Do you have any idea how powerful AOL and Yahoo once were, and how much they were once worth? Do you know how much shareholder value has been destroyed in these 2 companies in just 20 years? $221 Billion of destroyed wealth.
AOL pioneered the web as we know it today. Long before wireless, or broadband, there was “dial up service.” For young readers, that meant using a physical modem to connect your computer to a land-line telephone in order to literally dial up a connection to an internet service provider. AOL pioneered using the internet, and was the #1 connection with almost the entire marketplace. The phrase that made AOL famous back then was when you connected to AOL and it gave us the now iconic “You’ve got mail.” After connecting America, in 2000 AOL merged with Time Warner media in a deal valuing AOL at $111B.
Yahoo pioneered giving internet users news. It accumulated news from around the world on Sports, Economy and many other topics, making the news available to readers for free because it sold ads to pay the bills. In 2000 a publicly traded Yahoo was valued at $125B.
So in 2000, amidst a very extended NASDAQ internet hype, AOL and Yahoo were valued at $226B.
This week Verizon agreed to sell the two companies to a private equity firm for $5B. That’s a loss in value of $221B in 21 years.
How does a loss of this magnitude happen? A lot of focusing on tactics, ignoring market trends and failing to adapt the company strategy to meet changing competitive dynamics. Broadband and wireless eventually made dial-up irrelevant. And despite buying some media company to try and add new content to AOL, it lost all meaning. Time Warner spun it out to the public at a value of $3.5B in 2009.
Then, Verizon thought it could build a proprietary content company to get more Verizon customers so it bought AOL in 2015 for $4.4B. Only, nobody needed another content provider by then. Google served up general content just fine, Facebook gave us content we looked at frequently, and specialized content sites like Finance (Marketwatch) and Sports (ESPN) made it impossible that late in the game to launch a general purpose content accumulator and reposter. It was a strategy for 2005, not 2015. Meanwhile, Yahoo made one tactical decision after another to shore up its old model that didn’t work. Google became vastly better at search, and vastly better at delivering content. Tactical oriented CEOs Carol Bartz and Marissa Mayer had no strategy to meet emerging needs of the 2010 decade and beyond – leading Yahoo into complete irrelevancy.
Undeterred, the Verizon owned AOL bought Yahoo in 2017 for $4.5B. After all, it seemed cheap compared to its once $125B value – right? The idea was to merge the two companies, create “cost synergies” and “scale” in users to sell more advertising. Only, neither platform had enough original content to stop the user bleed to other sites. Netflix and Google’s YouTube took everyone who wanted new content away, and there was nothing left for AOL/Yahoo to deliver. It became the internal combustion engine repair shop in a world full of EVs
Now, after spending $9.9B on the entities plus much more in acquisitions, Verizon is selling both entities to Apollo Global Management private equity for $5B – a loss of $4.4B. And Apollo thinks this is a good deal because “a high tide raises all boats” and it will win merely because the world is increasingly using the internet. Really? More people are using the web, and more often, but they’ve already shown not via AOL nor Yahoo. Facebook, Instagram, Google, Pinterest, Twitter, and a raft of other sites are gaining the traffic. What was once irrelevant remains irrelevant.
It is crucial to understand why these to GIANTS of the internet are now part of history’s dustbin. While they pioneered the market, gaining huge revenues, share and valuation, they did NOT keep their eyes on disruptive innovators who could change the market they pioneered. Broadband killed dial-up, and because AOL moved too late it died. Google overtook search, delivering more content faster and better, and Yahoo simply waited too long to react. Not unlike how Research in Motion (Blackberry) failed to see the “app wave” in mobile coming and lost its enormous lead in mobile phones to Apple and Samsung. All thought their strength in pioneering was enough – and failed to keep their eyes on external trends and new market shifts that would change competition.
I wrote a raft of columns about the mistakes made by these company CEOs from 2009 through 2017 – constantly telling readers not to buy the stocks (just search the blogs my website adamhartung.com for AOL or Yahoo.) It is extremely rare for a corporation locked into its business model and cost cutting to adjust to a rapidly shifting market. When a company does so – like Jobs turned around Apple and Nadella at Microsoft – it is the exception to be well applauded. But that is very, very rare.
