsoft kept both focused on their historical game console business. Both kept investing in making the consoles more powerful, with more features, supporting more intense, lifelike games. Microsoft went so far as to implement in Windows 10 the capability for games to be played on Xbox and PCs, even though the PC gaming market had not grown in years. These massive investments were intended to defend their installed base of users, and extend the platform to attract new growth to the traditional, nearly 4 decade old market of game consoles that extends all the way back to Atari.
Both companies did little to address the growing market for mobile gaming. The limited power of mobile devices, and the small screens and poor sound systems made mobile seem like a poor platform for “serious gaming.” While game apps did come out, these were seen as extremely limited and poor quality, not at all competitive to the Sony or Microsoft products. Yes, theoretically Windows 10 would make gaming possible on a Microsoft phone. But the company was not putting investment there. Mobile gaming was simply not serious, and not of interest to the two Goliaths slugging it out for market share.
Building on trends makes all the difference
Back in 2014 I recognized that the console gladiator war was not good for either big company, and recommended Microsoft exit the market. Possibly seeing if Nintendo would take the business in order to remove the cash drain and distraction from Microsoft. Fortunately for Nintendo, that did not happen.
Nintendo observed the ongoing growth in mobile gaming. While Candy Crush may have been a game ignored by serious gamers, it nonetheless developed a big market of users who loved the product. Clearly this demonstrated there was an under-served market for mobile gaming. The mobile trend was real, and it’s gaming needs were unmet.
Simultaneously Nintendo recognized the trend to social. People wanted to play games with other people. And, if possible, the game could bring people together. Even people who don’t know each other. Rather than playing with unseen people located anywhere on the globe, in a pre-organized competition, as console games provided, why not combine the social media elements of connecting with those around you to play a game? Make it both mobile, and social. And the basics of Poke’Mon Go were born.
Then, build out the financial model. Don’t charge to play the game. But once people are in the game charge for in-game elements to help them be more successful. Just as Facebook did in its wildly successful social media game Farmville. The more people enjoyed meeting other people through the game, and the more they played, the more they would buy in-app, or in-game, elements. The social media aspect would keep them wanting to stay connected, and the game is the tool for remaining connected. So you use mobile to connect with vastly more people and draw them together, then social to keep them playing – and spending money.
The underserved market is vastly larger than the over-served market
Nintendo recognized that the under-served mobile gaming market is vastly larger than the overserved console market. Those console gamers have ever more powerful machines, but they are in some ways over-served by all that power. Games do so much that many people simply don’t want to take the time to learn the games, or invest in playing them sitting in a home or office. For many people who never became serious gaming hobbyists, the learning and intensity of serious gaming simply left them with little interest.
But almost everyone has a mobile phone. And almost everyone does some form of social media. And almost everyone enjoys a good game. Give them the right game, built on trends, to catch their attention and the number of potential customers is – literally – in the billions. And all they have to do is download the app. No expensive up-front cost, not much learning, and lots of fun. And thus in two weeks you have millions of new users. Some are traditional gamers. But many are people who would never be a serious gamer – they don’t want a new console or new complicated game. People of all ages and backgrounds could become immediate customers.
David can beat Goliath if you use trends
In the Biblical story, smallish David beat the giant Goliath by using a sling. His new technology allowed him to compete from far enough away that Goliath couldn’t reach David. And David’s tool allowed for delivering a fatal blow without ever touching the giant. The trend toward using tools for hunting and fighting allowed the younger, smaller competitor to beat the incumbent giant.
In business trends are just as important. Any competitor can study trends, see what people want, and then expand their thinking to discover a new way to compete. Nintendo lost the console war, and there was little value in spending vast sums to compete with Sony and Microsoft toe-to-toe. Nintendo saw the mobile game market disintegrate as smartphones emerged. It could have become a footnote in history.
But, instead Nintendo’s leaders built on trends to deliver a product that filled an unmet need – a game that was mobile and social. By meeting that need Nintendo has avoided direct competition, and found a way to dramatically grow its revenues. This is a story about how any competitor can succeed, if they learn how to leverage trends to bring out new products for under-served customers, and avoid costly gladiator competition trying to defend and extend past products.
by Adam Hartung | Feb 12, 2015 | Current Affairs, Disruptions, Innovation, Leadership, Web/Tech
Despite huge fanfare at launch, after a few brief months Google Glass is no longer on the market. The Amazon Fire Phone was also launched to great hype, yet sales flopped and the company recently took a $170M write off on inventory.
Fortune mercilessly blamed Fire Phone’s failure on CEO Jeff Bezos. The magazine blamed him for micromanaging the design while overspending on development, manufacturing and marketing. To Fortune the product was fatally flawed, and had no chance of success according to the article.
