Microsoft:  Value Creation Is About New Markets and Growth – Not Defending Your Base

Microsoft: Value Creation Is About New Markets and Growth – Not Defending Your Base

People who follow my speaking and writing – including my over 400 Forbes columns – know that I preach the importance of growth. Successful organizations are agile – and agility is the sum of learning + adaptability. Smart organizations are constantly looking externally, gathering data, learning about markets and shifts – then structured to adopt those learnings into their business model and adapt the organization to new market needs.

Steve Ballmer was the antithesis of agility. For his entire career he knew only that Microsoft stock price post BallmerWindows and Office made all the money at Microsoft. So he kept investing in Windows and Office. He failed at everything else. False starts in phones, tablets, gaming – products came and went like ice cream cones on a hot August day. Ballmer laughed at the very notion of the iPhone ever being successful – while simultaneously throwing away $7.2B buying Nokia. Then there was $8.5B buying Skype. $400M buying the Borders Nook. Those were ridiculous acquisitions that just wasted shareholder money. To Ballmer, Microsoft’s future relied on maintaining Windows and Office.

So as the market went mobile, Ballmer kept over-investing. He spent billions launching Windows 8, which I predicted was obviously going to fail at growing the Windows market as early as 2012. And it was easy to predict that Win8 tablets were going to be a bust when launched in 2012 as well. But Ballmer was “all-in” on Windows and Office. He was completely locked-in, and unwilling to even consider any data indicating that the PC market was dying – effectively driving Microsoft over a cliff.

It was not hard to identify Steve Ballmer as the worst CEO in America in 2012. When Ballmer took over Microsoft it was worth $60/share. He drove that value down to $20. And the company valuation was almost unchanged his entire 14 years as CEO. He remained locked-in to trying to Defend & Extend PC sales, and it did Microsoft no good. But when the Board replaced Ballmer with Nadella the company moved quickly into growth in gaming, and especially cloud services. In just 6 years Nadella has improved the company’s value by 400%!!!

Success is NOT about defending the past. Success IS about growth. Don’t be locked in to what worked before. Focus on what markets want and need – learn how to understand these needs – and then adapt to giving customers new solutions. Don’t make the mistakes of Ballmer – be a Nadella to lead your organization into growth opportunities!

Do You Grow with Market Shifts – or Slowly Lose Relevancy?  The Advertising Story

Do You Grow with Market Shifts – or Slowly Lose Relevancy? The Advertising Story

In 2020, internet ads will represent over 50% of all advertising money spent. Think about that factoid. An ad medium that wasn’t even important to the ad industry a decade ago now accounts for half of the industry. It took three years after the Dot Com bubble burst for internet advertising to hit bottom, but then it took off and hasn’t stopped growing.

An example of rapid, disruptive change. A market shift of tremendous proportions that has forever changed the media industry, and how we all consume both entertainment and news. Did you prepare for this shift? And is it helping you sell more stuff and make more money?

This was easy to predict. Seven years ago (12/10/12), I wrote “The Day TV Died.” The trend was unmistakable – eyeballs were going to the internet. And as eyeballs went digital, so did ads. These new, low cost ads were “democratizing” brand creation and allowing smaller companies to go direct to consumers with products and solutions like never before in history. It was ushering in a “golden age” for small businesses that took advantage.

However, small businesses – and large businesses – largely failed to adjust to these trends effectively. By 3/21/13 I pointed out in “Small Business Leaders Missing Digital/Mobile Revolution” that small businesses were continuing to rely on the least economical forms of media outreach – direct mail and print! They were biased toward what they knew how to do, and old metrics for media, instead of seizing the opportunity. Likewise, by 12/11/14 in “TV is Dying Yet Marketers Overspend on TV” I was able to demonstrate that the only thing keeping TV alive were ad price increases so big they made up for declining audiences. The leaders of big companies were biased toward the TV they knew, instead of the better performing and lower cost new internet media capabilities.

