You Should Love, and Buy, Netflix – the next Apple or Google

by | Nov 29, 2010 | Current Affairs, Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness, Television, Web/Tech


Summary:

  • Most leaders optimize their core business
  • This does not prepare the business for market shifts
  • Motorola was a leader with Razr, but was killed when competitors matched their features and the market shifted to smart phones
  • Netflix's leader is moving Netflix to capture the next big market (video downloads)
  • Reed Hastings is doing a great job, and should be emulated
  • Netflix is a great growth story, and a stock worth adding to your portfolio

"Reed Hastings: Leader of the Pack" is how Fortune magazine headlined its article making the Netflix CEO its BusinessPerson of the Year for 2010.  At least part of Fortune's exuberance is tied to Netflix's dramatic valuation increase, up 200% in just the last year.  Not bad for a stock called a "worthless piece of crap" in 2005 by a Wedbush Securities stock analyst.  At the time, popular wisdom was that Blockbuster, WalMart and Amazon would drive Netflix into obscurity.  One of these is now gone (Blockbuster) the other stalled (WalMart revenues unmoved in 2010) and the other well into digital delivery of books for its proprietary Kindle eReader.

But is this an honor, or a curse?  It was 2004 when Ed Zander was given the same notice as the head of Motorola.  After launching the Razr he was lauded as Motorola's stock jumped in price.  But it didn't take long for the bloom to fall off that rose. Razr profits went negative as prices were cut to drive share increases, and a lack of new products drove Motorola into competitive obscurity.  A joint venture with Apple to create Rokr gave Motorola no new sales, but opened Apple's eyes to the future of smartphone technology and paved the way for iPhone.  Mr. Zander soon ran out of Chicago and back to Silicon Valley, unemployed, with his tale between his legs.

Netflix is a far different story from Motorola, and although its valuation is high looks like a company you should have in your portfolio. 

Ed Zander simply took Motorola further out the cell phone curve that Motorola had once pioneered.  He brought out the next version of something that had long been "core" to Motorola.  It was easy for competitors to match the "features and functions" of Razr, and led to a price war.  Mr. Zander failed because he did not recognize that launching smartphones would change the game, and while it would cannibalize existing cell phone sales it would pave the way for a much more profitable, and longer term greater growth, marketplace.

Looking at classic "S Curve" theory, Mr. Zander and Motorola kept pushing the wave of cell phones, but growth was plateauing as the technology was doing less to bring in new users (in the developed world):

Slide1
Meanwhile, Research in Motion (RIM) was pioneering a new market for smartphones, which was growing at a faster clip.  Apple, and later Google (with Android) added fuel to that market, causing it to explode.  The "old" market for cell phones fell into a price war as the growth, and profits, moved to the newer technology and product sets:

Slide2
The Motorola story is remarkably common.  Companies develop leaders who understand one market, and have the skills to continue optimizing and exploiting that market.  But these leaders rarely understand, prepare for and implement change created by a market shift.  Inability to see these changes brought down Silicon Graphics and Sun Microsystems in 2010, and are pressuring Microsoft today as users are rapidly moving from laptops to mobile devices and cloud computing.  It explains how Sony lost the top spot in music, which it dominated as a CD recording company and consumer electronics giant with Walkman, to Apple when the market moved people from physical CDs to MP3 files and Apple's iPod.

Which brings us back to what makes Netflix a great company, and Mr. Hastings a remarkable leader.  Netflix pioneered the "ship to your home" DVD rental business.  This helped eliminate the need for brick-and-mortar stores (along with other market trends such as the very inexpensive "Red Box" video kiosk and low-cost purchase options from the web.)  Market shifts doomed Blockbuster, which remained locked-in to its traditional retail model, made obsolete by competitors that were cheaper and easier with which to do business.

But Netflix did not remain fixated on competing for DVD rentals and sales – on "protecting its core" business.  Looking into the future, the organization could see that digital movie rentals are destined to be dramatically greater than physical DVDs.  Although Hulu was a small competitor, and YouTube could be scoffed at as a Gen Y plaything, Netflix studied these "fringe" competitors and developed a superb solution that was the best of all worlds.  Without abandoning its traditional business, Netflix calmly moved forward with its digital download business — which is cheaper than the traditional business and will not only cannibalize historical sales but make the traditional business completely obsolete!  

Although text books talk about "jumping the curve" from one product line to another, it rarely happens.  Devotion to the core business, and managing the processes which once led to success, keeps few companies from making the move.  When it happens, like when IBM moved from mainframes to services, or Apple's more recent shift from Mac-centric to iPod/iPhone/iPad, we are fascinated.  Or Google's move from search/ad placement company to software supplier.  While any company can do it, few do.  So it's no wonder that MediaPost.com headlines the Netflix transition story "Netflix Streams Its Way to Success."

Is Netflix worth its premium?  Was Apple worth its premium earlier this decade?  Was Google worth its premium during the first 3 years after its Initial Public Offering?  Most investors fear the high valuations, and shy away.  Reality is that when a company pioneers a growth business, the value is far higher than analysts estimate.  Today, many traditionalists would say to stay with Comcast and set-top TV box makers like TiVo.  But Comcast is trying to buy NBC in order to move beyond its shrinking subscriber base, and "TiVo Widens Loss, Misses Street" is the Reuters' headline. Both are clearly fighting the problems of "technology A" (above.)

What we've long accepted as the traditional modes of delivering entertainment are well into the plateau, while Netflix is taking the lead with "technology B."  Buying into the traditionalists story is, well, like buying General Motors.  Hard to see any growth there, only an ongoing, slow demise.

On the other hand, we know that increasingly young people are abandoning traditional programing for 100% entertainment selection by download.  Modern televisions are computer monitors, capable of immediately viewing downloaded movies from a tablet or USB drive – and soon a built-in wifi connection.  The growth of movie (and other video) watching is going to keep exploding – just as the volume of videos on YouTube has exploded.  But it will be via new distribution.  And nobody today appears close to having the future scenarios, delivery capability and solutions of Netflix.  24×7 Wall Street says Netflix will be one of "The Next 7 American Monopolies."  The last time somebody used that kind of language was talking about Microsoft in the 1980s!  So, what do you think that makes Netflix worth in 2012, or 2015?

Netflix is a great story.  And likely a great investment as it takes on the market leadership for entertainment distribution.  But the bigger story is how this could be applied to your company.  Don't fear revenue cannibalization, or market shift.  Instead, learn from, and behave like, Mr. Hastings.  Develop scenarios of the future to which you can lead your company.  Study fringe competitors for ways to offer new solutions. Be proactive about delivering what the market wants, and as the shift leader you can be remarkably well positioned to capture extremely high value.