Similarly, the New York Times blasted Google co-founder and company leader Sergie Brin for the failure of Glass. He was held responsible for over-exposing the product at launch while not listening to his own design team.
Both these articles make the common mistake of blaming failed new products on (1) the product itself, and (2) some high level leader that was a complete dunce. In these stories, like many others of failed products, a leader that had demonstrated keen insight, and was credited with brilliant work and decision-making, simply “went stupid” and blew it. Really?
Unfortunately there are a lot of new products that fail. Such simplistic explanations do not help business leaders avoid a future product flop. But there are common lessons to these stories from which innovators, and marketers, can learn in order to do better in the future. Especially when the new products are marketplace disrupters; or as they are often called, “game changers.”
Do you remember Segway? The two wheeled transportation device came on the market with incredible fanfare in 2002. It was heralded as a game changer in how we all would mobilize. Founders predicted sales would explode to 10,000 units per week, and the company would reach $1B in sales faster than ever in history. But that didn’t happen. Instead the company sold less than 10,000 units in its first 2 years, and less than 24,000 units in its first 4 years. What was initially a “really, really cool product” ended up a dud.
There were a lot of companies that experimented with Segways. The U.S. Postal Service tested Segways for letter carriers. Police tested using them in Chicago, Philadelphia and D.C., gas companies tested them for Pennsylvania meter readers, and Chicago’s fire department tested them for paramedics in congested city center. But none of these led to major sales. Segway became relegated to niche (like urban sightseeing) and absurd (like Segway polo) uses.
Segway tried to be a general purpose product. But no disruptive product ever succeeds with that sort of marketing. As famed innovation guru Clayton Christensen tells everyone, when you launch a new product you have to find a set of unmet needs, and position the new product to fulfill that unmet need better than anything else. You must have a very clear focus on the product’s initial use, and work extremely hard to make sure the product does the necessary job brilliantly to fulfill the unmet need.
Nobody inherently needed a Segway. Everyone was getting around by foot, bicycle, motorcycle and car just fine. Segway failed because it did not focus on any one application, and develop that market as it enhanced and improved the product. Selling 100 Segways to 20 different uses was an inherently bad decision. What Segway needed to do was sell 100 units to a single, or at most 2, applications.
Segway leadership should have studied the needs deeply, and focused all aspects of the product, distribution, promotion, training, communications and pricing for that single (or 2) markets. By winning over users in the initial market Segway could have made those initial users very loyal, outspoken customers who would recommend the product again and again – even at a $4,000 price.
Segway should have pioneered an initial application market that could grow. Only after that could Segway turn to a second market. The first market could have been using Segway as a golfer’s cart, or as a walking assist for the elderly/infirm, or as a transport device for meter readers. If Segway had really focused on one initial market, developed for those needs, and won that market it would have started a step-wise program toward more applications and success. By thinking the general market would figure out how to use its product, and someone else would develop applications for specific market needs, Segway’s leaders missed the opportunity to truly disrupt one market and start the path toward wider success.
The Fire Phone had a great opportunity to grow which it missed. The Fire Phone had several features making it great for on-line shopping. But the launch team did not focus, focus, focus on this application. They did not keep developing apps, databases and ways of using the product for retailing so that avid shoppers found the Fire Phone superior for their needs. Instead the Fire Phone was launched as a mass-market device. Its retail attributes were largely lost in comparisons with other general purpose smartphones.
People already had Apple iPhones, Samsung Galaxy phones and Google Nexus phones. Simultaneously, Microsoft was pushing for new customers to use Nokia and HTC Windows phones. There were plenty of smartphones on the market. Another smartphone wasn’t needed – unless it fulfilled the unmet needs of some select market so well that those specific users would say “if you do …. and you need…. then you MUST have a FirePhone.” By not focusing like a laser on some specific application – some specific set of unmet needs – the “cool” features of the Fire Phone simply weren’t very valuable and the product was easy for people to pass by. Which almost everyone did, waiting for the iPhone 6 launch.
This was the same problem launching Google Glass. Glass really caught the imagination of many tech reviewers. Everyone I knew who put on Glass said it was really cool. But there wasn’t any one thing Glass did so well that large numbers of folks said “I have to have Glass.” There wasn’t any need that Glass fulfilled so well that a segment bought Glass, used it and became religious about wearing Glass all the time. And Google didn’t improve the product in specific ways for a single market application so that users from that market would be attracted to buy Glass. In the end, by trying to be a “cool tool” for everyone Glass ended up being something nobody really needed. Exactly like Segway.