Three years ago (1/6/17), I pointed out in “Four Trends That Will Forever Change Media… and You” it was obvious that digital social media advertising was making a huge impact on everyone. Fast shifting eyeballs were being tracked by new technology, so ads were being purchased by robots to catch those eyeballs – and this meant fake news would be rampant as media sites sought eyeballs by any means. And Netflix was well on its way to becoming the Amazon of media with its own programs and competitive lead.

So the point? It was predictable all the way back in 2012 that digital media would soon dominate. This would change advertising, distribution and content. Now digital advertising is bigger than all other advertising COMBINED. Those who acted early would get a huge benefit (think Facebook/Instagram Path to Media Domination) while those who didn’t react would feel a huge hurt (newspapers, radio, broadcast TV, brick and mortar retail, large consumer goods companies that rely on high priced TV.) But did you take action? Did you take advantage of these trends to make your business bigger, stronger, more profitable, more relevant? Or are you still reacting to the market, struggling to understand changes and how they will impact your business?

The world continues to be a fast changing place. Mobile phones and social media will not go away – no matter what Congress, the UN or the EU regulators do. Global competition will grow, regardless what politicians say. Those who understand how these big trends create opportunities will find themselves more successful. Those who focus on the past, try to execute better with their old “core,” and rely on historical biases will find themselves slowly made irrelevant by those who use new technologies and solutions to offer customers greater need satisfaction. Which will you be? A laggard? Or a leader? Will you build on trends to grow – or slump off into obsolescence? The choice is yours.

The Remarkable, Predictable Decline of TV

The Remarkable, Predictable Decline of TV

Seven years ago (12 December, 2012) I said it was “The Day TV Died.” There were a LOT of skeptics. At the time, TV was by far still the dominant medium. But the trends were absolutely clear – ad revenues were quickly moving toward on-line opportunities. Print was already well into the grave, and radio was sputtering along with no growth at all. Eyeball momentum had shifted on-line, and thus ads moved on-line, and it was obvious that programming dollars would soon follow – meaning that TV programming was already in Stage 4 termination.

Trends and Tech drove Netflix growth

Meanwhile, Netflix and its brethren were poised to have a fabulous, furious growth. These same trends led me to a full-throated pitch to buy Netflix nine years ago (Nov. 2010.) After Netflix made the decision to raise prices for DVD distribution in order to push people toward streaming the stock crashed, but trends indicated that customer preferences would lead Netflix to be the content winner so despite widespread despair, I called for people to buy the stock in Oct. 2011. In Jan. 2012, I made Netflix one of my top 4 picks for the year. So by Jan. 2013, I was making it clear that TV was has-been, and Netflix was the company to own.

Now, Statista has produced the numbers showing that in 2019 internet media consumption exceeded TV consumption – for the first time ever. And this trend will not stop. It was wholly predictable years ago – and the trends all say this will only accelerate. Where once the competition for entertainment was Netflix, now there is Amazon Prime, Disney+, Comcast Peacock, AT&T HBO Max and Apple TV+. The traditional networks simply don’t have a chance.

Impact of Trends

These trends are having an enormous impact on how we behave, how advertisers behave, what technology we buy, what entertainment we watch, how we use other technology like social media, how we absorb news — and more. So the question is, did you see the trends 7,8,9 years ago? Have you adjusted your strategy? Are you sure where trends are headed, and are you prepared for the future? Will you be a winner as the world changes – in a pretty predictable way – or will you lose out and say “you know, way back when……”

Now’s The Time To Buy FAANG Stocks

Now’s The Time To Buy FAANG Stocks

Since 2012, I’ve been a huge fan of Facebook, Apple, Amazon, Netflix and Google. And they have dramatically outperformed the market. In the last few weeks their values have fallen dramatically, and I’ve heard grumblings that these are no longer the stocks to own.