 

 

Getting Rich vs. Getting Lost – Smartphones – Google & Apple vs. RIM, Nokia, Samsung, Microsoft

by | Nov 23, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech


Summary:

  • Most planning systems rely on extending past performance to predict the future
  • But markets are shifting too fast, making such forecasts wildly unreliable
  • To compete effectively, companies must anticipate future market shifts
  • Planning needs to incorporate a lot more scenario development, and competitor information in order to overcome biases to existing customers and historical products
  • Apple and Google have taken over the mobile phone business, while the original leaders have fallen far behind
  • Historical mobile phone leaders Nokia, Samsung, Motorola, RIM and Microsoft had the technologies and products to remain leaders, but they lacked scenarios of the future enticing them to develop new markets.  Thus they allowed new competitors to overtake them
  • Lacking scenarios and deep competitor understanding, companies react to market events – which is slow, costly and ineffective.

“Apple, Android Help Smartphone Sales Double Over Last Year” is the Los Angeles Times headline.  Google-supplied Android phones jumped from 3% of the market to 26% versus the same quarter last year.  iPhones remained at 17% of the market.  Blackberry is now just under 15%, compared to about 21% last year.  What’s clear is people are no longer buying traditional mobile phones, as #1 Nokia share fell from 38% to 27%.  Like many market changes, the shift has come fast – in only a matter of a few months.  And it has been dramatic, as companies not even in the market 5 years ago are now the leaders. Former leaders are struggling to stay in the game as the market shifts.

The lesson Google and Apple are teaching us is that companies must have a good idea of the future, and then send their product development and marketing in that direction.  Although traditional cell phone manufacturers, such as Motorola and Samsung, had smartphone technology many years prior to Apple, they were so focused on their traditional markets they failed to look into the future.  Busy selling to existing customers an existing technology, they didn’t develop scenarios about 2010 and beyond that would describe how the market could expand – far beyond where traditional phone sales would take it.  Both famously said “so what” to the new technology, and used existing customer focus groups of people who had no idea the potential benefit of a smart phone to justify their willingness to remain fixated on the existing business.  Lacking a forward planning process based on scenario development, and lacking a good market sensing system that would pick up on the early market shift as novice competitor Apple started to really change the market, these companies are now falling rapidly to the wayside. 

Even smartphone pioneer Research in Motion (RIM) was so focused on meeting the needs of its existing “enterprise” customers that it failed to develop scenarios about how to expand the smartphone business into the hands of everyone.  RIM missed the value of mobile apps, and the opportunity to build an enormous app database.  Now RIM has been surpassed, and is showing no signs of providing effective competition for the market leaders.  While the Apple and Android app base continues to explode, based upon 3rd and 4th generation product inducing more developers to sign up, and more customers to buy in, RIM has not effectively built a developer base or app set – causing it to fall further behind quarter by quarter.

Even software giant Microsoft missed the market.  Fixated upon putting out an updated operating system for personal computers (Vista then later Windows 7) it let its 45% market share in smart phones circa 2007 disappear.  Now approaching 2011 Microsoft has largely missed the market.  Again, focused clearly upon its primary goal of defending its existing business in O/S and office automation software, Microsoft did not have a forward focused planning group that was able to warn the company that its new products might well arrive in a market that was stagnating, and on the precipice of a likely decline, because of new technology which could make the PC platform obsolete (a combination of smart mobile devices and cloud computing architecture.)  Microsoft’s product development was being driven by its historical products, and market position, rather than an understanding of future markets and how it should develop for them.

We can see this lack of future scenario development and close competitor tracking has confused Microsoft.  Desperately trying to recover from a market stall in 2009 when revenues and profits fell, Microsoft has no idea what to do in the rapidly expanding smartphone market today.  Its first product, Kin, was dropped only two months after launch, which industry analysts saw as necessary given the product’s lack of advantages.  But now Mediapost.com informs us in “Return of the Kin?” Microsoft is considering a re-launch in order to clear out old inventory.

This amidst a launch of the Windows Phone 7 that has gone nowhere.  Firstly, there was insufficient advertising to gain any public awareness of the product launch earlier in November (Mediapost “Where’s the Windows Phone 7 Ad Barrage?“)  Initial sales have gone nowhere “Windows Phone 7 Lands Without a Sound” [Mediapost], with many stores lacking inventory, very few promoting the product and Microsoft keeping surprisingly mum about initial sales. This has raised the question “Is Windows Phone 7 Dead On Arrival?” [Mediapost] as sales barely achieving 40,000 initial unit sales at launch, compared to daily sales of 200,000 Android phones and 270,000 iphones! 

Companies, like Apple and Google, that have clear views of the future, based upon careful analysis of what can be done and tracking market trends, create scenarios that allow them to break out of the pack.  Scenario development helps them to understand what the future can be like, and drive their product development toward creating new markets with more customers, more unit sales, higher revenues and improved cash flow.  By studying early competitors, especially fringe ones, they create new products which are more highly desired, breaking them out of price competition (remember the Motorola Razr fiasco that nearly bankrupted the company?) and into higher price points and better earnings. Creating and updating future scenarios becomes central to planning – using scenarios to guide investments rather than merely projections based upon past performance.

Companies that base future planning on historical trends find themselves rapidly in trouble.  Market shifts leave them struggling to compete, as customers quickly move to new solutions (old fashioned notions of “exit costs” are now dead).  Instead of heading for the money, they are confused – lost in a sea of options but with no clear direction.  Nokia, Samsung, RIM and Microsoft all have lots of resources, and great historical experience in the market.  But lacking good scenario planning they are lost.  Unable to chart a course forward, reacting to market leaders, and hoping customers will seek them out because they were once great. 

Far too many companies do their planning off of past projections.  One could say “planning by looking in the rear view mirror.” In a dynamic, global world this is not sufficient.  When monster companies like these can be upset so fast, by someone they didn’t even think of as a traditional competitor (someone likely not even on the radar screen recently) how vulnerable is your company?  Do you plan on 2015 looking like 2005?  If not, how can future projections based on past actuals be valuable?  it’s time more companies change their approach to planning to put an emphasis on scenario development with more competitive (rather than existing customer) input.  That’s the only way to get rich, instead of getting lost.

