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”
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?
(Image: Troy Strange.)
Facebook’s CEO recently took a drubbing by America’s Congresspeople. And some thought it bode poorly for the internet giant. There were rumors of customer defections, and fears that privacy issues would sink the company. The stock dropped from a February high of $193 to a March low of $152 – down more than 20%.
But by mid-May Facebook had recovered to $186, and the concerns seemed largely ignored. As they should have been.
Facebook is much more than Facebook. As of January, 2018 Facebook had 2.1M monthly active users (MAUs,) the most of all social media sites. But Facebook also owns the second most popular site WhatsApp with 1.3M MAUs, and the third most popular site Facebook Messenger with 1.2M MAUs, and the fifth most popular site Instagram with 800K MAUs. Instagram is 5 times larger than Snapchat. And Facebook Stories, which just started in 2017 is now almost as big as Snapchat and surely in the top 10. So, 5 of the top 10 social media sites are owned by Facebook, and they totally dominate the marketplace.
Facebook paid $1B for Instagram in 2012 though it had no revenues. Today, 1/3 of ALL USA mobile users use Instagram. 15 million businesses are registered on Instagram. In 2017 Instagram had $3.6B revenues, and projections for 2018 are $6.8B.
Facebook expands globally
Facebook paid $19B for WhatsApp in 2014, when it had just $15M in revenues. In 2015, WhatsApp had 1 billion users. It is the most used app on the planet – even though not a top app in the USA where mobile texting is generally free. Where texting is expensive, like India, over 90% of mobile users utilize WhatsApp, and users typically send over 1,000 messages/month. In 2017, WhatsApp revenue rose to $1B, and in 2018 it will cross over $2B.
Facebook is smart at realizing new ways people can use the platform. It adds functionality constantly, exponentially growing the user base and time spent on its sites. It is untouchable in its social media market domination. And it has proven, more than any other platform (compare Snapchat and Twitter) that it can monetize users into revenues and profits. Facebook’s leadership is constantly in touch with trends and keeps making social media more relevant in the lives of every person.
Unless you somehow think time will go backward, you have to recognize that social media – like all other personal technology – is constantly becoming more useful. It is gaining greater adoption, and more usage. And businesses are using social media to reach customers, thus paying for access, like they once did for newspapers, radio, television and then web sites.
Just the beginning…
Facebook is just getting started, sort of like Amazon did 20 years ago. That’s the Amazon that dominates on-line e-commerce sales. If you bought Amazon on the IPO 21 years ago (May, 2017) your investment would have risen from $18/share to $1,700 – a nearly 1,000-fold increase. Facebook’s IPO was 6 years ago (May, 2012) at $38 – 6 years later it is worth $185, almost a 5-fold increase. Not bad. But if Facebook performs like Amazon in the next 14 years it could rise to $3,600 – an almost 20x gain.
And that’s why you should ignore short–term blips like the Congressional investigation and realize that you, and everyone else, is a Facebook customer. And you want to share in that growth by being a Facebook shareholder.
(Featured image adapted from Troy Strange.)
Execution – Implementation – Delivering — These are table stakes today. If you can’t do them you don’t get a seat at the table, much less a chance to play the game. But, unfortunately, all too often tactical implementation decisions are made by tactical “experts” without proper consideration of the strategy. And one bad tactical decision can kill the entire business by not living up to the value proposition.
Take for example a small company named NakedWine.com that created a potential death trap for its business by implementing one crucial execution mis-step.
The NakedWine value proposition is simple. They will find wines you never heard of and skip the costs of distributors and retailers by matching the customer and winemaker. Customers ostensibly get wines far cheaper because the winemaker’s cost of marketing and sales are avoided. Decent value proposition for both the customer, and the manufacturer.
The NakedWine strategy is to convince people that the NakedWine wines will be good, month after month. The NakedWine brand is crucial, as customer trust is now not in the hands of the winemaker, nor wine aficionados that rate known wines on a point scale, or even the local retail shop owner or employee. Customers must trust NakedWine to put a good product in their hands. Customers who most likely know little or nothing about wines. NakedWines wants customers to trust them so much they will buy the company’s boxed selections month after month, delivered to their home. These customers likely don’t know what they are getting, and don’t much care, because they trust NakedWine to give them a pleasurable product at a price point which makes them happy.When implementing this value proposition NakedWines doesn’t target wine enthusiasts, because those customers already have their wine sources, and they are varietal, geography and brand picky. Instead NakedWine pays on-line retailers like Saks Off 5th, and others, to put flyers into customer packages of semi-luxury goods. NakedWine provides deep discounts for initial purchases to entice someone to take that first purchase risk. NakedWine incurs big costs finding potential buyers, and hooking them to make an initial purchase so they can bring them into the brand-building cocoon. NakedWine wants to build a brand which keeps the allure of good wine, a sophisticated idea, for a customer who would rather trust NakedWine than become a wine expert. Or experiment with a local retailer.