I virulently disagree. Great companies are where you should invest. If you don’t think these are great companies, you would be right to sell them (such as GE, Sears, and many others.) But despite complaints about privacy, usage rates, nefarious users, and other attacks on technology, the reality is that we love the convenience these companies gave us. We may not think things are perfect, but we are a lot happier than we used to be, and we are pretty happy with how these companies respond to product concerns.

  • These companies are still global leaders in some of the biggest and most powerful trends everywhere
  • The shift to e-commerce from traditional retail continues unabated
  • The movement to mobile devices continues
  • Using the cloud to replace device storage and network storage will not slow
  • Entertainment continues to move to streaming from TV and other sources
  • Ad growth remains firmly on the internet and mobile devices
  • Platform usage (such as social networks) keeps growing as more uses are developed

These mega-trends are the foundation of the FAANG companies. These companies became great by understanding these trends, then developing products for these trends that have attracted billions of customers. Their revenue growth continues, just as their product development continues. And their profits keep growing as well. Nobody ever saved their way to prosperity. To increase value you must increase profitable revenues. And that capability has not left these companies.

Some of these company’s leaders have recently been called to Washington to testify. Will they be attacked, split up, further regulated? Will the government kill the golden goose? Given that the US House of Representatives has not firmly moved to the Democrats, I see almost no sign of that happening. Democrats like happy constituents, and given how happy consumers are with these companies the Democrats are very unlikely to intervene. There has long been a deep friendship, built on significant campaign financing and lobbyist involvement, between these companies and Democrats. The change in government almost insures that the actions in Washington will prove to just be a lot of short-term heat, with little change in the overall lighting.

I don’t know when these stocks will reach a short-term bottom. Just like nobody can predict market highs, it is impossible to predict lows. But the one thing I feel very strongly about is that in a year these companies will be worth more than they are valued today.

For insight into my strong favorability for these companies, take a look at the infographic I’ve provided regarding Facebook. Despite the Facebook stock ups-and-downs, this infographic explains why long-term it has been very smart to buy Facebook. Despite how people have “felt” about the company, it is a GREAT company built on powerful trends. To understand even better, buy the ebook “Facebook, The Making of a Great Company” on Amazon for 99 cents.

Facebook Launches “Portal” – Why You Want to Pay Attention

Facebook Launches “Portal” – Why You Want to Pay Attention

As all readers know, I am a fan of owning Facebook’s stock. For years I have pointed out that Facebook has been incredibly innovative at bringing people together. First, it was Facebook.com, but then leadership added WhatsApp and Messenger to expand the ability to communicate, and after that, Instagram which augmented communications via pictures and video.  These capabilities, largely asynchronous, have expanded how easily we can communicate with friends, colleagues and business connections. It is this capability that made Facebook a success, because it brought people to the platforms – and as the audience grew advertising dollars grew as well.

(Watch my 2 minute video on Facebook the Innovation Engine)

Now, Facebook has launched “Portal.” It’s a piece of hardware, similar to a tablet in size. It has a speaker and a microphone, like a smart speaker on steroids, or like an enhanced tablet designed for communicating. Built on Android, it supports a plethora of apps, and it integrates with Alexa so you can not only talk to up to 7 people at the same time, but you can all listen to music via Spotify or Pandora, etc., and you can use it to make purchases on Amazon.com

At first you’d probably say this doesn’t sound very exciting. After all, aren’t we awash in hardware from smart phones to tablets to laptops to smart speakers and connected home devices? Why would we want another piece of hardware, when we already have so many that do so many different things? And didn’t Amazon infamously try to launch a enhanced smartphone (Fire Phone) and enhanced tablet (Fire Tablet) targeted at shopping, only to fail miserably? You could say Portal is likely to follow Fire into the tech archives.

And, on top of this, aren’t people paranoid about Facebook and privacy? After Cambridge Analytica manipulated Facebook data in the last election, and then the recent breach which could have revealed information on 50 million users, aren’t people going to quit using Facebook products?