 

 

Growth (vs Greed) is Good – Google, Amazon, Facebook vs Microsoft

by | Nov 18, 2010 | Current Affairs, In the Rapids, Leadership, Web/Tech


Summary:

  • Most managers think it’s good to lower costs
  • Most leaders focus heavily on earnings
  • But focusing on costs and earnings leads to a dysmal spiral of decline
  • Growth, rather than earings, distinguishes the higher value, and higher paying, companies
  • Google is giving across the board pay raises and bonuses, because it has high growth
  • Amazon, Facebook and Apple are hiring and paying more because they are growing
  • Microsoft is cutting staff and costs, and its value is going nowhere as it focuses on earnings
  • Growth is good, Greed (a focus on earnings) is the road to ruin

“Google to Give Staff 10% Raise” is the Wall Street Journal headline.  All 23,000 employees (globally) will receive a 10% raise this year.  At Mediapost.com in “Google Woos Troops with Cash and Raises” it is reported that additional to the 10% raise everyone will also receive at least a $1,000 cash bonus end of this year.  According to CEO Eric Schmidt “We want to make sure that you feel rewarded for all your hard work.” For best performers, Google is making some pretty big (outrageous?) offers.  In “Google Paying Big Bucks to Keep Talent” Mediapost reported a staff engineer was awarded $3.5 million in restricted stock to stay at the company.

Has your company announced anything similar?   Hold on, didn’t you and your team work really hard?  Don’t you deserve recognition for your efforts?  And given your value to your employer, shouldn’t you receive something special to retain you, before you run to a higher paying job with better growth opportunities?  Are we to believe all the good people, who deserve bonuses, are at Google?  Or is something different going on besides just “hard work” leading to this generous cash dispersal to employees?

Google is growing like crazy.  And that’s the difference.  As Bruce Henderson, founder of the famous Boston Consulting Group once said, “growth hides a multitude of sins.”  Growth surrounds the business with lush resources – it’s like being on the equator rather than the poles.  When you grow, you can pay more to employees, and your suppliers. You can be Santa Clause, rather than the Grinch.  Google is spending more money to keep, and hire, employees because other high growth companies, like Facebook, have been “stealing” them away.  It’s a problem of riches in the battle to hire and keep people!  Wouldn’t you like to particpate in this one?

Too many leaders confuse growth with greed (remember the famous Gorden Gekko speech from Wall Street about “Greed is Good”?)  The outcome is a surplus of focus on “the bottom line” and that leads to cost cutting – which hurts growth.  In the rush to show higher earnings, leaders forget earnings are the result of good management – and growth – and they begin looking for short-term ways to improve them. Greed, and the desire for more earnings now, causes them to forget that had they spent more time finding profitable growth markets yesterday the earnings today would be higher, and better. And they forget that without growth earnings are destined to decline!

Growth leads to a virtuous circle.  More sales leads to more investment in new products and markets, leading to more sales, leading to more earnings, leading to more hiring, leading to higher pay, leading to better talent, leading to better ideas, leading to more new products taking you into more new markets…. a pretty fun place to work.  Wheras greed leads to the whirlpool of despair.  Cost cutting, product line rationalization, benefit reductions, lower (or no bonuses), headcount freezes, layoffs, no new hires, lower pay, more pressure on suppliers to cut their prices, no new product introductions, lost accounts, fewer salespeople, layoffs, outsourcing, facility closings ….. very much not a fun place to work.  Where growth fuels a great company, focus on earnings inevitably kills the business.

We can see this difference when comparing performance of a few leading companies.  Microsoft grew for many years.  But now its strict focus on PC software has caused growth to lag.  At Techflash.com (Puget Sound Business Journal product) “Hiring: Microsoft Stays Cautious as Google, Amazon Ramp Up” tells the story.  Declining PC sales growth has led Microsoft to reduce its workforce by 2% globally the last year (~4,000).  Google has expanded by 18% (+23,300 jobs).  Since adding Kindle to its product line, and making other expansions, Amazon has added 44% to its workforce (~10,000 or 2.5 times the staff reduction at Microsoft).  New products and new markets is helping Google, Facebook and Amazon grow – while focus on old markets has lowered growth at Microsoft.

Now Microsoft is attempting to save face by focusing on expense management, and earnings.  Mr. Ballmer and his team hope Wall Street analysts will be happy with greed, by looking only at earnings, rather than growth.  Microsoft’s CFO said “the best measure for our financial performance… comes down to EPS [earnings per share]… what we really need to do is drive earnings per share growth.”  Microsoft missed the digital music wave, smartphone and tablet waves.  It’s now struggling to rediscover growth, so it’s hoping to appeal to greed. Microsoft is taking the old approach of “if you can’t show you understand markets, products and growth then try to convince them you’re a good manager who can cut costs.”   But how long can Microsoft manage its earnings when it’s not a significant player in the growth markets?  Cost reduction is never the route to prosperity.

The last decade has seen the revenge of cost management.  Coming out of the “go go” 1990s many leaders have proudly demonstrated their ability to avoid investment, cut costs, work employees harder, avoid increased pay, avoid new hires, send work to low-pay countries – and manage for the bottom line.  Unfortunately, most publicly traded companies are worth less now than they were a decade ago.  The DJIA and S&P 500 are worth less.  The dollar has taken a shellacking.  Fewer Americans are working and unemployment is higher.  Tax receipts are down, and (as shown in the last election) Americans are pretty sick of a lousy economy.  All this focus on earnings hasn’t done much for America’s workers, most American companies or the overall economy.

If you want to be “rewarded for all your hard work” through a big paycheck, a big raise, a big bonus – and you want employment that is filling and fun – then focus on growth.  Help your company create new markets, with new products that people want.  If you lead the marketplace with new applications and new solutions that fulfill unmet needs you’ll achieve good growth.  Then realize earnings are a result of implementing that growth at effective prices.  If you focus on the right thing – growth – then you’ll receive the results you want.  Less focus on greed, with more on growth, and you might get rich.

Facebook’s new email client is a big deal for business

by | Nov 16, 2010 | Defend & Extend, General, Innovation, Leadership, Web/Tech


Summary:

  • Many companies block employee access to Facebook and other social network applications
  • But these environments actually improve performance
  • Social networks like Facebook allow people to be more productive, and are very inexpensive
  • Facebook’s new email client is an example of how these environments can provide companies better services at lower cost – supplanting existing email, for example
  • Those who embrace advances early gain an information advantage, as well as a cost advantage
  • The new Facebook email client is a big deal for business, and should be explored by everyone

A year ago I was on a panel at the Indian Institute of Technology global conference.  My fellow panelists were mostly IT heads from major corporations.  When it came to Twitter, Linked-in, MySpace and Facebook – the world of social networking – universally they all blocked access.  The reasons given were primarily data confidentiality (fear company information would escape) and productivity (fear employees would unproductively apply their time to personal efforts.)  They saw no advantages to social network applications, only risk.  Most of those companies – from pharmaceuticals to airlines – still deny access. 