Microsoft recently launched its Hololens. Again, a pretty cool gadget. But, exactly what is the target market for Hololens? If Microsoft proceeds down the road of “a cool tool that will redefine computing,” Hololens will likely end up with the same fate as Glass, Segway and Fire Phone. Hololens marketing and development teams have to find the ONE application (maybe 2) that will drive initial sales, cater to that application with enhancements and improvements to meet those specific needs, and create an initial loyal user base. Only after that can Hololens build future applications and markets to grow sales (perhaps explosively) and push Microsoft into a market leading position.
All companies have opportunities to innovate and disrupt their markets. Most fail at this. Most innovations are thrown at customers hoping they will buy, and then simply dropped when sales don’t meet expectations. Most leaders forget that customers already have a way of getting their jobs done, so they aren’t running around asking for a new innovation. For an innovation to succeed launchers must identify the unmet needs of an application, and then dedicate their innovation to meeting those unmet needs. By building a base of customers (one at a time) upon which to grow the innovation’s sales you can position both the new product and the company as market leaders.
by Adam Hartung | Jun 8, 2011 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Apple’s market value has struggled in 2011. When I ask people why, the overwhelming top 3 responses are:
- How can a company nearly bankrupt 10 years ago become the second most valuable company on the equity market?
- Apple has had a long run, isn’t it about to end?
- How can Apple be worth so much, when it has no “real” assets?
I’m struck by how these questions are based on looking backward, rather than looking into the future.
Firstly, it doesn’t matter where you start, but rather how well you run the race. What happened in the past is just that, the past. Changing technologies, products, solutions, customers, business practices, economic conditions and competitors cause markets to shift. When they shift, competitor positions change. The strong can remain strong, but it’s also possible for company’s fortunes to change drastically. Apple has taken advantage of market shifts – even created them – in order to change its fortunes. What investors should care about is the future.
Which leads to the second question; and the answer that there’s no reason to think Apple’s growth run will end any time soon. Perhaps Apple won’t maintain 100% annual growth forever, but it doesn’t have to grow at that rate to be a very valuable investment. And worth a lot more than the current value. That Apple can grow at 20% (or a lot more) for another several years is a very high probability bet:
- Apple’s growth markets are young, and the markets themselves are growing fast. Apple is not in a gladiator war to maintain old customers, but instead is creating new customers for digital/mobile entertainment, smartphones and mobile tablets. Because it is in high growth markets it’s odds of maintaining company growth are very good. Just look at the recent performance of iPad tablet sales, a market most analysts predicted would struggle against cheaper netbooks. Quarterly sales are blowing past early 2010 estimates of annual sales, and are 250% over last year (chart source Silicon Alley Insider):
- Apple’s products continue to improve. Apple is not resting upon its past success, but rather keeps adding new capability to its old offerings in order to migrate customers to its new platforms. At the recent developer’s conference,for example, Apple described how it was adding Twitter integration for enhanced social media to its platforms and introducing its own messenger service, bypassing 3rd party services (like SMS) and replacing competitive products like RIM’s BBM.
- Further, Apple is introducing new solutions like iCloud (TechStuffs.net “Apple iCloud Key Features and Price) offering free wireless synching between Apple platforms, free and seamless back-ups, and the ability to operate without a PC (even Mac flavor) if you want to be mobile-only (“The 10 Huge Things Apple Just Revealed” BusinessInsider.com). These solutions keep expanding the market for Apple sales into new markets – such as small businesses (Entrepreneur.com “What Lion Means for Small Business“) as it solves unmet needs ignored by historically powerful solutions providers, or offered at far too high a price.
Thirdly, investors wonder how a company can be worth so much without much in the way of “real” assets. The answer lies in understanding how the business world has shifted. In an industrial economy real assets – like land, building, machinery – was greatly valued. They were the means of production, and wealth generation. But we have transitioned to the information economy. Now the information around a business, and providing digital solutions, are worth considerably more than “real” assets.
How many closed manufacturing plants, retail stores or restaurants have you seen? How many real estate developers have shuttered? Contrarily, what’s the value of customer lists and customer access at companies like Amazon.com, GroupOn, Linked-In, Twitter and Facebook in today’s information economy? What’s the demand for printed books, and what’s the demand for ebooks (such as Kindle?) “Real” asset values are tumbling because they are easy to obtain, and owning them produces precious little value, or profit, in today’s globally competitive economy.