There really isn’t much data to indicate people care about these breaches, or possibly illegal uses of data. Almost everyone now realizes that whatever they post on any Facebook platform, the information is public. And the reality is that by putting their information out there it actually makes users’ lives easier. Users get connections they want, information they want, and products they want that much faster, and easier. These platforms make their lives more convenient, and billions of people have no problem exchanging somewhat personal information for the convenience it provides. The more Facebook knows about them, the easier their lives are, and the richer their network communications.

That is why I’m optimistic that Portal will have an audience. Facebook Messenger has 400 million users. Those users generated 17 billion messages in 2017. Now, imagine if those users could use Portal to make those messages clearer, more powerful. And, as of June, 2018 Instagram has 1 billion monthly active users. If you have Portal it makes Instagram connecting much easier and more interesting.

Portal doesn’t have to replace an existing smartphone or tablet. It merely has to help the people who use Facebook platforms have a deeper, more powerful connection with those in their network. If it does that, there is an enormous installed base of users who could find Portal helpful, in many ways. More helpful than a stand-alone, limited use Echo (or Dot) speaker, for example, which have sold over 47 million units so far.

Facebook is good at understanding its value proposition which is connecting people in powerful ways. Facebook has shelved products that didn’t augment this value proposition – like a generalized smart phone. But Portal has the ability to further enhance user experiences, and that gives it a decent chance of being successful. And when Facebook adds its Oculus technology to Portal, allowing for 3D communications, Portal could become a one-of-a-kind product for communicating with your network.

For a look back at Facebook’s history, and my forecasts for the company, read my new ebook, “Facebook – The Making of a Great Company.” (At Amazon.com for just 99 cents!) It will help you take a longer look at Facebook’s leadership, and give you a different view on Facebook’s future than the current negative press is providing. With the stock $70 off its high, and trading at the same price it was a year ago, you just might think this is a buying opportunity.

New ebook from Adam Hartung on Facebook

New ebook from Adam Hartung on Facebook

In the recently published, “Facebook- The Making of a Great Company”, Adam Hartung analyzes the rise of Facebook and its impact on the financial community, business marketing and innovation.

Adam’s posts over the years have predicted key milestones in Facebook’s growth and its transformation into a driver of social trends.  He tells the story of this company that has overcome negativity and skepticism in the financial community and has adapted to its users.

“So last week, when Facebook reported that its user base hadn’t grown like the
past, investors fled. Facebook recorded the largest one day drop in valuation in
history; about $120B of market value disappeared. Just under 20%.

No other statistic mattered. The storyline was that people didn’t trust Facebook
any longer, so people were leaving the platform. Without the record growth numbers
of the past, many felt that it was time to sell. That Facebook was going to be
the next MySpace.”

“That was a serious over-reaction.”

Adam Hartung, “Facebook-The Making of a Great Company”

Buy ebook now

 

Reports of Facebook’s Death Are Greatly Exaggerated (Paraphrasing Mark Twain)

Reports of Facebook’s Death Are Greatly Exaggerated (Paraphrasing Mark Twain)

On July 26, 2018 Facebook set a record for the most value lost in one day by a single company.  An astonishing $119B of market value was destroyed as the shares sank more than $40.  For many investors, it was the sky falling.

As most of you know, I’ve followed Facebook closely since it went public in 2012.  And, I’ve long been an admirer.  I said buy it at the IPO, and I’m saying buy it now. Click on the title of any of the posts to read the full content.

To summarize, Facebook may be under attack, but it is barely wounded.  And it is not in the throes of demise.  The long-term trends all favor the social media’s ongoing growth, and higher values in the future.  Below I’ll offer some of my previous blogs that are well worth revisiting amidst the current Facebook angst.

FANG (Facebook, Amazon, Netflix and Google) investing is still the best bet in the market.  They have outperformed for years, and will continue to do so.  Why? Because they are growing revenues and profits faster than any other major companies in the market.  And “Growth is Good” (paraphrasing Gordon Gekko.)  If you have any doubts about the importance of growth, go talk to Immelt of GE or Lampert of Sears.

