The Day TV Died – Winners and Losers (Comcast, Disney, CBS)

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.

Newspaper ad spending 1950-2010
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.

Web v mobile v TV consumption
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?

 

 

Wal-Mart’s “Shoot Yourself in the Head” Strategy

For the last decade, Wal-Mart has been "dead money" in investor parlance.  After a big jump between 1995 and 2000, the stock today is still worth less than it was in 2000.  There has been volatility, which might have benefited some traders.  But for most of the decade Wal-Mart's price has been lower.  There has been excitement because recently the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.

WMT chart 1.30.12
Source: YahooFinance 1/30/12

What happened to Wal-Mart was the market shifted.  For many years being the market leader with every day low pricing was a winning strategy.  Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.

Then competitors took aim at Wal-Mart, and found out they could beat the giant.

Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam's Club) dried up.  Wal-Mart reacted by expanding many stores, making them "bigger and better," even adding groceries to some.  But that added only marginally to revenue, and even less marginally to profits. 

And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart's success formula offered.

Other U.S. discounters, like Target and Kohl's, offered nicer stores with more varieties or classier merchandise – and often their pricing was not much higher, or even the same.  And a new category of retailer, called "dollar stores" emerged that beat Wal-Mart's price on almost everything for the true price shopper.  These 99 cent stores became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart's stores. 

But, even more dramatically, the whole retail market began shifting on-line. 

Amazon, and its brethren, kept selling more and more products.  And at prices even lower than Wal-Mart.  And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer's home.  With each year, people found less need to buy at Wal-Mart as the on-line options exploded.

More recently, traditional price-focused retailers have been attacked by mobile devices.  Firstly, there's the new Kindle Fire.  In just one quarter it has gone from nowhere to tied as the #1 Android tablet

Kindle Fire share Jan 2012
Source: BusinessInsider.com

The Kindle Fire is squarely targeted at growing retail sales for Amazon, making it easier than ever for customers to ignore the brick-and-mortar store in favor of on-line retailers. 

On top of this, according to Pew Research 52% of in-store shoppers now use a mobile device to check price and availability on-line of products as they look in the store.  Thus a customer can look at products in Wal-Mart, and while standing in the aisle look for that same product, or comparable, in another store on-line.  They can decide they like the work boots at Wal-Mart, and even try them on for size. Then they can order from Zappos or another on-line retailer to have those boots shipped to their home at an even lower price, or better warranty, even before leaving the Wal-Mart store.

It's no wonder then that Wal-Mart has struggled to grow its revenues.  Wal-Mart has been a victim of intense competition that found ways to attack its success formula effectively. 

Then Wal-Mart implemented its "Shoot Yourself in the Head" strategy

What did Wal-Mart recently do?  According to Reuters Wal-Mart decided to transfer its entire marketing department to work for merchandising.  Marketing was moved from reporting to the CEO, to reporting into Sales.  The objective was to put all the energy of marketing into trying to further defend the Wal-Mart business, and drive up same-store sales.  In other words, to make sure marketing was fully focused on better executing the old, struggling success formula.

The marketing department at Wal-Mart does all the market research on customers, trends and advertising – traditional and on-line.  Marketing is the organization charged with looking outside, learning and adapting the organization to any market shifts. In this role marketing is expected to identify new competitors, new market solutions that are working better, and adapt the organization to shifting market needs.  It is responsible to be the eyes and ears of the organization, and then think up new solutions addressing these external inputs.  That's why it needs to report to the CEO, so it can drive toward new solutions that can revitalize the organization and keep it growing with new market trends.

But now, it's been shot.  Reporting to sales, marketing's role directed at driving same store sales is purely limiting the function to defending and extending the success formula that has produced lackluster results for 12 years.  Marketing is no longer in a position to adapt Wal-Mart.  Instead, it is tasked to find ways to do more, better, faster, cheaper under the leadership of the sales organization.

When faced with market shifts, winning companies adapt.  Look at how skillfully Amazon has moved from book seller to general merchandise seller to offering a consumer electronic device. 

Unfortunately, too many businesses react to market shifts like Wal-Mart.  They hunker down, do more of the same and re-organize to "increase focus" on the traditional business as results suffer.  Instead of adapting the company hopes more focus on execution will somehow improve results.

Not likely.  Expect results to go the other direction.  There might be a short-term improvement from the massive influx of resource, but long term the trends are taking customers to new solutions.  Regardless of the industry leader's size.  Don't expect Wal-Mart to be a long-term winner.  Better to invest in competitors taking advantage of trends.

 

 

Do you think you can fix that? – Filene’s, Syms, Home Depot, Sears, Wal-Mart


In the back half of the 1990s Apple was clearly on the route to bankruptcy.  Sun Micrososystems seriously investigated buying Apple.  After a review, leadership opted not to make the acquisition.  Sun’s non-officer management, bouyed on rumors of the acquisition, was heartbroken upon hearing Sun would not proceed.  When Chairman Scott McNeely was asked at a management retreat why the executive team passed on Apple, he responded with “Do you think you can fix that?”

Sun leadership clearly had answered “no.”  Good for a lot of us that Steve Jobs said “yes.” 

Sun has largely disappeared, losing 95% of its market cap after 2000 and being acquired by Oracle.  Why did Mr. Jobs succeed where the leadership of Sun, which couldn’t save itself much less Apple, feared it would fail?

For insight, look no further than the recent failure of Filene’s Basement (“Filene’s Saga EndsBoston.com) and its acquirer Sym’s (“Retailers’s Sym’s and Filene’s Go Out of BusinessChicago Tribune.)  Most of the time, when a troubled business is acquirerd not only is the buyer unable to fix the poor performer, but investments incurred by the buyer jeapardizes its business to the point of failure as well.  Given the track record of corporations at fixing bad businesses, Mr. McNeely was on statistically sound footing to reject buying Apple.