This same week that Apple announced a barrage of revenue-generating upgrades and new products asset rich Wal-Mart made an announcement as well. After a decade in which Apple’s value skyrocketed to over $330B (More than Microsoft and Intel Combined by the way), Wal-Mart’s value has gone nowhere, mired around $185B. Wal-Mart’s answer is to buy back it’s shares. The Board has authorized continuing and expanding a massive share buyback program of literally 1 million shares/day – 10% of all shares traded daily! The amount allocated is 1/6th the entire market cap! At this rate 24x7WallStreet.com headlined “Wal-Mart’s Buyback Plan Grows & Grows.. Could Take Itself Private by 2025.”
Share buybacks produce NO VALUE. They don’t produce any revenue, or profit. All they do is take company cash, and spend it to buy company shares. The asset (cash) is spent (removed) in the process of buying shares, which are then removed from the company’s equity. The company actually gets smaller, because it has less assets and less equity. (Compared to LInked-In, for example, that grew larger by selling shares and increasing its cash assets.) Over time the cash disappears, and the equity disappears. Eventually, you have no company left! Stock buybacks are an end of lifecycle investment, and should trigger great fear in investors as they demonstrate management has lost the ability to identify high-yield growth opportunities.
Wal-Mart is steeped in assets. It has land, buildings, stores, shelves, warehouses, trucks, huge computer systems. But these assets simply don’t produce a lot of profit, as competitors are squeezing margins every year. And there’s not much growth, because doing more of what it always did isn’t really wanted by a lot more people. So it has gobs of assets. So what? The assets simply aren’t worth a lot when the market doesn’t need any more retail stores; especially boring ones with limited product selection, limited imagination and nothing but “low price.”
Assets aren’t the “store of value” analysts gave them in an industrial economy, and it’s time we realize investing in “assets” is fraught with risk. Assets, like homes and autos have shown us, can go down in value even easier and faster than they can go up. Global competitors can match the assets, and drive down prices using cheap labor and operating by less onerous standards. In today’s market, assets are as likely to be an anchor on value as an asset.
I started 2011 saying Apple was a screaming buy. Today that’s even more true than it was then. Apple’s revenues, profits and cash flow are up. Sales in existing lines are still profitably growing at double (or triple) digit rates, and enhancements keep Apple in front of competitors. Meanwhile Apple is entering new markets every quarter, with solutions meeting existing, unmet needs. Because value has been stagnant, the value (price) to revenue, earnings and cash flow have all declined, making Apple cheaper than ever. It’s time to invest based on looking to the future, and not the past. Doing so means you buy Apple today, and start dumping asset intensive stocks like Wal-mart.
Update 12 June, 2011 – Chart from SeekingAlpha.com. Apple’s cash hoard grows faster than its valuation. When a company can grow cash flow and profits faster than revenues – and it’s doubling revenues – that’s a screaming buy!
by Adam Hartung | Apr 29, 2011 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
CIO Magazine today published my latest article for IT professionals “Why You Should Stop Worrying and Let End Users Have iPads.” (note: free site registration may be required to read the full article)
The editors at CIO agreed with me that a big change is happening in “enterprise IT.” User technology is now so cheap, and good, that employees no longer depend upon corporate IT to provide them with their productivity tools. When you can buy a smartphone for $100, and a tablet for $500, increasingly users are happy to supply their own, private, productivity tools rather than try using something they find larger, heavier and harder to use from their boss — and also something which they’ve been told for years should not have personal items on it.
The serious impact is that increasingly the users feel “burdened” by corporate IT. They become less accessible as they leave the company laptop at work – and shut off the company Blackberry after work hours. They complain about the inefficiency of corporate tools, while using personal phones and tablets to do internet searches, access networks for fast info sharing (Facebook, Twitter, Linked-in), and generally find greatest productivity by ignoring technology supplied by employers. Often tehnology that is incredibly expensive.
Leading companies are taking advantage of this trend, and supplying the latest devices to employees. They recognize that greatest good comes not from “controlling” employee technology use. Rather, productivity is greatly enhanced by encouraging employees to take advantage of newest technology in the course of their work. Thus, leaders are providing iPhones and iPads, and giving access to Facebook and YouTube through the company network.
The world of IT shifts fast. Changes in IT have often seperated winners from losers. IT leaders have to change their mindsets if they want to help their companies profitably grow. And the first step is giving users technology they want, rather than technology they too often despise.