Don’t forget, for years now Facebook is more than Facebook.com.  It’s smart acquisition programs have dramatically increased the platform’s reach with video, messaging, texting and eventually peer-to-peer video.  Facebook’s leadership has built a very adaptable company, able to change the product to meet growing user (and customer) needs.

Facebook is on a path toward significant communication domination.  Facebook today is sort of the New York Times, Washington Post, Los Angeles Times and about 90% of the rest of the nation’s newspapers all in one.  Nobody is close to challenging Facebook’s leadership in news distribution, and all news is increasingly going on-line.

For all these reasons, you really do want to own Facebook.  Especially at this valuation.  It’s getting a chance to buy Facebook at its value when the year started, and Facebook is that much bigger, stronger, and adapted to changing privacy regulations that were still a mystery back then.

Oh, one last thing (paraphrasing Steve Jobs.)  Facebook actually isn’t the biggest one day drop in stock valuation, despite what you’ve read.

Stocks are priced in dollars, and dollars are subject to inflation.  So we should look at historical drops in inflation adjusted dollars.  Even though inflation has been mostly below 3% since the 1990s, from 2000 to today the dollar has inflated by 46%.  So inflation-adjusted, the biggest one day value destruction actually belongs to Intel, which lost $131B in September, 2000.  And Microsoft is only slightly in third place, having lost $117B in April, 2000.  So keep this in mind when you think about the long-term opportunity for Facebook.

Now Published!  “Facebook- The Making of a Great Company” ebook by Adam Hartung.

Click for Info and Ordering

Medical Tourism TREND – or How to Make a Fortune From US Health Care Stupidity

Medical Tourism TREND – or How to Make a Fortune From US Health Care Stupidity

USA health care is ridiculously expensive. It’s good, but no statistics show that US healthcare is better than any other developed country. Nor any better than accredited facilities in large, developing countries. Look at these comparisons according to Medicaltourism.com:

Procedure                         USA cost   India cost in accredited facility
Heart Bypass                    $123,000    $7,900
Heart Valve Replacement $170,000  $10,450
Hip Replacement                $40,364    $7,200
Knee Replacement             $35,000    $6,600
Spinal Fusion                    $110,000   $10,300
Hysterectomy                      $15,400    $3,200
Cornea Replacement          $17,500    $2,800

Over 1/3 of Americans live with the myth that if they need medical care, somehow it will magically happen at no cost. The Affordable Care Act tried to fix that myth by making everyone buy health insurance. But Congress removed that government mandate. So most Americans that don’t have company-sponsored health insurance don’t buy insurance. Their primary source of health insurance is hope. When illness or accident happens these folks end up with extra-ordinary debt. And they can’t eliminate this debt because health care debt doesn’t go away in bankruptcy. So every year more and more people learn that an unexpected health incident means they will spend the rest of their lives paying for medical services that were 10x or 100x what they expected.

This is a trend that will not end soon. Costs keep going up. The political sides are too divided on what to do. And health insurance companies spend literally billions annually to make sure insurance for all (referred to as Medicare for all) never becomes reality.

This trend means there is opportunity. And that has become medical tourism. Literally, flying to foreign countries for medical procedures.

You may say “not me.” But if you have no money in the bank, and you let your health insurance lapse when you lost your last corporate job ended and you entered the gig economy, you could face a very tough situation. The same one almost all farmers face, and most small business owners, since their insurance is unaffordable. And most 1099 contract employees. When you have an unexpected heart attack at age 41 you wake up to hear a hospital admin say “you are alive, but you need surgery. If you want to live, we can do a heart bypass. Just sign this document and you’ll wake up somewhere north of $123,000 in debt.” Which means you’ll lose your house, for sure. Your kids won’t go to college. And you’ll never again buy a new car.