But, NakedWines blew the whole strategy with one simple execution mistake.
Not everyone lives where they can accept a case of wine, due to weather. As northern Californians, maybe NakedWine leaders just forget how cold it is in Minneapolis, Chicago, Buffalo and Boston. Or how hot it is in Tucson, Phoenix, Houston, Palm Springs and Las Vegas. In these climates a case of wine left on a truck for a day – or 2 if the first delivery is missed – spells the end of that wine. Ruined by the temperature. Especially heat, as everyone who drinks beer or wine knows that a couple of hours at 90 degrees can kill those products completely.
The only time the customer finally connects with NakedWine is when that wine enters the house, and over the lips. But that step, that final step of getting the perishable wine to the customer safely, in good quality, and aligned with customer expectations was not viewed as part of the brand-building strategy. Instead, leadership decided at this step NakedWines should instead focus on costs. They would view delivery as completely generic – divorced from the brand-building effort. They would use the low–cost vendor, regardless of the service provided.
NakedWine decided to use Fedex Ground, even though Fedex has a terrible package tracking system. Fedex is unwilling to make sure (say, by drivers using a cell phone) that customers will be there to receive a shipment. The driver rings a bell – no answer and he’s on the run in seconds to make sure he’s meeting Fedex efficiency standards, even if the customer was delayed to the door by a phone call or other issue. When the customer requests Fedex send the driver back around again, Fedex is unwilling to attempt a second delivery within short time, or even any time that same day, after delivery fails. If a customer calls about a missed delivery, Fedex is unwilling to route a failed delivery to a temperature local Fedex Office location for customer pick-up. Or to tell the customer where they can meet the driver along his route to accept delivery. Despite a range of good options, the NakedWine product is forced to sit on that Fedex truck, bouncing around all day in the heat, or cold, being ruined. Fedex uses its lowest cost approach to delivery to offer the lowest cost bid, regardless of the impact on the product and/or customer experience, and NakedWine didn’t think about the impact choosing that bid would have on its brand building.
Brand Building at Every Step
Simply put, in addition to flyers, advertising and product discounts, NakedWine should have followed through on its brand building strategy at every step. It must source wines its customers will enjoy. And it must deliver that perishable product in a way that builds the brand – not put it at risk. For example, NakedWine should screen all orders for delivery location, in order to make sure there are no delivery concerns. If there are, someone at NakedWine should contact the customer to discuss with them issues related to shipping, such as temperature. If it is to be too hot or cold, they could highly recommend using a temperature controlled pick-up location so as not to put the product at risk. And they should build in fail-safe’s with the shipping company to handle delivery problems. That is implementing a brand building strategy all the way from value-proposition to delivery.
Leaders Execute Plans
Too often leaders will work hard on a strategy, and create a good value proposition. But then, for some unknown reason, they turn over “execution” to people who don’t really understand the strategy. Worse, leadership often makes the egregious error of pushing those who create the value delivery system to largely to focus on costs, or other wrong metrics, with little concern for the value proposition and strategy. The result is a great idea that goes off the rails. Because the value delivery system simply does not live up to expectations of the value proposition.
Do you remember the songs, and videos, from 2008 “United Breaks Guitars?” After United Airlines destroyed musician Dave Carroll’s guitar he chronicled the months-long journey he took trying to replace it. In the end, United told him “F**k you” as customer service blew him off completely. He went on to make a few million dollars with his songs and parody about the horrible experience. Because so many people felt they were abused like Mr. Carroll.
“United Breaks Guitars” was a hit because so many people related to the terrible customer experience on United. “The Unfriendly Skies” was the motto of customers, mocking the airlines “Friendly Skies” ads. It was clear that by 2008 United did not care about customers. Moving headlong to constantly lower operating costs, United built a culture that focused solely on efficiency, leading to terrible customer service, unhappy customers and employees that were a lot more worried about being yelled at by their bosses for not cutting costs than creating any customer satisfaction.
Things certainly haven’t changed. In 2017, United ejected a 69 year old physician from a plane, breaking his nose, knocking out his teeth and giving him a concussion. That created an uproar. Yet within a week United killed the world’s largest bunny rabbit in an airplane holding bin. But, even worse, last week United actually killed a puppy by forcing it be placed in an overhead bin. At least the dog United sent on a 1,000 mile unexpected flight to Japan survived, and the interviewed owner said he felt lucky the airline hadn’t killed his pet. Of course United refunded their money – which as you can imagine was a slap in the face to all these people who were so abused.
Unfortunately, United is just the worst of a bunch of bad airlines. Customer service really isn’t any better on Delta, American, JetBlue or Southwest. Saying these other airlines are better is just picking out a less heinous member of the Khmer Rouge Army.