This follows a long list of things denied employees by large employers on the grounds of confidentiality and productivity

  • employees don’t need a phone at their desk, who could they need to talk to and what do they need to say at work?  They can write letters or memos.
  • employees don’t need a personal computer.  All data should be kept on secured tapes and accessed by productive data center professionals when it makes sense.
  • employees don’t need a hard disk in their personal computer.  We must keep all data away from employees and keep them focused on using applications tied to central data repositories for productivity
  • employees don’t need laptops.  Who knows where they will go, and what employees will do with them.  They could let data escape, or spend time on personal letters and spreadsheets.
  • employees don’t need their own printers.  Send all jobs to a central printer location so we can control what is printed for confidentiality and to make sure somebody isn’t printing more than is necessary
  • employees don’t need their own cell phones.  What in the world do they need to say that can’t wait until they are in the office?  How will we keep them from wasting time on personal calls?
  • employees don’t need internet access at work.  There’s nothing on the web that is important for their work, and it opens a security hole in our operations.  If we give them internet access they’ll waste hours and hours browsing instead of working.

This list could go on for a long time, as I’m sure you can now imagine.  Confidentiality and productivity are merely excuses for those who fear new tools.  Reality is that all these new products improved productivity dramatically, helping employees get more done faster – and making them smarter on the job as well.  Organizations that rapidly adopted these (and other) technologies actually achieved superior performance, and rapidly saw their costs decline as these lower cost solutions gave more productivity at lower prices.  In most cases, something formerly proprietary and costly became available from an outside source much, much cheaper that worked a whole lot better.  Like how the Post Office displaced private messenger services – even though it did have security risks and made it possible for anyone to send a letter (see what I mean, you can go back in time forever with these examples.)

Today social media is the next “big thing” to improve productivity.  Facebook, Twitter and its counterparts offer full multi-media, real time interaction with people you know, and don’t know that well, globally.  You can find out about everything remarkably fast, and often quite accurately, at practically no cost.  No server need be bought – and you don’t even need a PC.  A cheap smartphone or tablet will give you all you want – soon to include conferencing and video chat.  And you don’t have to buy any software.  And you can connect to everyone – not just the people in your company, or on your server, or even on your network or your network service provider. According to Gartner, at MediaPost.com “Implications of a Facebook email Client” will be noticable by 2012, and universal by 2014!

And that’s why “Facebooks Not email Announcement” (as reported in LiveBlog Twitter style on ReadWriteWeb.com) is important for business.  Facebook email is going to be better, faster and cheaper than existing email – especially if you’re still using 2 decades out-of-date products like Lotus Notes!  Something Facebook doesn’t even want to call email because of its advancements.  

An email client for Facebook goes far beyond the value of a Microsoft Live server (think Hotmail+ if you’re not IT oriented).  Even GMail, for all its great features, doesn’t offer everything you get in Facebook, due to how Facebook provides integration into everything else that makes its network wildly productive for those of us who realize we live in networks.  You even have an archive, searchability – and the capability of creating multiple virtual private networks for doing all kinds of business activities in different markets! And practically free!  Using incredibly cheap devices, in multiple varieties and platforms, that employees might well purchase themselves! 

For use by everyone from execs to salespeople, businesses will soon be able to stop buying and handing out laptops.  Even PCWorld addressed the opportunity in “Social Networks to Supplant email in Business?” Businesses will soon quit operating server farms for most communications.  Even quit supporting networks for things like printing sales documents, or creating document-loaded USB drives to hand out.  With everyone on tablets and smartphones, and connected over social networks, in a couple of years “leave behinds” will be unnecessary.  Those in sales and purchasing will be able to obtain competitive reviews, and prices, and configurations almost instantaneously by asking people on their network for input and feedback. Email will become slow, and a siloed application less useful than products that sit on the network.

With each advance, new opportunities emerge.  Doctors have long been notoriously unwilling to carry laptops, or email patients.  From the operating room to test results, finding out from an M.D. what’s going on has been problematic.  Now MediaPost tells us in “Doctors Without Social Media Borders” how patient communication is rising dramatically from adoption of social media.  It lets the physician, and others in medicine, communicate faster, more productively and cheaper than anything before. And this is just one example of how behavior changes when new capabilities arise.  Formerly unmet needs are satisfied, and people shift to where they achieve greatest satisfaction.

Once email was considered the “killer app” that made everyone need a PC – and access to the web.  Social media takes email into entirely new orbits.  Getting more done, faster, with more people, using more current data, verified by more access points, across multiple media creates competitive advantage.  Those who ignore this trend will fall behind.  Those who adopt it have the opportunity to beat their competition.  Everyone knows that those who know the most, first, and are able to apply it have a big first mover advantage.  If you’re not promoting this in your company – if you are in fact blocking it – you’ll soon have no chance of remaining competitive.  You’ll just start falling behind – and the gap will widen. 

 

Value is created in the future, not the past – U.S. News and other old brands

by | Nov 11, 2010 | Current Affairs, In the Whirlpool, Lock-in, Web/Tech


Summary:

  • Business value requires meeting future needs
  • Businesses have to transition to remain valuable
  • U.S. News is smart to drop its print edition and go all digital
  • Print newspapers and magazines are obsolete
  • Old brands have no value
  • Businesses have to develop and fulfull future scenarios, and forget about what made them successful in the past.  Value comes from delivering in the future, not the past

Do you know any antique collectors?  They scour for old things, considered rare because they are the remaining few out of a bygone era.  For some people, these old things represent something treasured about the past – perhaps a turn in technology or some aspect of society.  But there is no useful purpose to an antique.  You can’t use the chair as a chair, for fear you’ll break it.  Mostly, old things are just that – old things. Once useful, but no longer.  They are remembrances. For most of us, seeing them in a museum once in a while is plenty often enough.  We don’t need a houseful of them – and would happily trade the old Schwynn bicycle from high-school days for an iPad.

So what’s the value of the Chicago Tribune, or the Los Angeles Times?  With the internet, tablets and other ereaders, mobile smartphones and laptops – why would anyone expect these newspapers to ever grow in value?  Yes, they were once valuable – when readers could be “current” with daily news, largely from a single source.  But now these newsapapers are practically obsolete.  Expensive to create, expensive to print, expensive to distribute.  And largely outdated by faster news outlets providing real time updates via the web, or television for those still not on-line. They are as valuable as a stack of 45 or 33 RPM records, or 8-track tapes (and if you don’t know what those are, ask your parents.)

As much as some of us, especially over 40, like the idea of newspapers and magazines – they really are obsolete.  When automobiles were first created many people who grew up riding horses said the auto would never be able to displace the horse.  Autos required petrol, where horses could feed anywhere.  Autos required roads, where horses could walk (or tow a cart) practically anywhere.  Mechanical autos broke down, where horses were reliable day after day.  And autos were expensive to purchase and use. To those raised with horses, the auto seemed interesting but unnecessary – and with drawbacks.  Yet, auto technology was clearly superior – offering better speed and longer distances, and the infrastructure was rapidly coming into place.  The horse was obsolete.  And this change made livery stables, saddle makers and blacksmiths obsolete as well.  It took only a few years.