Or you blow out a hip, or knee,playing that Sunday basketball pick-up game – or golf. You’re 50-55, so too young for Medicare. But you lost health insurance years ago. Or you have a minimalistic plan which will cover a fraction of the cost. Finding the cost is $35,000 to $40,000 (or more likely $60,000 at a for-profit US hospital) are you really able to afford this? Or will you spend your life using crutches, or in a wheelchair? Or start an on–line begging campaign from your friends to cover the cost?

Suddenly, being a medical tourist doesn’t sound so unlikely. Saving $30,000 to $100,000 could determine your financial future. This trend was pretty clear back in 2010 when I pointed out that US medical tourists grew from 700,000 in 2007 to 1.2 million in just 3 years. The trend was actually obvious in 2005, when most people laughed at the idea of medical tourism – because they refused to look at the demographic and cost trends.

That’s why medical tourism is already a $20B business. And growing at 18% annually. Some analysts estimate the global market at almost $80B. Demographics are all in favor of future growth. The developed world population is aging. Health care costs are going up. Government ability to pay is going down. Insurers are charging outrageous rates. Fewer people are buying health care, and even fewer are buying “gold plated plans” that match the average plan in 1990. And American health care policies, in particular, keep driving up costs. It is EASY to see that as people can’t afford care at home, so they WILL be making more trips overseas.

There are already companies making the plunge. Some are matching services between patients and medical facilities. Some are building certified medical facilities in places like India, Singapore, Brazil, Malaysia, Thailand, Costa Rica and Mexico. The opportunities are as big as the health industry.

And this trend affects every business. Are you still stuck in the status quo thinking of extremely expensive insurance for employees, or none? Medical tourism offers a plethora of other opportunities. You can offer a bare-bones domestic plan, with augmented insurance to be a medical tourist. Or even a company sponsored plan, with the opportunity for employees to build a health-care bank, and a relationship with a medical tourism company to help employees find providers offshore. And gig-economy employees can drop the idea of domestic coverage (other than bare bones) for a mixed program including offshore insurance.

Fighting the health cost trend in the USA is foolish. Doing nothing hurts your competitiveness. Given the opportunities in medical tourism, are you thinking about how to build on this trend as a new business? Or a way to offer more to full time and 1099 contractors?

Apple’s Installed Base – Foundation for Success, or Curse?

Apple’s Installed Base – Foundation for Success, or Curse?

The last few quarters sales growth has not been as good for Apple as it once was. The iPhone X didn’t sell as fast as they hoped, and while the Apple Watch outsells the entire Swiss watch industry it does not generate the volumes of an iPhone. And other new products like Apple Pay and iBeacon just have not taken off.

Amidst this slowness, the big winner has been “Apple Services” revenue. This is largely sales of music, videos and apps from iTunes and the App store. In Q2, 2018 revenues reached $9.2B, 15% of total revenues and second only to iPhone sales. Although Apple does not have a majority of smartphone users, the user base it has spends a lot of money on things for Apple devices. A lot of money.

Statista Apple Aftermarket ShareIn a bit of “get them the razor so they will buy the razor blades” CEO Tim Cook’s Apple is increasingly relying upon farming the “installed base” of users to drive additional revenues. Leveraging the “installed base” of users is now THE primary theme for growing Apple sales. And even old-tech guys like Warren Buffett at Berkshire Hathaway love it, as they gobble up Apple shares. As do many analysts, and investors. Apple has paid out over $100B to developers for its services, and generated over $40B in revenues for itself – and with such a large base willing to buy things developers are likely to keep providing more products and working to grow sales.

But the risks here should not be taken lightly. At one time Apple’s Macintosh was the #1 selling PC. But it was “closed” and required users buy their applications from Apple. Microsoft offered its “open architecture” and suddenly lots of new applications were available for PCs, which were also cheaper than Macs. Over a few years that “installed base” strategy backfired for Apple as PC sales exploded and Mac sales shrank until it became a niche product with under 10% market share.