This all goes back to deregulation. When President Carter allowed the airlines to charge as they like the industry really had no idea what it was going to do. There was chaos for years. But eventually consolidation kicked-in, and cutting cost was the only thing all 3 majors agreed upon. Buy more market share, as opposed to winning it with customer service, then slash the costs. This did the wonderfulness of leading all of them to file bankruptcy! Some twice! What a grand industry strategy!
Then Chairman of American Airlines received Wall Street Journal front-page coverage for realizing people weren’t eating their olives in first class, so he ordered olives removed from the first class meals. He was cheered for saving $100K. But what folks missed was that he, and his peers leading the airlines, were systematically trying to figure out “how do we offer the least possible service.” By focusing on a strategy of lowering cost, and being doggedly determined in that strategy, soon nothing else mattered.
Today, there are no free meals in coach, and terrible meals in first class. Management angered employees into strikes and multi-year negotiations, beating down compensation and eliminating benefits leading to unhappiness so bad that in 2010 a Jet Blue flight attendant pulled the emergency exit and jumped out of the plane as he quit.
So, all the airlines in America stink. And, many domestic airlines in Europe, such as Ryan Air, have followed suit. The execs keep saying “all customers care about is price.” They use that excuse to create a culture so hostile to employees, and customers, that pretty soon employees are beating up customers and killing family pets (after charging extra to take the pet on the plane) and actually not caring.
Employees have become gestapos for the leadership – which has created a culture in which nobody wins. So flight attendants do as little as possible, because they don’t care about customers any more than leadership does. In 2017, a JetBlue attendant threw a family off flight because their toddler kicked the seat. When a woman complains about a child in seat next to her a Delta attendant throws her off the plane. And just last week when a 2 year old cries during boarding a Southwest attendant throws the child and her father off the plane.
Deregulation led to an oligopoly. Now, customers have no choice. Some of us fly almost every week on business, and it is pure hell. Nobody we deal with, from TSA to airport vendors to airline staff like customers. The culture has become “I’m abused, so you will be abused.” To fly is to succumb to being obsequious to ALL employees in your effort to not anger anyone, for fear they will deny you service. Or, worse, beat you up or kill your pet. But, honestly, there is nothing customers can do about it.
The leadership of the airlines, lacking regulation, implemented a strategy of “be low cost.” The result was creating a culture where employees routinely abuse customers in the process of trying to save a few dimes. If the next Mark Zuckerberg, Elon Musk or Reed Hastings showed up, do you think HR would hire them? Would the Board of Directors, so focused on the wrong strategy, consider any of them as CEO? The wrong strategy has led to the ruination of an entire industry, miserable employees, unhappy customers and marginal returns. It is a terrible culture.
So what is your strategy? Is your strategy creating the culture you want? Are you headed toward happy customers who want more of your product or service, and create growth? Or are you letting your lack of a forward-thinking strategy default you into operational cost cutting, and the movement toward a culture of misery that drives away employees, vendors and eventually customers?
Here in late 2017, the biggest trends are: the 24 hour news cycle, animosity in broadcast and online media, fatigue from constant connection and interaction, international threats and our political climate. The holiday season is in the background struggling for attention.
How are people tuning out of this cacophony to get in the mood for the holidays?
The answer: Christmas movies! And which channel has 75% share of the new movies in 2017? If you have watched any TV since October, you’d know that it’s The Hallmark Channel. THC has produced over 20 original movies for the 2017 Christmas season and has seen viewership grow by 6.7% per year since 2013. THC is on track to surpass the 2016 season in viewership and its brand image is solidly wholesome.
Starting in October, THC runs seasonal programming with its successful “The Good Witch” series (no vampires!) and continues with “Countdown to Christmas” featuring original Hallmark-produced content.
Hallmark spent decades preparing to capture the benefits of these trends. It had become a source of family oriented, holiday-themed programming especially popular in recent years. Once only an ink and paper company, Hallmark expanded strategically in the 1970s with ornaments and cultural greeting cards and again in 1984 with its acquisition of Crayola drawing products. The company moved into direct retail in 1986 and ecommerce in the mid-1990s. Hallmark eCards was launched in 2005.
Hallmark capitalized on branded media content originally to support the core business and it now generates profits as a standalone business. In 2001, the Hallmark Channel was launched. The Hallmark Movie Channel was developed in 2004 which became Hallmark Movies and Mysteries in 2014. This year, the Hallmark Drama channel was launched further leveraging the brand.
Many companies sponsored radio shows in the 1920s through the war years. Serials featuring one company’s products appeared in 1928 on radio. In 1952, Proctor and Gamble sponsored the first TV soap opera featuring one company (“The Guiding Light”). But The Hallmark Hall of Fame was there first on Christmas Eve in 1951 sponsoring a made-for-TV opera, “Amahl and the Night Visitors.”
Written by Gian Carlo Menotti in less than two months and timed for a one hour TV slot, “Amahl” has become, probably, the most performed opera in history.