And this is NOT what PE companies do. They aren’t visionary investors who put in lots of money to change companies. They cut costs, streamline operations, and add debt to get their investment back. Apollo is no different. It has no vision of the internet future that will slow Facebook, Apple, Netflix, Alphabet/Google or even Amazon. It has purchased two irrelevant brands with outdated business models, no new technology, no new market approaches and no new insight to future unmet needs. There is no doubt Apollo will not turn these around. Apollo will unload this newest Yahoo! over-leveraged to a public debt market dominated by pension funds and it will soon enough file bankruptcy, finishing the coffin.
Do you think you could turn these around? First, are you ready to turn around your own business? Are you focused on how market shifts, happening today, will change your market? Are you seeing trends, and changing your business model and technology to adjust? Are you building a business around future scenarios you’ve created to compete in 2025 and beyond with different competitors offering different solutions? Or are you relying on past strengths to carry you through the future? If you’re planning with your eyes firmly in the rear view mirror I highly recommend you learn the lesson from AOL and Yahoo – that approach will not work.
Do you know your Value Proposition? Can you clearly state that Value Proposition without any linkage to your Value Delivery System? If not, you better get on that pretty fast. Otherwise, you’re very likely to end up like encyclopedias and newspaper companies. Or you’ll develop a neat technology that’s the next Segway. It’s always know your customer and their needs first, then create the solution. Don’t be a solution looking for an application. Hopefully Uber and Aurora will both now start heading in the right directions.
Did you see the trends, and were you expecting the changes that would happen to your demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, perhaps you should contact us, Spark Partners. We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info. Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
Give us a call or send an email. Adam@sparkpartners.com 847-331-6384
In September, 2015 (5 years ago) I wrote that Tesla was going to change global oil demand. Why? Because Tesla had proven there was a market shift toward electric vehicles (EV’s). Yes, the market was small. But every major auto company had seen the trend emerge, and all had EV’s on the drawing tables. Simultaneously, this was showing a shift to “electrification” at the same time that solar energy costs were dropping in price similar to computer chips in the 1990s.
The combination of shifts away from internal combustion engine (ICE) automobiles operating on petroleum, and the growth in renewable energy production from solar and wind was becoming obvious. In sailing, there are small lengths of cloth attached to the sails specifically to obtain an early read on wind direction. These are called “telltales.” Looking at Tesla and growing renewable electricity generation, the telltales gave me confidence to
specifically predict it would really hurt Exxon.
Now, 5 years later, most pundits think the world has reached “peak oil” usage, and demand for oil will only fall.
Since 2015 Exxon’s equity value (XOM) has declined 65%. Due to declining demand, the company is being forced to restructure and possibly cut its dividend
as the company shrinks.
Some would look only at short-term issues like the pandemic, but the economy in China has fully recovered – yet its demand for oil has not. Or some might say that oil prices are down only because Saudi Arabia and Russia are battling over market share – but this only portends more bad news for Exxon because 2 giants with the lowest cost battling for share will only make it harder for Exxon to sell products, even at a lower price and little or no margin.
Unfortunately, the pandemic has created an acceleration in the trends that are dooming profits for oil companies like Exxon. Once business happened in physical meetings where we transported ourselves by auto or plane fueled by oil. Now, meetings are being held on-line, virtually. Increasingly individuals, and companies, have learned not only how to use this technology but that they are more productive. Less wasted commuting time, less wasted hallway conversation time, fewer interruptions, and a recognition that it is possible to cut meeting time allowing attendees to better streamline work and decision-making. Speaking of work, virtual meetings are leading to better employee concentration due to better scheduling of time for meetings, and scheduling time for individual work.
Recall 2010 and the effort put into driving to work, or flying to meetings. Exxon, GM, Ford, Boeing, United Airlines and American Airlines were economic leaders, reflecting the work methods of the Industrial Era. Exxon was one of the 30 stocks on the Dow Jones Industrial Average. But the Great Recession had taken GM off the Dow, and now declining oil demand has removed Exxon – following the path I previously predicted.
Look at current 11/2020 market capitalizations:
Exxon – $133B
General Motors – $49B
Ford – $31B
Boeing – $83B
United Airlines – $10B
American Airlines – $6B
The world has changed. Trends have prevailed. We are now more mobile-oriented, work more asynchronously and use more gig resources.
Now we connect by Zoom and travel on electrons.