Today, Android phones are the #1 smartphone market share platform, and Android devices (like the PC) are much cheaper. Even cheaper are Chinese made products. Although there are problems, the risk exists that someday apps, etc for Android and/or other platforms could become more standard and the larger Android base could “flip” the market.

The history of companies relying on an installed base to grow their company has not gone well. Going back 30 years, AM Multigraphics an ABDick sold small printing presses to schools, government agencies and businesses. After the equipment sale these companies made most of their growth on the printing supplies these presses used. But competitors whacked away at those sales, and eventually new technologies displaced the small presses. The installed base shrank, and both companies disappeared.

Xerox would literally give companies a copier if they would just pay a “per click” charge for service on the machine, and use Xerox toner. Xerox grew like the proverbial weed. Their service and toner revenue built the company. But then people started using much cheaper copiers they could buy, and supply with cheaper consumables. And desktop publishing solutions caused copier use to decline. So much for Xerox growth – and the company rapidly lost relevance. Now Xerox is on the verge of disappearing into Fuji.

HP loved to sell customers cheap ink-jet printer so they bought the ink. But now images are mostly transferred as .jpg, .png or .pdf files and not printed at all. The installed base of HP printers drove growth, until the need for any printing started disappearing.

The point? It is very risky to rely on your installed platform base for your growth. Why? Because competitors with cheaper platforms can come along and offer cheaper consumables, making your expensive platform hard to keep forefront in the market. That’s the classic “innovator’s dilemma” – someone comes along with a less-good solution but it’s cheaper and people say “that’s good enough” thus switching to the cheaper platform. This leaves the innovator stuck trying to defend their expensive platform and aftermarket sales as the market switches to ever better, cheaper solutions.

It’s great that Apple is milking its installed base. That’s smart. But it is not a viable long-term strategy. That base will, someday, be overtaken by a competitor or a new technology. Like, maybe, smart speakers. They are becoming ubiquitous. Yes, today Siri is the #1 voice assistant. But as Echo and Google speaker sales proliferate, can they do to smartphones what smartphones did to PCs? What if one of these companies cooperates with Microsoft to incorporate Cortana, and link everything on the network into the Windows infrastructure? If these scenarios prevail, Apple could/will be in big trouble.

I pointed out in October, 2016 that Apple hit a Growth Stall. When that happens, maintaining 2% growth long-term happens only 7% of the time. I warned investors to be wary of Apple. Why? Because a Growth Stall is an early indicator of an innovation gap developing between the company’s products and emerging products. In this case, it could be a gap between ever enhanced (beyond user needs) mobile devices and really cheap voice activated assistant devices in homes, cars, offices, everywhere. Apple can milk that installed base for a goodly while, but eventually it needs “the next big thing” if it is going to continue being a long-term winner.

Harley Davidson Has Far Worse Problems Than President Trump or EU Tariffs

Harley Davidson Has Far Worse Problems Than President Trump or EU Tariffs

On Monday, Harley Davidson, America’s leading manufacturer of motorcycles, announced it was going to open a plant in Europe.

Ostensibly this is to counter tariffs the EU will be imposing on its products if imported from the USA. President Trump reacted vociferously on Tuesday, threatening much bigger taxes on Harley if it brings to the USA any parts or motorcycles from its offshore plants in Brazil, Australia, India or Thailand. He also intimated that Harley Davidson was likely to collapse.

Lots of heat, not much light. The issues for Harley Davidson are far worse than an EU tariff.

Harley Davidson has about 1/3 of the US motorcycle market. But in “heavy motorcycles,” those big bikes that are heavier and generally considered for longer riding, Harley has half the market. Which sounds great, until you realize that until the 1970s, Harley had 100% of that market. Ever since then, Harley has been losing share – to imports and to its domestic competitor Polaris.