Today, printed documents like newspapers and magazines are obsolete.  They have a purpose for travelers and commuters – but not for long.  Tablets are making even the travelers use of paper unnecessary.  With each of the 12million iPads sold (and who knows how many Kindles and other readers) another newspaper was unnecessary on the hotel room door.  So I was extremely heartened to read that “U.S. News [and World Report] is ending its print edition” on MediaLifeMagazine.com.

Some might nostalgically say this decision is the end of something grand.   Contrarily, this is the smart move by leadership to help the employees, customers and suppliers all continue pushing forward.  As a print product U.S. News reached its end of life.  As a digital product, U.S. News has a chance of becoming an important part of future journalism.  While some are concerned the future digital product is not about the same old news it used to report, the facts are that we don’t need another magazine just for news.  But the rankings and industry reports U.S. News has long created have the most value to readers (and therefore advertisers) and so the editors will be focusing on those areas.  Smart move.  Instead of doing what they always did, the editors are going to produce what the market wants.  U.S. News has a fighting chance of survival, and thriving, if it focuses on the marketplace and meeting needs.  It can expand with new products as it continues to learn what digital readers want, and advertisers will support. As an obsolete weekly magazine it didn’t have any value, but as a digital product it has a chance of being worth something. 

I was shocked to read in Advertising Age “Meister Brau, Braniff and 148 other Trademarks to be Sold at Auction.”  Who would want to buy a trademark of an old brand?  It no longer has any value.  Brands and trademarks have value when they help you aspire toward something in the future.  A dead brand would have the cost not only of developing value — like Google in search or Android in phones has done; or the entire “i” line from Apple, or even Whole Foods or Prada.  But to resurrect Meister Brau, Lucky Whip or Handi-Wrap would mean first overcoming the old (worn out and failed) position, and then trying to put something new on top.  It’s even more expensive than starting from scratch with a brand that has no meaning – because you have to overcome the old meaning that clearly did not succeed. 

Value is in the future.  Yes, rare artifacts are sometimes cherished, and their tangible ownership (think of historical pottery, or rare furniture) can cannote something of a bygone era that provides an emotional trigger.  These occasionally (like real items from the Titanic) can be collected and valuable.  But a brand?  Do you want a plastic Lucky Whip tub to help you recall bad 1960s deserts?  Or a cardboard Handi-Wrap box to remind you of grandma’s leftovers?  In business value is not about the past, it’s entirely about the future.

For businesses to create value they have to generate and fulfull scenarios about the future.  Nobody cares if you were good last year (and certainly not if you were good last decade – anybody want an Oldsmobile?)  They care about what you’re going to give them in the future.  And all business planning needs to be looking forward, not backward. And that’s why it’s a good thing that U.S. News is going all digital.  Maybe if the turnaround pros at Tribune Corporation understood this they could figure out how to grow revenues at Tribune or the Times again, and maybe get the company out of bankruptcy.  Because trying to save any business by looking at what it used to do is never going to work.

2 Losers Don’t make a Winner – Ignore Yahoo and AOL

by | Nov 8, 2010 | Current Affairs, In the Swamp, Lifecycle, Web/Tech


Summary:

  • Creating value requires growth, not cost reductions
  • Yahoo and AOL have no growth, and no new market development plans
  • Yahoo and AOL lack the resources to battle existing competitors Google and Apple
  • Don’t invest in Yahoo or AOL individually, or if they merge
  • Companies that generate high valuation, like Apple, do so by pioneering new markets with new products where they generate growth in revenue, profits and cash flow

Rumors have been swirling about Yahoo! and AOL merging – and Monday’s refresh led to about a 2% gain in the former, and 4% gain in the latter. But unless you’re a day trader, why would you care? Merging two failing companies does not create a more successful progeny.

AOL had a great past.  But since the days of dial-up, the value proposition has been hard to discern.  What innovations has AOL brought to market the last 2 years?  What new technologies is AOL championing?  What White Space projects are being trumpeted that will lead to new capabilities for web users if they purchase AOL products? 

And the same is true for Yahoo!  Although an early pioneer in on-line advertising, and to this day the location of many computer user’s browser home page, what has Yahoo! brought to market the last 2 years?  In the search market, on-line content management, browser technology and internet ad placement the game has fully gone to competitor Google.  Although the new CEO, Ms. Bartz, was brought in to much fanfare, there’s been nothing really new brought forward.  And we don’t hear about any new projects in the company designed to pioneer some new market.

And from this merger, where would the cash be created to fight against the likes of Google and Apple?  Unless one of these companies has a silver bullet, the competitors’ war chests assures “game over” for these two.

Sure, merging the two would likely lead to some capability to cut administrative costs.  But is that how you create value for an internet company?  What creates value is developing new markets – like AOL did when it brought millions of people to the internet for the first time.  And like Yahoo! did with its pioneering products delivering news, and placing ads for companies.  But since both companies have lost the willingness, capability and resources to develop new markets and products they’ve been unable to grow revenues and cash flow.  The road to prosperity most assuredly does not lie in “synergistic cost reductions” across administration, selling and product development for these two market laggards.

The reason Apple is skyrocketing in value is because it has pioneered new markets.  And produced enough cash to buy both these companies – if there was any value in them.  SeekingAlpha.com lays out the case for almost 100million iPad sales, and a lot more iPhones, in “What Could Justify a $500 Apple Stock Price.”  But beyond selling more of what it’s pioneered, Apple has not stopped pioneering new markets.  Another SeekingAlpha article points out the likelihood of Apple making video chat something people will really want to use, now that it can be done on mobile devices like iPads and iPhones, in “Apple’s Future Revenue Driver: FaceTime.”  It’s because Apple has the one-two punch of growing the markets it has pioneered while simultaneously developing new markets that makes it worth so much.

If you’ve been thinking a merged Yahoo/AOL is a value play – well think again.  Both companies are well into the swamp of declining returns.  So focused on fighting off the alligators and mosquitos trying to eat them that they long ago forgot their mission was to create new markets with new products that could carry them out of the low-growth swamp.  Sell both, if you haven’t already, and don’t look back.  Whether you take a loss or gain, at least you’ll leave with some money.  The longer you stay with these companies the less they’ll be worth, because neither has a sail of any kind to catch any growth wind.

Apple at $500 might sound crazy – but it’s a better bet than hoping to make any money in the individual, or merged, old-guard companies.  They don’t have the cash, nor the cash flow, to drive new solutions.  And that’s how value is created. 