Zoom market cap – $146B
Tesla market cap – $380BWhy this walk down the path of recent history? Markets shift – often a lot faster than we would like to imagine. The economic hurt on those left behind is enormous. The opportunity for new leaders even more enormous. On the back end of trends is a LOT of pain. On the front end of trends is a lot of happy, happy. It is incredibly important to pick out the telltales and incorporate them into your planning. Earlier rather than later.Let trends direct your investments and your business decisions – look forward not backward. You want to be Zoom or Tesla (or own the stocks,) not Exxon, GM or Boeing (nor own those stocks.)
If you don’t have a clear line of sight to the future, ask for help – it’s my job. Do you remember anyone else predicting this enormous shift back in 2015? Back then oil was $100/barrel and Exxon was trading at $100/share. More pundits were expecting the future to look like the past than to make a radical shift. But we are always looking at the early telltales, always developing new scenarios, always preparing for market shifts and their implications.
Did you see the trends, and were you expecting the changes that would happen to oil demand? It IS possible to use trends to make good forecasts, and prepare for big market shifts. If you don’t have time to do it, maybe you should contact us!! We track hundreds of trends, and are experts at developing scenarios applied to your business to help you make better decisions.
Or, to keep up on trends, subscribe to our weekly podcasts and posts on trends and how they will affect the world of business at www.SparkPartners.com
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business. Click for Assessment info.
Give us a call or send an email. Adam@sparkpartners.com 847-331-6384
On 8/31/20, the Dow Jones Industrial Average went through a change in composition. Out went Exxon, Pfizer and Raytheon. In came Salesforce.com, Amgen and Honeywell. This is the 8th time the Index components have changed this decade, the 13th time since 2000 and the 55th change since created in 1896. So changes are not uncommon. But, are they meaningful? Ask any academic and you’ll get a resounding “NO.” There is no stated criteria for selection, no metrics for inclusion, no breadth to the number of companies (which has changed significantly over time,) and not even a weighting for market capitalization! The DJIA has no relationship to “the market,” which could well be measured better by the S&P 500, or the Russell 3000. And it doesn’t even link to any specific industry! To academics, “the Dow” is just a random number that reflects nothing worth measuring!!
The DJIA is (currently) a group of 30 stocks selected by the editors of Dow Jones (publisher of the Wall Street Journal, owned by News Corp – which also owns Fox News – and controlled by Rupert Murdock). Despite its lack of respect by academics and money managers, because of its age – and the prestige of being selected by these editors – being on the DJIA has been considered somewhat revered. Think of it as an “editorial award of achievement” for size, profitability and perceived stability. For these reasons, over time many investors have believed the index represents a low–risk way to invest in corporations and grow their wealth.
So the daily value of the DJIA is pretty much meaningless. And being on the DJIA is also pretty much meaningless. But, investors have followed this index every trading day for 124 years. So, it is at least interesting. And that’s because it is a track on what these editors think are important very long-term economic trends.
The original Index composition looks NOTHING like 2020. American Cotton Oil Company, American Spirits Manufacturing Company, American Sugar Refining Company, American Tobacco Company, Chicago Gas Light and Coke, General Electric, Leclede Gas, National Lead, Pacific Mail Steamship Company, Tennessee Coal Iron and Railroad Company, United State Cordage Company and United States Leather Company. Familiar household names? This initial list represents the era in 1896 – an agrarian economy just on the cusp of coming into the industrial age. Not forward looking, but rather somewhat reflective of what were the biggest parts of the economy historically with a not forward.
Over 124 years lots of companies left the DJIA — were replaced – and many replacements left. Some came on, went off, and came back on again – such as AT&T, Exxon (formerly Standard Oil of New Jersey) and Chevron (formerly Standard Oil of California.) Even the vaunted GE was inducted in 1899, only to be removed in 1901 – then added back in 1907 where it stayed until CEO Jeff Immelt imploded the company and it was removed for good in 2018.
But, there has been a theme to the changes. Originally, the index was largely agricultural companies. As the economy changed, the Index rotated into commodity companies like gas, coal, copper and nickel – the materials leading to a new era of tools. This gave way to component manufacturers, dominated by the big steel companies, which created the industrial era. Which, of course, led to big manufacturing companies like 3M and IBM. And, along the way, there was recognition for growth in new parts of the economy, by adding consumer goods companies like P&G, Coca-Cola, McDonald’s, Kraft (since removed,) and Nike along with retailers like Sears (later removed,) Walmart, Home Depot and Walgreens. The massively important role of financial services to the economy was reflected by including Travelers, JPMorgan Chase, American Express, Visa and Goldman Sachs. And as health care advanced, the Index added pharmaceutical companies like Pfizer, Johnson & Johnson and Merck.