It was 2006 when I first wrote about Harley Davidson’s big demographic problem. Basically, its customers were all aging. Younger people were buying other motorcycles, so the “core” Harley customer was getting older every year. From mid-30s in the 1980s, by the year 2000 the average buyer was well into their mid-40s. In 2007, I pointed out that Harley had made a stab at changing this dynamic by introducing a new motorcycle with an engine made by Porsche, and a far more modern design (the V-Rod.) But Harley wasn’t committed to building a new customer base, so when dealers complained that the V-Rod “wasn’t really a Harley” the company backed off the marketing and went back to all its old ways of doing business.

Simultaneously, Harley Davidson motorcycle prices were rising faster than inflation, while Japanese manufacturers were not. Thus, as I also pointed out in 2007, it was struggling to maintain market share. Slower sales caused a lay-off that year, and despite the brand driving huge sales of after-market products like jackets and T-shirts, which had grown as big as bike sales, it was unclear how Harley would slow the aging of its customer base and find new, younger buyers. Harley simply eschewed the trend toward selling smaller, lighter, cheaper bikes that had more appeal to more people – and in more markets.

Globally, the situation is far more bleak than the USA. America has one of the lowest motorcycle ridership percentages on the globe. Americans love cars. But in more congested countries like across Europe or Japan and China, and in much poorer countries like India, Korea, and across South America motorcycles are more popular than automobiles. And in those countries Harley has done poorly. Because Harley doesn’t even have the smaller 100cc,200cc, 400cc and 600cc bikes that dominate the market. For example, in 2006 (I know, old, but best data I could find) Harley Davidson sold 349,200 bikes globally. Honda sold 10.3 million. Yamaha sold 4.4 million. Even Suzuki sold 3.1 million – or 10 times Harley’s production.

But, being as fair as possible, let’s focus on Europe – where the new Harley plant is to be built. And let’s look exclusively at “heavy motorcycles” (thus excluding the huge market in which Harley has no products.) In 2006, Harley was 6th in market share. BMW 16%, Honda 15%, Yamaha 15%, Suzuki 15%, Kawasaki 11% and Harley Davidson 9%. Wow, that is simply terrible.

Clearly, Harley has already become marginalized globally. Outside the USA, Harley isn’t even relevant. The Japanese and Germans have been much more successful everywhere outside the USA, and every one of those other markets is bigger than the USA. Harley was simply relying on its core product (big bikes) in its core market (USA) and seriously failing everywhere else.

Oh, but even that story isn’t as good as it sounds. Because in the USA sales of Harley motorcycles has been declining for a decade! Experts estimate that every year which passes, Harley’s customer base ages by 6 months. The average rider age is now well into their 50s. Since Q3, 2014 Harley’s sales growth has been negative! In Q2 and Q3 2017 sales declines were almost 10%/quarter!

As its customer demographic keeps working against it, new customers for big bikes are buying BMWs from Germany – and Victory and Indian motorcycles made by Polaris, out of Minnesota (Polaris discontinued the Victory brand end of 2017.) BMW sales have increased for 7 straight quarters, and their European sales are growing stronger than ever – directly in opposition to Harley’s sales problems. Every quarter Indian is growing at 16-20%, taking all of its sales out of Harley Davidson USA share.

Going back to my 2016 column, when I predicted Harley was in for a hard time. Shares hit an all-time high in 2006 of $75. They have never regained that valuation. They plummeted during the Great Recession, but bailout funds from Berkshire Hathaway and the US government saved Harley from bankruptcy. Shares made it back to $70 by 2014, but fell back to $40 by 2016. Now they are trading around $40. Simply put, as much as people love to talk about the Harley brand, the company is rapidly becoming irrelevant. It is losing share in all markets, and struggling to find new customers for a product that is out-of-date, and sells almost exclusively in one market. Its move to manufacture in Europe is primarily a Hail-Mary pass to find new sales, paid for by corporate tax cuts in the USA and tariff tax avoidance in Europe.

But it won’t likely matter. Like I said in 2006, Harley Davidson is a no-growth story, and that’s not a story where anyone should invest.