Hallmark wasn’t the first mover in sponsored media content, but it had learned to experiment with new media. The company was positioned to take advantage of the trend toward family friendly broadcast content and this year was ready to give the nation a place to rest and escape from the chaos. A bit like the story of Amahl and Christmas itself.
Once just a card company, Hallmark followed market trends to expand its business and become a leader in content marketing which is now one of the hottest areas in all marketing. And both the new video content and large library were ready for the current trend- streaming video!
For most consumers an Android-based phone from one of the various manufacturers, most likely bought through a wireless provider if in the USA, does pretty much everything the consumer wants. Developers of most consumer apps, such as games, navigation, shopping, etc. make sure their products work on all phones. For that reason, the bulk of consumers are happy to buy their phone for $200 or less, and most don’t even care what version of Android it runs. As a stand-alone tool an Android phone does pretty much everything they want, and they can afford to replace it every year or two.
But the business community has different requirements.
And because iOS has superior features, Apple continues to dominate the enterprise environment:
- All iPhones are encrypted, giving a security advantage to iOS. Due to platform fragmentation (a fancy way of saying Android is not the same on all platforms, and some Android phones run pretty old versions) most Android phones are not encrypted. That leads to more malware on Android phones. And, Android updates are pushed out by the carrier, compared to Apple controlling all iOS updates regardless of carrier. When you’re building an enterprise app, these security issues are very important.
- iOS is seamless with Macs, and can be pretty well linked to Windows if necessary for an apps’ purpose. Android plays well with Chromebooks, but is far less easy to connect with established PC platforms. So if you want the app to integrate across platforms, such as in a corporation, it’s easier with iOS.
- iPhones come exactly the same, regardless of the carrier. Not true for Android phones. Almost all Androids come with various “junkware.” These apps can conflict with an enterprise app. For enterprise app developers to make things work on an Android phone they really need to “wipe” the phone of all apps, make sure each phone has the same version of Android and then make sure users don’t add anything which can cause a user conflict with the enterprise app. Much easier to just ask people to use an iPhone.
- iOS backs up to iCloud or via iTunes. Straightforward and simple. And if you need to restore, or change devices, it is a simple process. But in the Android world companies like Verizon and Samsung integrate their own back-up tools, which are inconsistent and can be quite hard for a developer to integrate into the app. Enterprise apps need back-ups, and making that difficult can be a huge problem for enterprise developers who have to support thousands of end users. And the fact that Android restores are not consistent, or reliable, makes this a tough issue.
- Search is built-in with iOS. Simple. But Android does not have a clean and simple search feature. And the old cross-platform inconsistencies plague the various search functions offered in the Android world. When using an enterprise app, which may well have considerable complexity, accessing an easy search function is a great benefit.
Most of these issues are no big deal for the typical smartphone consumer who just uses their phone independently of their work. But when someone wants to create an enterprise app, these become really important issues. To make sure the app works well, meeting corporate and end user needs, it is much easier, and better, to build it on iOS.
This allows Apple to price well above the market average
Today Apple charges around $800 for an iPhone 7, and expectations are for the iPhone 8 to be priced around $1,000. Because Apple’s pricing is some 4-5x higher, it allows Apple’s iOS revenue to actually exceed the revenue of all the Android phones sold! And because Android phone manufacturers compete on price, rather than features and capabilities, Apple makes almost ALL the profit in the smartphone hardware business. Even as iPhone unit volume has struggled of late, and some analysts have challenged Apple’s leadership given its under 20% market share, profits keep rolling in, and up, for the iPhone.
By taking the lead with enterprise app developers Apple assures itself of an ongoing market. Three years ago I pointed out the importance of winning the developer war when IBM made its huge commitment to build enterprise apps on iOS. This decision spelled doom for Windows phone and Blackberry — which today have inconsequential market shares of .1% and .0% (yes, Blackberry’s share is truly a rounding error in the marketplace.) Blackberry has become irrelevant. And having missed the mobile market Microsoft is now trying to slow the decline of PC sales by promoting hybrid devices like the Surface tablet as a PC replacement. But, lacking developers for enterprise mobile apps on Microsoft O/S it will be very tough for Microsoft to keep the mobile trend from eventually devastating Windows-based device sales.
As the world goes mobile, devices become smaller and more capable. The need for two devices, such as a phone and a PC, is becoming smaller with each day. Those who predicted “nobody can do real work on a smartphone” are finding out that an incredible amount of work can be done on a wirelessly connected smartphone. As the number of enterprise apps grows, and Apple remains the preferred developer platform, it bodes well for future sales of devices and software for Apple — and creates a dark cloud over those with minimal share like Blackberry and Microsoft.