 

It’s About the Economy, Stupid – Lessons from the election

by | Nov 4, 2010 | Current Affairs, General, Innovation, Leadership, Web/Tech


Summary:

  • Voters whipsawed from throwing out the Republicans 2 year ago to throwing out Democrats this election
  • Americans are frustrated by a no-growth economy
  • Recent government programs have been ineffective at stimulating growth, despite horrific expense
  • Lost manufacturing/industrial jobs will never return
  • America needs new government programs designed to create information-era jobs
  • Education, R&D, Product Development and Innovation investment programs are desperately needed

“It’s the Economy, Stupid” was the driving theme used during Bill Clinton’s winning 1992 Presidential campaign.  Following the dramatic changes produced in Tuesday’s American elections, this refrain seems as applicable as ever.  Two years ago Americans changed leadership in the Presidency, Congress and the Senate out of disgust with the financial crisis and lousy economy.  Now, Congress has shifted back the other direction – and the Senate came close – for ostensibly the same, ongoing reason. What seems pretty clear is that Americans are upset about their economy – and in particular they are worried about jobs and incomes.

So why can’t the politicians seem to get it right?  After all, economic improvement allowed Bill Clinton to retain the Presidency in 1996.  If smart politicians know that Americans are “voting with their pocketbooks” these days, you’d think they would be doing things to improve the economy and jobs.  Wasn’t that what the big big bailouts and government spending programs of the last 4 years were supposed to do? 

What we can now see, however, is that programs which worked for FDR, or Ronald Reagan and other politicians in the late 1900s aren’t working these days.  Everything from Great Depression Keynesians to Depression retreading Chicago School monatarists to Laffer Curve idealists have offered up and applied programs the last 8 years intended to stimulate growth.  But so far, the needle simply hasn’t moved.  Recognizing that the economy is sick, looking at the symptoms of weak jobs and high unemployment, could it be that the country’s leaders are trying to apply old medicine when the illness has substantially changed? 

What’s missed by so many Americans today – populace and politicians – is that the 2010 economy is nothing like that of the 1940s; and bares little resemblance to the economy as recently as the 1990s.  Scan these interesting facts reported by BusinessInsider.com:

These lost jobs are NEVER coming back.  The American economy has fundamentally shifted, and it will never go back to the way it was.  Clocks don’t run backward. 

In 1910 90% of Americans were working in agriculture.  By 1970 that proportion had dropped to 10%.  Had American policy in the last century remained fixated on protecting farming jobs the country would have failed.  Only by shifting to industrialization (manufacturing) was America able to continue its growth – and create all those new industrial jobs.  Now American policy has to shift again if it wants to start creating new jobs.  We have to create information-era jobs.

But government programs applied the last 12 years were all retreaded industrial era ideas (implemented by Boomer-era leaders educated in those programs.)  They were intended to grow industrial jobs by spurring supply and demand for “things.”  Lower interest rates were intended to increase manufacturing investment and generate more supply at lower cost.  These jobs were expected to create more service jobs (retailers, schools, plumbers, etc.) supporting the manufacturing worker.  But today, supply isn’t coming from America.  Nobody is going to build a manufacturing plant in America when gobs of capacity is shuttered and available, and costs are dramatically lower elsewhere with plentiful skill supply.  We can keep GM and Chrysler on life support, but there is no way these companies will grow jobs in face of a global competitive onslaught with very good products, new innovations and lower cost.  Cheap interest rates make little difference – no matter what the cost to taxpayers.   

Other old-school programs focused on increasing demand. TARP, cheap consumer lending, tax cuts, rebates and subsidies were intended to encourage people to buy more stuff.  Consumers were expected to take advantage of the increased supply and spend the cash, thus reviving the economy.  But today, many people are busy paying down debt or saving for retirement.  Further, even when they do spend money the goods simply aren’t made in America.  If consumers (including businesses) buy 10 Dell computers or 20 uniform shirts it creates no new American jobs. Spurring demand doesn’t matter when “things” are made elsewhere.  In fact, it benefits the offshore economies of China and other manufacturing centers more than the USA!

If this new crop of politicians, and the President, want to keep their jobs in the next election they had better face facts.  The American economy has shifted – and it will take very different policies to revive it.  New American jobs will not be created by thinking we’ll will make jeans, baby food or baseballs, so applying old approaches and focusing on increasing supply and demand will not work.  America is no longer an industrial economy.

The jobs at Dell are engineering, design and managerial.  Hiring organizations like Google, Apple, Cisco and Tesla are adding workers to generate, analyze, interpret and gain insight from information.  Jobs today are based upon brain work, not brawn.  An old American folk song told the story about John Henry’s inability to keep up with the automated stake driving machine – and showed all Americans that the industrial era made conventional, uneducated hand-labor of little value.  Now, computers, networks and analytics are making the value of manufacturing work low value.  Because we are in an information economy, rather than an industrial one, pursuing growth of industrial jobs today is as misguided as trying to preserve manual labor and farm jobs was in the 1960s and 1970s.

Directionally, American politicians need to implement programs that will create the kind of jobs that are valuable, and likely, in America.  Incenting education, to improve the skills necessary to be productive in this economy, is fairly obvious.  Instead of cutting education benefits, raise them to remain a world leader in secondary education and produce a highly qualified workforce of knowledge workers. Support universities struggling in the face of dwindling state tax funds.  Subsidize masters and PhD candidates who can create new products and lead companies into new directions, and do things to encourage their hiring by American companies.

Investments in R&D and product development are likewise obvious.  America’s growth companies are driving innovation; bringing forward world-demanded products like digital music, on-line publications, global networks, real-time feedback on ad links, ways to purify water – and in the future trains, planes and automobiles that need no fossil fuels or drivers (just to throw out a not-unlikely scenario.)  For every dollar thrown at GM trying to keep lower-skilled manufacturing jobs alive there would be a 10x gain if those dollars were spent on information era jobs in innovation.  America doesn’t need to preserve jobs for high school graduates, it must create jobs for the millions of college grads (and post-graduate degree holders) working today as waiters and grocery cashiers.  Providing incentives for angel investing, venture capital and other innovation investment will have a rapid, immediate impact on job creation in everything from IT to biotech, nanotech, remote education and electric cars.

A stalled economy is a horrible thing.  Economies, like companies, thrive on growth!  Everyone hurts when tax receipts stall, government spending rises and homes go down in value while inflationary fears grow.  And Americans keep saying they want politicians to “fix it.”  But the “fix” requires thinking about the American economy differently, and realizing that programs designed to preserve/promote the old industrial economy – by saving banks that invest in property, plant and equipment, or manufacturers that have no money for new product development – will NOT get the job done.  It’s going to take a different approach to drive economic growth and job creation in America, now that the shift has occurred.  And the sooner politicians understand this, the better!