Why is the track record of corporate management so bad at fixing problem businesses?  Largely because most of their time is spent tyring to extend the past, rather than create a business which can thrive in the future.

The leadership of Sun didn’t see a future filled with mobile devices for music, movies or telephony.  They were fixated on the Unix-based computers Sun built and sold.  It was unclear how Apple would help them sell more servers, so it was a management diversion – a “poor strategic fit” – for Sun to acquire a technology intensive, talent rich organization.  They passed, stayed focused on Unix servers and high-end workstations, and failed as that market shifted to PC products.

Much is the same for Filene’s Basement.  A great brand, Sym’s bought Filene’s in an effort to continue pushing the discount model both Filene’s and Sym’s had historically pursued.  Unfortunately, the market for discount department store merchandise was rapidly shifting to higher end middle-market players like Kohl’s, and for deeply discounted goods the internet was making deal shopping a lot easier for everyone.  Because management was fixated on the old business, they missed the opportunity to make Filene’s and Sym’s a leader in new retail markets – like Amazon has done.

Remember in 2006 when Western Auto’s leader (and former hedge fund manager) Ed Lampert bought up the bonds of KMart, then used that position to acquire Sears?  The market went gaga over the acquisition, heralding Mr. Lampert as a genius.  Jim Cramer urged on his television program Mad Money that everyone buy Sears.  Now the merged KMart/Sears company has lost much of its value, and 24×7 Wall Street claimed it was the #1 worst performing retail chain (“America’s Eight Worst-Performing Retail Chains“.)

Z-2
Chart courtesy Yahoo.com 11/11/11 (note vertical scale is logarithmic)

Both KMart and Sears were deeply troubled when Mr. Lampert acquired them.  But he largely followed a program of cost cutting, hoping people would return to the stores once he lowered prices.  What he missed was a retail market which had shifted to Wal-Mart for the low-end products, and had fragmented into multiple competitors in the mid-priced market leaving Sears Holdings with no compelling value proposition. 

Mr. Lampert has turned over management, fired scores of employees, closed stores and largely led both brands to retail irrelevancy.  By trying to do more of the past, only better, faster and cheaper he ran into the buzz saw of competitors already positioned in the shifted market and created nothing new for shoppers, or investors.

And that’s why investors need to worry about Home Depot.  The company was a shopper and investor darling as it maintained double digit growth through the 1980s and 1990s.  But as competition matched, or beat, Home Depot’s prices – and often the capability of in-store help – growth slowed. 

The Board replaced the founding leader with a senior General Electric leader named Robert Nardelli.  He rapidly moved to operate the historical Home Depot success formula cheaper, better and faster by cutting costs — from employees to store operations and inventory.  And customers moved even more quickly to the competition.

As the recessions worsened job growth remained scarce and eventually home values plummeted causing Home Depot’s growth to disappear.  The company may be good at what it used to do, but that is simply a more competitive market that is a lot less interesting to shoppers today.  Because Home Depot has not shifted into new markets, it is in a difficult situation (and considered the 5th worst performing retailer.)  Who cares if you are a competitive home improvement store when your house is only worth 75% of the outstanding mortgage and you can’t refinance?

Z-3
Chart source Yahoo Finance 11/11/11

And it is worth taking some time to look at Wal-Mart.  The chain is famous for its rural and suburban stores selling at low prices, both as Wal-Mart and Sam’s Club.  But looking forward, we see the company has failed at everything else it has tried.  It’s offshore businesses have never met expectations and the company has left most markets.  It’s efforts at more targeted merchandise, upscale stores and smaller stores have all been abandoned.  And the company remains a serious lagger in understanding on-line sales as it has continued pouring money into defending its historical business, providing almost no return to investors for a decade. 

The market is shifting, competitors have attacked its old “core,” but Wal-Mart remains stuck trying to do more, better, faster, cheaper with no clear sign it will make any difference as people change buying patterns. How can any brick-and-mortar retailer compete on cost with a web page?

Z-4
Chart Source Yahoo Finance 11/11/11

All markets shift.  All of them.  Poor performance is most often an indication that the company has not shifted with the market.  Competition in lower growth markets leads to weak revenue performance, and declining profits.  Trying to “fix” the business by doing more of the same is almost always a money-losing proposition that hastens failure. 

It is possble to fix a weak business.  Moving with shifting markets into mobile has been very valuable for Apple investors.  Two decades ago IBM shifted from hardware sales to a services focus, and the company not only escaped bankruptcy but now is worth more than Microsoft.  

“Fixing” requires focusing on the future, and figuring out how to compete in the shifting market.  Rather than applying cost-cutting and operational improvement, it is important to determine what future markets value, and deliver that.  Zappos figured out that it could take a big lead in footwear and apparel if it offered people on-line convenience, and guaranteed taking back any products customers didn’t want (“What Other Businesses Can Learn from ZapposCMSWire.com.)  It’s sales exploded.  Toms Shoes tapped into the market desire for helping others by donating a pair of shoes every time someone bought a pair, and sales are growing in double digits (CNBC video on Tom’s Shoes).

History has taught us to be pessimistic about fixing a troubled business.  But that is largely because most management is fixated on trying to defend & extend the past.  But turnarounds can be a lot more common if leaders instead focus on the future and meet emerging needs.  It simply takes a different approach. 

In the meantime, in retail it’s a lot smarter to invest in Amazon and retailers meeting emerging needs than those fixated on cost cutting and operational improvement.  Be wary of Sears, Home Depot and Wal-Mart as long as management remains locked-in to its past.