Amid all the political news last week it was easy to miss announcements in the business world. Especially one that was relatively small, like Starbucks announcement on Thursday July 27, 2017 that it was closing all 379 of its Teavana stores. While these will be missed by some product fanatics, the decision is almost immaterial given that these units represent only about 3% of Starbucks US stores, and about 1.5% of the 25,000 Starbucks globally.
Yet, closing Teavana is a telltale sign of concern for Starbucks investors.
Starbucks founding CEO Howard Schultz returned to the top job in January, 2008, promising to get out of distractions such as music production, movie production, internet sales, grocery products, liquor products and even in-store food sales in order to return the company to its “core” coffee business. Since then Starbucks valuation has risen some 5.5-6 fold, from $9.45/share to the recent range of $54 to $60 per share. A much better return than the roughly doubling of the Dow Jones Industrial Average over the same timeframe.
Yet, one should take time to evaluate what this closing means for the long-term future of Starbucks. This is the second time Starbucks made an acquisition only to shut it down. In 2015 Starbucks closed all 23 La Boulange bakery cafes, with little fanfare. Now, after paying $620M to buy Teavana in 2012, they are closing all those stores. While leadership blamed its decision on declining mall visits (undoubtedly a fact) for the closures, Teavana is not missing goals due to the Amazon Effect. There are multiple options for how to market Teavana’s fresh and packaged products far beyond mall store locations. Choosing to close all stores indicates leadership has minimal interest in the brand.
Starbucks’ focus leaves little opportunity for new growth
It increasingly appears that today’s Starbucks literally isn’t interested, or able, to do anything other than build, and operate, more Starbucks stores. And Starbucks is clearly doubling down on its plans to be Starbucks store-centric. The company opened 575 new units in the last year, and announced plans to open more stores creating 68,000 additional US jobs in the next 5 years. Further, Starbucks is paying $1.3B to buy the half of its China business previously owned by a partner. Clearly, leadership continues to tighten company focus on the “core” coffee store business for the future.
This sounds great short-term, given how well things have gone the last 8 years. But there are concerns. Sales are up 4% last quarter, but that is wholly based upon higher prices. Customer counts are flat, indicating that stores are not attracting new customers from competitors. Sales gains are due to average ticket prices increasing 5%, which is marginal and likely refers to higher priced products. Starbucks is now relying completely on new stores to create incremental growth, since bringing in new customers to existing stores is not happening.
Frequently this stagnant store sales metric indicates store saturation. A bad sign. Does the US, or international markets, really need more, new Starbucks stores? It was 2010 when comedian Lewis Black had a successful viral rant (PG version) claiming that when he observed a Starbucks across the street from another Starbucks he knew it was the end of civilization.
What happens when the market doesn’t need new Starbucks stores?
One does have to wonder when the maximum number of Starbucks will be reached. Especially given the ever growing number of competitors in all markets. Direct competitors such as Caribou Coffee, The Coffee Bean, Seattle’s Best, Gloria Jean’s, Costa, Lavazza, Tully’s, Peet’s and literally dozens of chain and independent coffee shops are competing for Starbucks’ customers. Simultaneously competition from low priced alternatives is emerging from brands like Dunkin Donuts and McDonald’s, now catering more to coffee lovers. And non-coffee fast casual shops are seeking to attract more people for congregating, such as Panera, Fuddruckers, Pei Wei, TGI Friday’s and others. All of these are competitors, either directly or indirectly, for the customer dollars sought by Starbucks. Are more Starbucks stores going to succeed?
As McDonald’s, Pizza Hut and other fast food chains learned the hard way, there comes a time when a brand has built all the market needs. Then leadership has to figure out how to do something else. McDonald’s invested heavily in Boston Market and Chipotle’s, but let those high growth operations go when it decided to refocus on its “core” hamburger business – leading to heavy valuation declines. Starbucks is closing Teavana, but should it? When will Starbucks saturate? And what will Starbucks do to grow when that happens?
Starbucks has had a great run. And that run appears not fully over. But long-term investors have reason to worry.
Is it smart to make such a huge bet on China?
Will store growth successfully continue, with all the stores that already exist?
Will direct and indirect competitors eat away at market share?
What will Starbucks do when it has reached it market maximum, and it doesn’t seem to have any emerging new store concepts to build upon?
Amazon just had another record Prime Day, with sales up 60%. And the #1 product sold was Amazon’s Echo Dot speaker. At $34.99 it surpassed last year’s unit sales by seven-fold. And the traditional Echo speaker, marked down 50% to $90, broke all previous sales records.
Amazon just took a commanding lead in the voice assistant platform market
These Echo sales most likely sealed Amazon’s long-term leadership in the war to be the #1 voice assistant. Amazon already has 70% market share in voice activated speakers, nearly 3 times #2 provider Google. And all other vendors in total barely have 5% share.