You can also access this article by clicikng on links to the following journals:
I look forward to your opinion about this topic! Do you think IT departmernts are slow to react to new tools? Do you think the new tools are “enterprise ready?” Do you think the advantages of newer techbnology outweigh potential IT risks? Drop comments here, or on the article pages! Love to hear what others think
by Adam Hartung | Oct 19, 2010 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech
Summary:
- Apple keeps itself in growth markets by identifying unmet needs
- Apple expands its markets every quarter
- Apple deeply understands its competition
- Apple knows how to launch new products quickly
- These skills allow investors to buy Apple with low risk, and likely tremendous gains
Apple’s recently announced sales and earnings beat expectations. Nothing surprising about that, because Apple always lowballs both, and then beats its forecast handily. What is a touch surprising is that according to Marketwatch.com “Apple’s Decline in Margins Casts a Shadow.” Some people are concerned because the margin was a bit lower, and iPad sales a bit lower, than some analysts forecast.
Forget about the concerns. Buy the stock. The concerns are about as relevant as fretting over results of a racing team focused on the world land speed record which insteading of hitting 800 miles per hour in their recent run only achieved 792 (according to Wikipedia the current record is 763.) The story is not about “expectations.” Its about a team achieving phenominal success, and still early in the development of their opportunity!
Move beyond the financial forecasts and really look at Apple. In September of 2009 there was no iPad. Some speculated the product would flop, because it wasn’t a PC nor was it a phone – so the thinking was that it had no useful purpose. Others thought that maybe it might sell 1 million, if it could really catch on. Last quarter it sold over 4 million units. No single product, from any manufacturer, has ever had this kind of early adoption success. Additionally, Apple sold over 14 million iPhones, nearly double what it sold a year ago. Today there are over 300,000 apps for iPad and iPhone – and that number keeps growing every day. Meanwhile corporations are announcing weekly rollouts of the iPad to field organizations as a replacement for laptop PCs. And Apple still has a majority of the MP3 music download business. While sales of Macs are up 14% last quarter – at least 3 times the growth rate of the moribund PC market!
The best reason to buy any stock is NOT in the financial numbers. Endless opportunities to manipulate both sales and earnings allow all management teams to alter what they report every quarter. Even Apple changed its method of reporting iPhone sales recently, leaving many analysts scratching their heads about how to make financial projections. Financials are how a company reports last year. But if you buy a stock it should be based on how you think it will do well next year. And that answer does not lie in studying historical financials, or pining over small changes period to period in any line item. If you are finding yourself adopting such a focus, you should reconsider investing in the company at all.
Investors need growth. Growth in sales that leads to growth in earnings. And more than anything else, that comes from participating in growth markets — not trying to “manage” the old business to higher sales or earnings. If a company can demonstrate it can enter new markets (which Apple can in spades) and generate good cash flow (which Apple can in diamonds) and produce acceptable earnings (which Apple can in hearts) while staying ahead of competitors (which Apple can in clubs) then the deck is stacked in its favor. Yes, there are competitive products for all of the things Apple sells, but is there any doubt that Apple’s sales will continue its profitable growth for the next 2 or 3 years, at least? At this point in the markets where Apple competes competitors are serving to grow the market more than take sales from Apple!
Apple has developed a very good ability to understand emerging market needs. Almost dead a decade ago, Apple has now achieved its first $20 billion quarter. This was not accomplished by focusing on the Mac and trying to fight the same old battle. Instead Apple has demonstrated again and again it can identify unmet needs, and bring to market solutions which meet those needs at an acceptable price – that produces an acceptable return for Apple’s shareholders.
And Steve Jobs demonstrated in Monday’s earnings call that Apple deeply understands its competitors, and keeps itself one step ahead. He described Apple’s competitive situation with key companies Google and Research in Motion (RIM) as reported in the New York Times “Jobs Says Apple’s Approach Is Better Than Google’s.” Knowing its competitors has helped Apple avoid head-on competition that would destroy margins, instead identifying new opportunities to expand revenues by bringing in more customers. Much more beneficial to profits than going after the “low cost position” or focusing on “maintaining the core product market” like Dell or Microsoft.
Apple’s ongoing profitable growth is more than just the CEO. Apple today is an organization that senses the market well, understands its competition thoroughly and is capable of launching new products adeptly targeted at the right users – then consistently enhancing those products to draw in more users every month. And that is why you should own Apple. The company keeps itself in new, growing markets. And that’s about the easiest way there is to make money for investors.
After the last decade, investors are jaded. Nobody wants to believe a “growth story.” Cost cutting and retrenchment have dominated the business news. Yet, those organizations that retrenched have done poorly. However, amidst all the concern have been some good growth stories – despite investor wariness. Such as Google and Amazon.com. But the undisputed growth leader these days is Apple. While the stock may gyrate daily, weekly or even monthly, the long-term future for Apple is hard to deny. Even if you don’t own one of their products, your odds of growing your investment are incredibly high at Apple, with very little downside risk. Just look beyond the numbers.
