Archive for September 2009

On Being Prepared to Walk Alone

September 28th, 2009 — 11:11pm

Between 1994 and 1998, I was first a senior consultant and then a Director (partner) at Arthur D. Little. ADL was really a technology consulting company and the majority of the people I worked with were highly skilled, hard core engineers and scientists, many of whom held Ph.D.s. (ADL ran into trouble – after I left – because the people who ran it forgot its essence and decided to compete head-to-head with McKinsey. But that’s a story for another day.)

One day, infuriated at a “McKinsey wannabe,” I turned to an outstanding engineer. “Dave,” I said, “One reason companies run into trouble is that everyone believes that he or she can do strategy. No one questions the fact that to do what you do, you need years of specialized training. There have been great inventors who never ever attended school, but they were few and far between. In contrast, there are many more examples of people – like Bill Gates – who became brilliant strategists without any training. So, everyone seems to believe that they too can be great strategists – without investing any time or energy or creativity. What utter nonsense!” Dave made sympathetic noises and returned to his work.

This story has a link to my last post on competing with “free” on the Web. A key reason why media companies are hemorrhaging money is that few have true strategies.

All the great thinkers in strategy agree on two issues. First, a strategy must be unique and hard to effect. Recall that in the heydays of the dot com companies, every website had a page entitled, “Our Partners” which – invariably – named IBM, Microsoft and Cisco. For years, I’ve told executives, “If IBM is everybody’s partner, then IBM is nobody’s partner.” Generalizing, if every company has the same strategy, no one has a strategy. This is definitely true of most media companies: most have the same content; all are reliant on advertising; all have roughly comparable technical capabilities; all can be accessed from around the world; and only a handful have true brand names which could give them great advantage.

Second, a great strategy is about fit – lots of little factors are designed to work together as one seamless entity. Thus, simply copying the most prominent and visible of these factors does not help a competitor. For example, in my post, “Time to Re-read ‘What is Strategy?’” I argued that simply copying Apple’s retail strategy won’t help Microsoft, just as it didn’t help Sony. Apple’s retail stores are a seamless part of the “digital culture” that pervades all its products and services.

Media companies will not thrive if they all rely on advertising. This funding mechanism worked for newspapers and broadcast TV since they differentiated themselves first by content and second, by distribution. It also work for Google for pretty much the same reason. Since there’s really nothing unique in the online personas of most media companies, an advertising based model will inevitably reduces competition to a dog-eat-dog level, forcing them to compete with “free.”

A different solution can be found; it only requires creative thinking. After leaving ADL, I became the Chief Technology & Strategy Officer of a high tech company, TurboChef, which still manufactures a device which I’ve always described as “a computer which cooks.” When I was creating its online strategy, I deliberately eschewed advertising. No person who could afford to buy a TurboChef was going to spend endless time sitting in front of its control screen watching advertisements.

In its place, I focused on the one thing we controlled that no one else, regardless of size, could duplicate – at least as long as our patents were valid. I asked my engineers to design the device so that its operating system would be upgradeable for several years. This required, for example, the use of flash memories, which were just appearing and very expensive. Nevertheless, I mandated the use of flash memories. We would give consumers a “free” upgrade (naturally downloaded directly into their TurboChef ovens) if and only if they participated in the online community we were creating – where they could buy exotic foods, high end kitchen artifacts and yes, exchange recipes (by downloading them directly into each other’s ovens). We would make money online through this community – without relying on a single advertisement.

We would also be able to do something no consumer durable company has ever been able to: keep in constant touch with our consumers. That way, in five or seven years, when we told them that their hardware (the physical oven) could no longer handle the latest versions of the operating system, they would virtually be compelled to buy the latest TurboChef available.

Much of the “strategy” churned out by companies stinks (and that’s putting it mildly) because people who formulate them think it is a mechanical exercise. Creating good strategy requires creativity comparable to that which underlies the output of a good artist or a top-notch engineer. And so, the worst possible time for companies to create strategies is in conjunctions with their annual business planning cycle. At that time, the only creativity observable is in the “massaging” of budget numbers to produce a pre-determined output!