While it may seem like digital speakers are no big deal, speaker sales are analogous to iPhone sales when evaluating the emergence of smartphones and apps. The iPhone seemed like a small segment until it became clear smartphones were the new personal technology platform. Apple’s early lead allowed iOS to dominate the growth cycle, making the company intensely profitable.
Echo and Echo Dot aren’t just speakers, but interfaces to voice activated virtual assistants. For Echo the platform is Amazon’s Alexa. Alexa is to voice activated devices and applications what iOS was to Smartphones. By talking to Alexa customers are able to do many things, such as shopping, altering their thermostats, opening and closing doors, raising and lowering blinds, recording people in their homes — the list is endless. And as that list grows customers are buying more Alexa devices to gain greater productivity and enhanced lifestyle. Echos are entering more homes, and multiplying across rooms in these homes.
Do you remember when early iPhone ads touted “there’s an app for that?” That tagline told customers if they changed from a standard mobile phone to a smartphone there were a lot of advantages, measured by the number of available apps. Just like iOS apps gave an advantage to owning an iPhone, Alexa skills give an advantage to owning Echo products. In the last year the number of skills available for Alexa has exploded, growing from 135 to 15,000. Quite obviously developers are building on Alexa much faster than any other voice assistant.
By radically cutting the price of both Echo Dot and Echo, and promoting sales, Amazon is creating an installed base of units which encourages developers to write even more skills/apps.
The more Alexa devices are installed, the more likely developers will write additional skills for Alexa. As more devices lead to more skills, skills leads to more Alexa/Echo capability, which encourages more people to buy Alexa activated devices, which further encourages even more skills development. It’s a virtuous circle of goodness, all leading to more Amazon growth.
For marketers it is important to realize that success really doesn’t correlate with how “good” Alexa works. Google’s Assistant and Microsoft’s Cortana perform better at voice recognition and providing appropriate responses than Alexa and Siri. But there are relatively few (almost no) devices in the marketplace built with Assistant or Cortana as the interface. Developers need their skills/apps to be on platforms customers use. If customers are buying speakers, thermostats and televisions that are embedded with Alexa, then developers will write for Alexa. Even if it has shortcomings. It’s not the product quality that determines the winner, but rather the ability to create a base of users.
It is genius for Amazon to promote Echo and Echo Dot, selling both cheaper than any other voice activated speaker. Even if Amazon is making almost no profit on device sales. By using their retail clout to build an Alexa base they make the decision to create skills for Alexa easy for developers.
It is genius for Amazon to promote Echo and Echo Dot, selling both cheaper than any other voice activated speaker. Even if Amazon is making almost no profit on device sales. By using their retail clout to build an Alexa base they make the decision to create skills for Alexa easy for developers.
This is a horrible problem for Google, #2 in this market, because Google does not have the retail clout to place millions of their speakers (and other devices) in the market. Google is not a device company, nor a powerful retailer of Android devices. The Android device makers need to profit from their devices, so they cannot afford to sell devices unprofitably in order to build an installed base for Google. And because Android’s platform is not applied consistently across device manufacturers, Google Assistant skills cannot be assured of operating on every Android phone. All of which makes the decision to build Google Assistant skills problematic for developers.
Can Apple Stop the Alexa juggernaut?
The game is not over. Apple would like customers to use Siri on their iPhones to accomplish what Amazon and Alexa do with Echo. Apple has an enormous iPhone base, and all have Siri embedded. Perhaps Apple can encourage developers to create Siri-integrated apps which will beat back the Amazon onslaught?
Today, Apple customers still cannot use Siri to control their Apple TV (Though as of August, 2017, it’s been improved.), or make payments with ApplePay, for example. Nor can iPhone users tell Siri to execute commands for remote systems which are controlled by apps, like unlocking doors, turning on appliances, shooting remote security video or placing an on-line order. Apple has a lot of devices, and apps, but so far Siri is not integrated in a way that allows voice activation like can be done with Alexa.
Additionally, as big as the iPhone installed base has become, when comparing markets the actual raw number of speakers could catch up with iPhones. Echo Dot is $35. The cheapest iPhone is the SE, at $399 (on the Apple site although available from Best Buy at $160.) And an iPhone 7 starts at $650. The huge untapped Apple markets, such as China and India, will find it a lot easier to purchase low cost speakers than iPhones, especially if their focus is to use some of those 15,000 skills. And because of the low pricing ($35 to $90) it is easy to buy multiple devices for multiple locations in one’s home or office.
Will we look back and call Echo a Disruptive Innovation?
Recall the wisdom of Clayton Christensen‘s “Innovator’s Dilemma.” The incumbent keeps improving their product, hoping to maintain a capability lead over the competition. But eventually the incumbent far overshoots customer needs, developing a product that is overly enhanced. The disruptive innovator enters the market with a considerably “less good” product, but it meets customer needs at a much lower price. People buy the cheaper product to meet their limited goal, and bypass the more capable but more expensive early market leader.