What Could Go Wrong at Ikea?

by | Nov 1, 2010 | Defend & Extend, Leadership, Lock-in


Summary:

  • When something works, we do more of it
  • But markets shift, and what we did loses its ability to create growth
  • Out of high growth comes Lock-in to old practices that blind us to potential market changes which could create price wars or obsolescence
  • Lock-in gets in the way of seeing emerging market shifts
  • Ikea is doing well now, but it is already seriously locked-in on an aging strategy
  • Will Ikea continue succeeding as it runs into Wal-mart and other price-focused competitors?
  • Will Ikea be able to adapt to changing markets as developed economies improve?

“If it works, do more of it” is a famous coaching recommendation.  “Nothing succeeds like success” is another.  Both are age old comments with simple meanings.  Don’t overthink a situation.  If something works, keep on doing it.  And the more it works, the more you should “keep on keepin’ on” as once famous pop song lyrics recommended. One could ask, why should you try doing anything else, if what you’re doing is working?  Many people would sagelyl recommend another common comment, “if it ain’t broke, don’t fix it!”

And this seems to be the philosophy of the new CEO at Ikea, Mikael Ohlsson as descibed in an Associated Press article on Chron.com, the web site for the Houston Chronicle, “New Ikea CEO Cuts Prices, Targets Frugal U.S. Families.” 

A lifelong Ikea employee, Mr. Ohlsson joined Ikea right out of college in 1979 as a rug salesperson.  He’s watched the company grow dramatically across his career.  And he’s watched the company essentially grow by doing one thing – make home goods people need cheaply, figure out how to keep shipping and distribution costs to a minimum, and offer them directly to customers through your own stores.  All designed to keep prices at a minimum.  Most people would applaud him for focusing on doing more of the same.

And certainly today Ikea’s strategy is benefitting from the “Great Recession,” as we’ve come to call it.  A flat economy, no job growth, little income growth, rampant unemployment, declining home values and limited credit access has helped Americans move along the road of penny-pinching. 

Somewhat stylish, but primarily low-priced, furniture and other goods long appealed to college students.  The fact that most of the furniture was designed for very economical shipping was a big plus with students that changed dorms and apartments frequently.  Low price, in addition to the fact that most students are poor, was a benefit in case someone had to leave the stuff behind due to a longer move, downsizing, or simply lost their abode for a while.  That the furniture and some of the other items didn’t hold up all that well wasn’t such a big deal, because nobody intended to keep it once school ended and they could afford something better.

But recent cheapness has caused a lot more people to start buying Ikea.  That has contributed to a lot more growth than the company originally expected in developed countries like the USA.  As sales grew, the company has been pushing year after year to keep lowering costs – and prices.  The CEO proudly touted his ability to relocate manufacturing and distribution in order to drive down U.S. prices on several items.  In language that sounds almost like Wal-Mart, he talks about constantly driving down cost, and price, in order to appeal to Americans – and even continental Europeans – in the throes of being cheap.  Cost, cost, cost in order to sell cheap, cheap, cheap seems to have worked well for Ikea.

And that’s the worry foundation owners should have (Ikea is not publicly traded, it is owned by a foundation.)  Ikea is rapidly catching the Wal-Mart Disease (see this blog 13 October).  Focusing on execution, in order to lower cost, keep lowering price and expecting the market to expand.  This will eventually lead to two very unpleasant side effects:

  1. Eventually Ikea will run headlong into Wal-Mart.  And other price-focused competitors in the USA and other countries.  In doing so, margins will be crimped, as will growth.  When 2 (or more) companies compete on cost/price it creates a price war, and if it’s between Ikea and Wal-Mart expect the war to be incredibly bloody (this is also bad news for Microsoft shareholders, who are going to increasingly see Ikea join other competitors in pressuring Wal-Mart’s strategy.)
  2. What will happen to Ikea’s growth if the market shifts?  What will happen if customers quit focusing on price, and start looking for better products (longer lasting, higher quality materials, increased sturdiness – for examples)?  Or if they want different designs?  Or they get tired of the long drives to those huge Ikea stores, and prefer shopping closer to home?  Quite simply, what will happen to Ikea’s growth if something besides price retakes importance for customers in developed countries?

There is no doubt Ikea has had a great run.  But in large part, fortuitous economic events played a big role.  The rising percentage of youth going to colleges, as well as the large migration of developing country students to developed country universities, helped propel the need for affordable items appealing to students.  Then the economic faltering post-2000, combined with the banking crisis, created a very slow economy in developed countries.  Suburbanization gave Ikea the opportunity to build massive stores at affordable cost to which customers could flock.  For 30 years these trends benefitted companies with a price focus – such as Ikea (and Wal-Mart). And all the company had to do was “more of the same.”

But will that remain the long-term trend?  As households downsize, home prices stabilize then recover, developed economies improve, jobs grow again and incomes start rising is it possilble that customers will want something beyond low price? 

And when that happens, will Ikea find itself so locked-in to its strategy that it cannot adjust to market shifts?  What will it do with those manufacturing centers, distribution hubs and huge stores then?  How will it be able to recognize the change in customer needs, and alter its merchandise – and stores – to meet changing needs?  Or will Ikea rely far too long on improving execution of the strategy that got it where the company is today?  Will its decision-making processes, designed to improve execution, keep Ikea making cheap furniture and other goods long after competing on price is sufficient?

Ikea is likely to do well for at least a couple more years.  But one can already see how the company, and its CEO, have locked-in on what worked early in the company lifecycle.  And now the focus is on executing the old strategy – reinforcing what the company locked-in upon.  And there doesn’t seem to be a lot of concern about dealing with potential market shifts. 

Most worrisome of all was the CEO’s comment, “I tend not to look so much at competition.”  In a very real way, this shows a blindness towoard looking for price wars and market shifts.  A blindness toward identifying emerging trends.  A blindness toward identifying there may be groth opportunities in a year or two that are better than simply continuing to do what Ikea has always done.  And even for a fast growing company, luckily positioned in the right place at the right time, this is something to be worried about.

The Myth of “Maturity” – AT&T and Microsoft

by | Oct 27, 2010 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Web/Tech


Summary:

  • We like to think of "mature" businesses as good
  • AT&T was a "mature" business, yet it failed
  • "Maturity" leads to inward focus, and an unwillingness to adjust to market shifts
  • Microsoft is trying to reposition itself as a "mature" company
  • Despite its historical strengths, Microsoft has astonishing parallels to AT&T
  • Growth is less risky than "maturity" for investors, employees and customers

Why doesn't your business grow like Apple or Google?  Is it because you think of your business, or the marketplace you serve, as "mature?" Quite a euphanism, maturity.  It sounds so good.  How could being "mature" be bad?  As children we strive to be "mature." The leader is usually the most "mature" person in the group.  Those who like good art have "mature" taste. Surely, we should want to be "mature." And we should want our businesses to reach "maturity" and have "mature" leaders who don't take unnecessary risks.  Once "mature" the business should be safe for investors, employees, suppliers and customers.