Obviously, the word “industrial” no longer has any meaning in the Dow Jones Industrial Index.
Reading across the long history of the DJIA one recognizes the editors’ willingness to try and reflect what was growing in the American economy. But in a laggard way. Not selecting companies too early, preferring instead to see that they make a big difference and remain important for many years. And a tendency to keep them on the index long after the bloom is off the rose – like retaining Kraft until 2008 and still holding onto P&G and Coke today.
The bias has always been to be careful about adding companies, lest they not be sustainable. And not judge too hastily the demise of once great companies. Disney wasn’t added until 1991, long after it was an established entertainment leader. Boeing was added in 1987, after pioneering aviation for 30 years. Microsoft added in 1999, well after it had won the PC war. Thus, the index is a “lagging index.” It reflects a big chunk of what was great, while slowly adding what has recently been great – and never moving too quickly to add companies that just might be tomorrow’s leaders.
Sears added in 1924, wasn’t removed until 1999 when its viability is questionable. Phillip Morris Tobacco (became Altria) was added in 1985, and hung around until 2008 — long after we knew cigarettes were deadly and leadership didn’t know how to do anything else. Even today we see that United Aircraft was added in 1939, which became United Technologies in 1976 and then via merger Raytheon in 2020 – before it is now removed, as all things aircraft are screeching to a pandemic halt. And Boeing is still on the Index despite the 737 fiasco and plunging sales. IBM was added in 1939, and through the 1970s it was a leader in office equipment creating the computer industry. But IBM after years of declining sales and profits isn’t really relevant any longer, yet it is still on the Index.
As for adding growing stars, GM stays on the Index until it goes bankrupt, but Tesla is yet to make consideration (largely due to lack of profit history.) Likewise, Walmart remains even though the “big gun” in retail is obviously Amazon.com (another lacking the size and longevity of profits the editors like.) McDonald’s stays on the list, despite no growth for years and even as the Board investigates its HR department for hiding abhorrent leadership behavior – while Starbucks is eschewed. And Cisco is there, while we all use Zoom for pandemic-driven virtual meetings.
So what can we take away from today’s changes? First, the Index has changed dramatically over 20 years to reflect electronic technology. IBM, Microsoft and Apple are now joined by Salesforce. Pharma company Pfizer is being replaced by bio-pharma company Amgen in a nod to the future, although almost 40 years after Genentech went public. Exxon disappears as oil prices fall to sub-zero, demand declines globally and electric cars are on the cusp of taking market leadership. And conglomerate Honeywell is added just to show the editors still think conglomerates matter – even if GE has nearly disintegrated.
Is any of this meaningful? I don’t really think so. As an award for past performance, it’s a nice token to make the list. As business leaders, however, we need to be a LOT more concerned about developing businesses for the future, based on trends, than is indicated by the components of the DJIA. Driving revenue growth and higher margins comes from doing the next big thing, not the last big thing. And, as investors, if you want to make outsized returns you have to know that a basket of largely laggards (Apple, Microsoft and Salesforce excepted) is not the way to build your retirement nest. Instead, you have to invest in companies that are creating the future, making the trends a reality for businesses and consumers. Think FAANG.
Nonetheless, after 124 years it is still sort of interesting. I guess most of us do still care what the editors of big news companies think.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)
Give us a call or send an email. Adam@sparkpartners.com
In 2019, the California legislature passed Assembly Bill, AB5 “The Gig Economy Law.” It redefined “employee” in an effort to try and dramatically reduce “contract workers.” This law is intended to force people who work to become ”employees” (of someone), and thereby receive more rights. Simultaneously it forces those who pay for work to become “employers” covering additional costs forced onto them by the legal definition of an “employee”. In other words, AB5 attempts to set back the advancement of the Gig Economy 30+ years. Last week, that law was put on hold by a California court, and California citizens will vote in November on whether requirements of AB5 should remain, or be repealed.