Doesn’t this sound remarkably similar to the development of iPhones (now on version 8 and expected to sell at over $1,000) compared with a $35 speaker that is far less capable, but still does 15,000 interesting things?
The biggest loser in this new market is Microsoft
This week Microsoft announced another 1,500 layoffs in what has become an annual bloodletting ritual for the PC software giant. But even worse was the announcement that Microsoft would no longer support any version of Windows Phone OS version 8.1 or older – which is 80% of the Windows Phone market. Given that Microsoft has less than 2% market share, and that less than .4% of the installed smartphone base operates on Windows Phone, killing support for these phones will lead to sales declines. This action, along with gutting the internal developer team last year, clearly indicates Microsoft has given up on the phone business for good. This means that now Microsoft has no device platform for Cortana, Microsoft’s voice assistant, to use.
Microsoft ignored smartphones, allowing Apple’s iOS to become the early standard. Apple rapidly grew its installed base. Microsoft could not convince developers to write for Windows Phone because there weren’t enough devices in the market. Without a phone base, with tablet and hybrid sales flat to declining, and with PC sales in the gutter Cortana enters the market DOA (Dead On Arrival.) Even if it were the best voice assistant on the planet developers will not create skills for Cortana because there are no devices out there using Cortana as the interface.
So Microsoft completely missed yet another market. This time the market for voice activated devices in the smart phone, smart car or any other smart device in the IoT marketplace. It missed mobile, and now it has missed voice assist. As PC sales decline, Microsoft’s only hope is to somehow emerge a big winner in cloud storage and services (IaaS or Infrastructure as a Service) with Azure. But, Azure was a late-comer to the cloud market and is far behind Amazon’s AWS (Amazon Web Services.) Amazon has +40% market share, which is 40% more than the share of Microsoft, Google and IBM combined.
Build the base and developers will come…
There has been a lot of press about Millennial entrepreneurs the last 2 years. Young folks – mostly boys – dropping out of high school to start their own businesses at ages as young as 15. One of these, Noah Miller, who started a sports web site at 15 and later a creative agency asked to join my network on Linked-in. Then he asked me to look into the topic of young entrepreneurs and see what lessons we could learn.
1 – If you are really good at something at a young age, continue to work at it
Ben Pasternak liked gaming, and he liked apps. So at 15 he wrote a game-like app and put it on iTunes. 1.3million downloads later he was a young superstar. Since then he’s created two more apps (Flogg and Monkey.) His young hobby led to building strong programming skills, which when linked to identifying what appeals to Millenials turned into apps people really use.
George Matus started flying drones at age 12. He loved it so much he started modifying drones, and building his own. He published videos of his exploits on YouTube, and convinced drone makers to let him be a tester. After 6 years of working on Drones he now has his own Peter Thiel funded company making drones. So far no products on the market, but he is working at it.
Whether iOS apps or drones will be a long-term career is hard to say. But by building strong skills in new technologies with large markets and high growth rates these fellows created business opportunities. You don’t have to be a Millenial to do that.
2 – Take advantage of trends while they are hot
Collecting sneakers is a remarkably big market. Most older folks would call it a fad, thinking nobody will collect sneakers for long. But, it doesn’t really matter if a trend is going to be long-lived, or not, if you are willing to jump in and help push the trend along.
Fifteen year old Ben Kapelushnik liked sneakers. He wanted money to buy more. So he started buying multiple pairs of collectible sneakers and selling the “extra” pairs at a profit. To grow he networked with sneaker sellers to figure out how he could get in line early and buy many pair. Then he networked hard as he could to find associations with big time sneaker collectors, like rappers and other creative artists. Now he has a business buying and selling sneakers. How long will the fad last? Who knows – but Ben is making money by taking advantage of a hot trend.
Connor O’Neil saw the same phenomenon. He thought “why don’t I go source things people want?” So he created a web site where buyers can request he source sneakers, T-shirts and other items. He then searches the web, sourcing the items manually and with bots that will make instantaneous purchases of hard to find items. He charges customers a fee to find what they want. By meeting customer needs for trendy items, he finds an opportunity for profit.
At 16 Casey Adams started networking on Snapchat, Facebook, Twitter and other social media. After he built up a following of several thousand followers he began offering them t-shirts and wristbands. Pretty soon he was generating $5k/month in revenue. While many older folks still think social media, and Snapchat in particular, is a time-waster, Casey is making money on the obvious trend toward all things social. He’s leveraging his social network to sell things – and teaching other people how to do the same.
Are Bitcoins long-term currency? Will crypto-currency replace things like Dollars and Euros? Most older generation folks don’t think so, and view this as another fad. But Erik Finman saw the trend at age 12, and started buying Bitcoins. A few trades later and he turned $1,000 into $100,000. A few more trades and Finman had a stash worth over $1,000,000. Are Bitcoins the next Tulip bulbs? You can research the economists for opinions on that. But as long as the trend is growing, Erik Finman is making money.