Since childhood, I have loved Bengali song that says, “If no one hears your call, then walk alone.” (Trust me, the poetry is much more lyrical in the original language!) Creating anything, particularly something unique, requires the courage of conviction and the willingness to walk alone.

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There’s Always a Price Tag

September 13th, 2009 — 3:46am

In recent weeks, media mogul Barry Diller made a news splash when he proclaimed that hundreds of millions of people are in for a rude shock: They who expect virtually everything on the Internet to be free, but within 5 years, they will actually have to pay for content.

Virtually simultaneously, Chris Anderson, the editor-in-chief of Wired magazine (and author of The Long Tail), set forth a dramatically different viewpoint. In his book, Free: The Future of a Radical Price, he argued that businesses must learn to compete with “free.” Anderson doesn’t really believe the provocative title of his book; he argues that in an Internet-focused world, every business must be willing to give away something valuable for free in order to gain paying customers for other – presumably more expensive – products and services. Anderson himself is reportedly giving away copies of his book for free (at least to some people); his payoff will be invitations by companies and associations to give paid talks, which can be a very lucrative business.

Anderson’s viewpoint is not novel, though it is being treated as such. A decade ago, I read a book entitled Information Rules: A Strategic Guide to the Network Economy. The authors, two well known economists (Carl Shapiro and Hal Varian) argued that the “new rules of business,” a very common phrase during the early days of the commercialized Internet, were not new at all. Indeed, classical economic theory had within its doctrine all of the rules needed to run Internet-based businesses successfully. One, which is relevant here, was that buyers could not assess the true value of an “experience good” without consuming it at least once.

The experience good idea suggests that Anderson overstates his case, while Dillard will have to pay at least some attention to the idea of “free.” For example, business people can assume that the online Wall Street Journal – perhaps the best example of the Barry Dillard argument – will be worth paying for since they have consumed the paper version and know that there are at best, only a handful of media outlets which can provide comparable information. In contrast, the online version of the average daily newspaper has to give away all its content for free simply because experience has taught potential consumers that most newspapers carry pretty much the same news – at least regarding most of the important issues of the day. So, if a particular newspaper charges for its online edition, the average consumer can find similar coverage by some other which does not.

Media companies will not succeed unless they pay much greater attention to the first of nine questions I ask when formulating strategy: Who needs us? Why? If no one “needs us” we can’t charge for the value we think we deliver. If people do need us, we can.

Of course, one might present a counter-argument by pointing to the relationship young people have with music: They “need” it but they want it free. Here I’ll say that we must differentiate between theft and fair use. I have yet to meet a young person who considers ripping off music as his or her right; they are almost always apologetic and defensive, pointing out they have little money and “everyone is doing it.” If it weren’t for this attitude, I doubt if iTunes would have been the money maker it is: why buy it on iTunes if you can get it for free? Yet Apple is making money … perhaps even minting it.

The Internet is as close as we can come to the economists’ assumption of a perfect market – one in which no one makes “supernormal profits” because there are too many buyers and too many sellers of the same (or very similar) stuff. The only way a company can make money is by making this perfect market “imperfect,” and draw a greater number of buyers than any competitor. And there are only three ways of doing this: building a great brand, creating defensible intellectual property or creating a hard to replicate delivery system. The WSJ is in the catbird seat because it has done the first two very well; the typical newspaper lacks “defensible intellectual property” and is distributed in exactly the same way as every other. Moreover, only a handful have true “brand name” status. Hence, they cannot get out of the perfect market.

I will be interested in learning how Mr. Dillard will deal with this issue. If he can, he will be able to turn the Internet into paid media. If he cannot, he won’t – unless of course, all of the content providers collude and in Ayn Rand’s John Galt style, go on strike (or equivalently, coordinate the raising of barriers).

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