Go back to 1900 and there were very few “employees.” Most people just worked. But the industrial economy boomed, and with it the need to put people into factories. Showing up on time, doing a job, was crucial to the industrial economy – whether you were making car parts or pushing invoices around. We’ve all seen pictures of assembly lines in factories making shirts or lawn mowers, and assembly lines of gray steel desks where people manually processed documentation. Being an “employee” meant showing up and was central to developing the industrial economy, where lots of cogs were needed for the machine to work.
There is one thing stronger than all the armies in the world, and that is an Idea whose time has come.
But we’re not in an industrial economy any more. Since 1990 we’ve been transforming into the information economy (or the knowledge economy, pick your preferred term.) Automation has replaced labor, with robots making trucks while computers process documents. People don’t stand in assembly lines – machines do. Work doesn’t happen with our hands, it happens with our brains – and machines do the manual labor. Managers don’t manage people, they manage processes. As a result, companies have been realizing they need a lot fewer people.
No longer can employers consider employees for life. Rather, companies need flexibility to adjust to the fast paced marketplace. Owning resources, including labor, can feel like dragging an anchor along with your business. Yes, people are needed people to do things. But every business leader knows that the brainpower needed today is probably not what was needed yesterday and not what will be needed tomorrow. Businesses need to access the knowledge workers they need quickly and shift their resources fast in order to meet changing market conditions- agility not stability. Relationships are transactional, not societal.
This is actually good for everyone. A hundred years ago studios controlled everything about movie making, including actor salaries. Many actors (i.e. Judy Garland & Mickey Rooney) made dozens of movies, yet had very little money. But that lock was broken, and it allowed actors to sell their services to the highest bidder – leading to today’s “star economy” where actors make what they can get producers to pay. There is a set scale to employment, but every actor is a free agent able to negotiate their terms of “employment” for each project.
Major league sports is the same. Where once club owners dictated pay, today players negotiate across teams for the best contracts. It allows for negotiating the best price for the best service in an open, flexible economy. If you’re good at playing, or coaching, you negotiate with the teams to get your best price for your services.
Uber and Lyft aren’t much different from studios and sports franchisees. Once, taxi companies controlled the market. All of us spent time standing in lines, waiting on cabs, that too often were dirty and broken. Market access was controlled by taxi tokens, and so was pricing. So service deteriorated to as low as possible, while customers stood in line on Friday night hoping to get a cab home from the theatre. But Uber unleashed the market. Resources could be added, or removed, by market participants. Pricing was determined by the buyers and sellers. And pricing variability allowed for quality variations as drivers tried to acquire repeat business. Surge pricing meant you could get a ride on New Year’s eve, meeting the customer needs and with pricing to meet the supplier’s need for expanding short-term capacity.
You might not think of Kim Kardashian, Tom Brady and an Uber driver as gig workers. But they are. And this hasn’t been lost on most of us. As publishers have disappeared, writers now must sell their research and writing independently, no longer expecting a set salary and benefits from newspaper owners. Virtual office assistants abound. For almost 30 years we’ve been building a flourishing economy of “gig workers” who are looking to match their skills with market needs. Uber and Lyft are just platforms created to help match the sellers and buyers (as is FiveRR for graphics and other office services.) Their success has been due to meeting a very real market need.
Uber and Lyft have helped the trend toward individual economic independence grow, not created the trend. When you see managers, who work for a set wage, working 24x7x365 on their iPhone or other mobile device, what’s the difference between them and a “gig worker?” When it comes to getting the work done, nothing. Just how they are paid – and some serious illusions about the employee/employer compact that are wholly out of date. Increasingly, we are recognizing we are better off to maximize the value of our services working independently, and seeking out projects that can use our services as contractors, rather than going through the burden of “hiring” and “firing” across “employers” in a fast changing world. Uber didn’t put people out of work, the knowledge economy redefined work. Uber doesn’t create low pay, it just offers a market that allows for flexible capacity and variable pricing. Uber offers a platform matching buyers and sellers. And that’s something we need MORE as adaptability demands keep rising.
California legislators can see that work has changed. But their approach was backward. They are trying to push everyone – both workers and business people – into an outdated model. An industrial model of employment. That will never work. It won’t work because the economy has changed, the world has changed, needs have changed, and these trends will not reverse. Trying to rewind the clock will only cause employers to abandon markets, as Uber and Lyft did when they said they would leave California. Solutions must address trends for independence and accessibility, not try to apply 100 year old definitions to a modern problem.