Peter Szabo was only 12 when he used a Google search to identify ways to make money on the internet. He discovered making Facebook ads for affiliates could pay off – in pennies at first, but as volume rose these became dollars. Since so few older people knew how to manage a Facebook ad budget, by age 18 he created an on-line agency focused on maximizing value (and return) for Facebook advertising. You don’t have to be a Millennial to recognize the growth of new platforms and help people use them to make money.
3 – There has never been a better time to be a self-promoter
Today anyone can claim to be “great” at anything using the web. There are so few genuine ways to measure quality and results when it comes to anything on the web that if you say it enough, and find enough testimonials, you can be very convincing.
Noah Miller started a sports web site at age 15 using a group of writers he amassed via Twitter connections. Sports Crave had some success with USAToday and Google before Noah closed it at age 17. Based on his claims of great success he’s now promoting his new creative agency, Colour Medium, which has nothing more than a flash page. But the web allows Noah to position himself at the forefront of creative.
Benji Taylor at age 18 has opened a new on-line creative agency named Next Exit focused on art for the music industry. By forging relationships with known young musicians he has positioned his agency at the top of the creative spectrum for his target customers. Given how fast musicians come and go in the limelight, who knows how long his testimonials will stand up. But as long as people know the name of those who know his name he is leveraging those associations to crown himself the king of that industry.
Eighteen year old Josh King Madrid, known as Jet, has built a business on seemingly nothing more than a lifestyle. It is wholly unclear if Jet has ever actually created a profitable business selling anything physical or digital. But what he has done is convince lots of Millenials that he knows the lifestyle they want to lead, and he can tell them how to lead it. So now, largely without any clear source of how he obtained any knowledge about succeeding at business, he is proselytizing how young people can be independent, self-actualized and living the “Jet Set” lifestyle at his events. Jet is one of the best descriptions of how self-promotion can succeed in today’s social-media world, leading people to believe they should listen to you primarily because of the image you portray.
Overall Lessons from these 10 under 20 entrepreneurs
There is precious little to support the grandiose success claims of most Millennial entrepreneurs. They claim huge revenues and wealth, but in most cases it is impossible to prove their claims, and most support comes down to number of followers, or testimonials of some celebrity. But, that does not mean we can’t learn from what they did to achieve their current fame:
- Use social media exhaustively. Over-communicate. Use Facebook, Instagram, YouTube, Snapchat, Twitter, etc. over and over and over to communicate your value and your message. These platforms are dirt cheap, so hard work there can make up for few dollars.
- Take big risks, especially if you have little to lose. Most folks are hamstrung by the commitments of family, mortgage, car payments, etc. If you remove these bindings you can take big risks, like rolling over thousands of dollars worth of crypto-currency. And if something fails, never call it a failure. Just a learning experience you’ve moved beyond.
- Don’t try to improve something that already exists. Do something new. Develop a new app, a new drone, a site focused on selling collectible sneakers. It is cheaper, and more likely to succeed, if you are an early entrant in something new and growing.
- Hype is good. Pre-announce everything. And announce that your next thing (whether a drone, a web site, an exchange site or something else) is going to be HUGE. It will be the VERY BEST EVER. Do not be deterred by feeling the need to prove any of your claims, just make big claims with tremendous bravado.
- Take credit for anything that goes right. None of these people ever say they were lucky. Whatever went right was always do to their inherent insight, skill or genius.
- Stay out of specifics. Talk in platitudes. Especially statements that appeal to other Millenials.
- “Live your own life if you want to succeed.”
- “Believe in yourself 1,000%. That’s what truly matters.”
- “Don’t trust employers or education. Trust only yourself.”
- “Self-education is better than schools. You can learn more on YouTube than any classroom. Teachers are nay-sayers.”
- “Do what you are passionate about.”
- “Millennials are special. Millennials are smarter and better than older people.”
- Select good parents. I was struck by the fact that almost all these young people had parents and/or grandparents that were physicians, PhDs, successful real estate developers, successful business people. There is no doubt they benefited at their young age from families that had resources and skills that are not available to the vast majority of folks.
Is ongoing success pre-ordained?
I remember the student counsel President of my school, Mr. Popularity, who dropped out of college to open a string of pizza shops. He received ample praise and publicity for his young entrepreneurial success. But after a few setbacks the pizza shops failed, he took work as a salesman for a liquor distributor, became an alcoholic and lost his family. I was glad he found success early, and saddened that he wasn’t the wunderkind many people foisted upon him.
Life is not a one round fight. It will be interesting to see who among these, if any, go on to do great things in business, politics or another arena. While they are full of chutzpah today, life has a way of throwing many derailing curves into everyone’s path. But…
…that does not mean their early success can’t teach us some important lessons that can be applied, regardless of our age.