That was probably what the folks at AT&T thought.  When judge Greene broke up AT&T in 1984 the company had a near monopoly on long-distance.  AT&T was a "mature" company in a "mature" telephone industry.  It appeared as though all AT&T had to do was keep serving its customers, making regular improvements to its offering, to perpetually maintain its revenue, jobs and profitability.  A very "mature" company, AT&T's "mature" management knew everything there was to know about long distance – about everything related to communications.  And due to its previous ownership of Bell Labs and Western Union, it had deep knowledge about emerging technologies and manufacturing costs allowing AT*T to make "mature" decisions about investing in future markets and products.  This "mature" company would be able to pay out dividends forever!  It seemed ridiculous to think that AT&T would go anywhere but up!

Unfortunately, things didn't work out so well.  The "mature" AT&T saw its market share attacked by upstarts MCI and Sprint.  As a few "early adopters" switched services – largely residential and other very small customers – AT&T was unworried.  It still had most of the market and fat profits.  As these relatively insignificant small users switched, AT&T reinforced its world's largest billing system as an incomparable strength, and reminded everyone that its "enterprise" (corporate) offerings were still #1 (anybody remember AT&T long distance cards issued by your employer for use at pay phones?). 

But unfortunately, what looked like an unassailable market position in 1984 was eventually diminished dramatically as not only homeowners but corporations started shifting to new offerings from competitors.  New pricing plans, "bundled" products and ease of use encouraged people to try a new provider.  And that AT&T had become hard to work with, full of rules and procedures that were impossible for the customer to comprehend, further encouraged people to try an alternative.  Customers simply got fed up with rigid service, outdated products and high prices.

Unexpectedly, for AT&T, new markets started to grow much faster and become more profitable than long distance voice.  Data services started using a lot more capacity, and even residential customers started wanting to log onto the internet.  Even though AT&T had been the leader (and onetime monopolist – did you know broadcast television was distributed over an AT&T network?) with these services, this "mature" company continued to focus on its traditional voice business – and was woefully late to offer commercial or residential customers new products.  Not only were dial-up offerings delayed, but higher speed ISDN and DSL services went almost entirely to competitors.

And, much to the chagrin of AT&T leaders, customers started using their mobile phones a lot more.  Initially viewed as expensive toys, AT&T did not believe that the infrastructure would be built quickly, nor be robust enough, to support a large base of cellular phone users.  Further, AT&T anticipated pricing would keep most people from using these new products.  Not to mention the fact that these new phones simply weren't very good – as compared to land-line services according to the metrics used by AT&T.  The connection quality was wildly inferior to traditional long distance, and frequently calls were completely dropped!  So AT&T was slow to enter this market, half-hearted in its effort, and failed to make any profits.

Along the way a lot of other "non-core" business efforts failed.  There was the acquisition of Paradyne, an early leader in modems, that did not evolve with fast changing technology.  New products made Paradyne's early products obsolete and the division disappeared.  And the acquisition of computer maker NCR failed horribly after AT&T attempted to "improve" management and "synergize" it with the AT&T customer base and offerings. 

AT&T had piles and piles of cash from its early monopoly.  But most of that money was spent trying to defend the long distance business. That didn't work.  Then there was money lost by wheelbarrow loads trying to enter the data and mobile businesses too late, and with little new to offer.  And of course the money spent on acquisitions that AT&T really didn't know how to manage was all down the proverbial drain. 

Despite its early monopoly, high cash flow, technology understanding, access to almost every customer and piles of cash, AT&T failed.  Today the company named AT&T is a renamed original regional Bell operatiing company (RBOC) created in the 1984 break-up — Southwestern Bell.  This classically "mature" company, a stock originally considered "safe" for investing in the "widow's and orphan's fund" used up its money and became obsolete.  "Mature" was a misnomer used to allow AT&T to hide within itself; to focus on its past, instead of its future.  By being satisfied with saying it was "mature" and competing in "mature" markets, AT&T allowed itself to ignore important market shifts.  In just 25 years the company that ushered in mass communications, that had an incredibly important history, disappeared.

I was struck today when a Reuters story appeared with the headline "Sleepy in Seattle: Microsoft Learns to Mature."  There's that magic word – "mature."  While the article lays out concerns with Microsoft, there were still analysts quoted as saying that investors didn't need to worry about Microsoft's future.  Investors simply need to change their thinking.  Instead of a "growth" company, they should start thinking of Microsoft as a "mature" company.  It sounds so reassuring.  After all:

  • Microsoft has a near monopoly in its historical business
  • Microsoft has a huge R&D budget, and is familiar with all the technologies
  • Microsoft has piles and piles of cash
  • Microsoft has huge margins in its traditional business – in fact profits in operating systems and office automation exceed 100% of the total because it loses billions of dollars in other things like Bing, MSN and its incredibly expensive foray into gaming systems (xBox)
  • Markets won't shift any time soon – say to this new "cloud computing" – and Microsoft will surely have products when they are needed if there is a market shift
  • While home users may buy these new smartphones, tablets and some Macs, enterprise customers will keep using the technology they've long purchased
  • Microsoft is smart to move slowly into new markets, it shouldn't cannibalize its existing business by encouraging customers to change platforms. Going slow and being late is a good thing for profits
  • Although Microsoft has been late to smartphones and tablets, with all their money and size surely when they do get to market they will beat these upstarts Apple and Google, et. al.

Sure made me think about AT&T.  And the fact that Apple is now worth more than Microsoft.  Made me wonder just how comfortable investors should be with a "mature" Microsoft. Made me wonder how much investors, employees and customers should trust a "mature" CEO Ballmer.

Looking at the last 10 years, it seems like there's a lot more risk in "mature" companies than in "growth" ones.  We can be almost certain that Apple and Google, which have produced huge returns for investors, will grow for the next 3 years, improving cash flow and profitability just by remaining in existing new markets.  But of course both have ample new products pioneering yet more new markets.  And companies like NetApp look pretty safe, building a fast-growing base of customers who are already switching to cloud computing – and producing healthy cash flow in the emerging marketplace. 

Meanwhile, the track record for "mature" companies would leave something to be desired. One could compare Amazon to Circuit City or Sears.  Or just list some names: AT&T, General Motors, Chrysler, Xerox, Kodak, AIG,  Citibank, Dell,  EDS,  Sun Microsystems.  Of course each of these is unique, with its own story.  Yet….

Yes, You Should Buy Apple

by | 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.