Contract work is here to stay. It’s been growing for 30 years. What’s needed are better Gig Marketplace tools to help business people find the resources they need, for workers to find projects that fit their skills and that meet their societal needs.
The old model created the term “benefits” for societal needs comprised of unemployment pay, retirement pay, hazard compensation, health care, etc. and forced those costs onto the “employer.” In much of the world today these costs are born by the government, but in the USA they are still borne by “employers”. In a contractor relationship, no one is required to cover the costs of those benefits. In most businesses now, “employer” is a term with a lot less meaning since businesses need much more agility than they did in an industrial economy. During this transition from industrial to gig economy, those societal needs are not being met effectively, leading to individual suffering and much, much higher costs to society.
New solutions are required to meet these needs – instead of forcing the old model onto a new economy. Legislators and regulators need to recognize that old approaches need to be revamped. All of these problems need new solutions – not some effort to force the industrial model onto platform providers that do little more than match needs with skills.
And this requirement for change applies to labor representation as well. The Department of Labor is an industrial era dinosaur that has little to no value in a world of work-from-home employees, outsourced manufacturing plants and easily available offshore production. Industrial era labor unions make no sense when we don’t work on assembly lines. Yet, unions are a very important part of entertainment and professional sports. Because in the latter markets leaders have adapted the union’s services to meet modern needs. Whether they realize it or not, gig workers need help with representation. But that representation must be a lot more sophisticated at helping workers than the throngs of attorneys at the AFL-CIO.
Californians would be suffer negative impacts if Uber and Lyft leave the market. And they realize that. But the solution is not the blunt axe of AB5. Thus, the law will almost surely be reversed in the next election. Then, hopefully, California will step up to the challenge of leading the country with new approaches that meet gig worker needs – expanding their markets and opportunities while building social solutions to every day needs.
TRENDS MATTER. If you align with trends your business can do GREAT! Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)
Give us a call or send an email. Adam@Sparkpartners.com
TRENDS: Covid-19 has accelerated a lot of trends. Few more than retail. Oddly some people have taken the view that Covid-19 changed retail. Actually, it didn’t. The pandemic has merely accelerated trends that have been driving industry change for almost two decades.
Back in 2004, Eddie Lampert bought all the bonds of defunct Kmart and used those assets to do a merger with Sears – creating Sears Holdings that encompassed both brands. The day of announcement Chicago Tribune asked for my opinion, and famously I predicted the merger would be a disaster. Clearly both Kmart and Sears were far, far off trends in retail, both were already struggling – and neither had a clue about emerging e-commerce.
Why in 2004 would I predict Sears would fail? The #1 trend in retail was e-commerce, which was all about individualized customer experience, problem solving for customer needs — and only, finally fulfillment. By increasing “scale” – primarily owning a lot more real estate – this new organization would NOT be more competitive. Walmart was already falling behind the growth curve, and everyone in retail was ignoring the elephant in the room – Amazon.com. Loading up on a lot more real estate, more inventory, more employees, more supplier relationships and more community commitments – old ideas about how to succeed related to fulfillment – would hurt more than help. Retail was an industry in transition. All of these factors were boat anchors on future success, which relied on aggressively moving to greater internet use.
Unfortunately, Eddie Lampert as CEO was like most CEOs. He thought success would come from doing more of what worked in the past. Be better, faster, cheaper at what you used to do. In 2011 Sears asked its HQ town (Hoffman Estates) and the state (Illinois) for tax subsidies to keep the HQ there. Sears had built what was once the world’s once tallest building, named the Sears Tower. But many years earlier Sears left, the building was renamed, and Sears was becoming a ghost of itself. I pleaded with government officials to “let Sears go” since the money would be wasted. And it was clear by 2016, that Lampert and his team’s bias toward old retail approaches had only served to hurt Sears more and guarantee its failure. Now – in 2020 – Hoffman Estates has taken the embarrassing act of removing the Sears name from the town’s arena, admitting Sears is washed up.
It was with a multi-year observation of trends that I told people in 2/2017 that retail real estate values would crumble . Now mall vacancies are at an 8 year high and 50% of mall department stores will permanently close within a year. We are “over-stored” and nothing will change the fast decline in retail real estate values. Who knows what will happen to all this empty space?
Trends led me in March 2017 to advise investors they should own NO traditional retail equities. Shortly after Sears filed bankruptcy Radio Shack and storied ToysRUs followed. And with the pandemic acting as gasoline fueling change, we’ve now seen the bankruptcies of Neiman Marcus, JCPenney, J Crew, Forever 21, GNC and Chuck e Cheese (but, really, weren’t you a bit surprised the last one was still even in business?) After 3 years of pre-Covid store closings, Industry pundits are finally predicting “record numbers of store closings”. And, after 15 years of predictions, I’m being asked by radio hosts to explain the impact of widespread failures of both local and national retailers ( ).Ignominious ends are abounding in retail. But – it was all very predictable. The trends were obvious years ago. If you were smart, you moved early to avoid asset traps as valuations declined. You also moved early to get on the bandwagon of trend leaders – like Amazon.com – so you too could succeed.
As we move forward, what will happen to your business? Will you build on trends to create a new future where growth abounds? Will you align your strategy with the future so you “skate to where the puck will be?” Or will you – like Sears and so many others – find an ignominious end to your organization? Will the signs change, or will the signs come down? The trends have never been stronger, the markets have never moved faster and the rewards have never been greater. It’s time to plan for the future, and build your strategy on trends (not what worked in the past.)
But don’t lose sight of the lesson. TRENDS MATTER. If you align with trends your business can do GREAT! Like Facebook. But if you don’t pay attention, and you miss a big trend (like demographic inclusion) the pain the market can inflict can be HUGE and FAST. Like Facebook. Are you aligned with trends? What are the threats and opportunities in your strategy and markets? Do you need an outsider to assess what you don’t know you don’t know? You’ll be surprised how valuable an inexpensive assessment can be for your future business (https://adamhartung.com/assessments/)
Give us a call or send an email. Adam @Sparkpartners.com
Americans take it for granted that all currencies are measured against the US Dollar. It’s been that way since WWII, so they just expect it will always be that way. But, things have a way of changing.
In this pandemic the US Federal Reserve is printing money as fast as possible to help prop up the economy. That’s better than the alternative, which would be another Great Depression. But, eventually we have to create value via goods and services to put value in those dollars, or they will be worth a whole lot less. In other words, if we don’t change our fiscal policy to improve production of goods and services, the US Dollar will fall in value – maybe a lot – and it could even lose its status as the world’s “reserve currency.”
Back in 2008, I wrote that there was no inherent reason the US Dollar would be the benchmark for all currencies. It gained that position as the dominant economy after WWII. American’s like to assume superiority, and therefore the US Dollar will always reign supreme. But as I also said in 2008, that’s an assumption that can easily be changed – especially regarding currencies. Lots of factors could cause the US Dollar to suddenly lose a whole lot of value – creating inflation rates that make the 1980s (>18%/year) seem tame.
Since WWII, a lot has happened. Economies in Europe grouped into the Economic Union (EU) making the Euro more powerful. And the economy of China has grown enormously. (China’s economy will be bigger than the USA economy sometime in 2020 or 2021.) Simultaneously, isolationism has hurt growth in America, and caused the EU to lose the UK. What’s rapidly happening is a shift in economic power away from the US and Europe to China.
Additionally, the largest holder of US debt is China. As I pointed out in 2009, this policy of supporting US debt has aided China’s desire to grow. But, as China becomes larger it will no longer need to prop up the US Dollar by purchasing Treasuries. Once bigger than the USA, China could demand that its trade be in Yuan and the value of the dollar could fall very far, very fast.
China has developed enormous inroads into the global economy, across dozens of countries, with its “Belt and Road Initiative” created in 2013. China has quietly become more important to the economy of 70 countries than the USA. Instead of supplying countries guns, China gave them infrastructure and facilities – and jobs – and economic growth. In most of these countries, the USA is more feared than adored, while the Chinese are seen as a very good friend. Meanwhile, the USA “put America first” policies, including trade wars and social justice, have isolated the USA from not only rivals but its global friends – including Europe (threats to kill NATO, for example.)
Now, we are in a pandemic. The Chinese are very determined to control its impact. Meanwhile the USA, UK and many other democracies are being far less careful. If this plays out with a full pandemic recession in the USA, China could stop buying American bonds and the value of the dollar could disintegrate in weeks. Disintegrate as in $1 could be worth 1 penny. It would take bushels of dollars to buy imported goods in stores.
In this election year, the biggest concern is, do those leading the USA realize the peril? Do business leaders? Do you?
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 Windows 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!
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.
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……”
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.