Wednesday, October 26, 2011

Netflix: The bad news keeps on coming

Netflix shares dropped 35% Tuesday, after reporting that it lost rather than gained US subscribers. At $77, stock is now down 74% from its alltime July peak, when it flirted with 300.

It’s down 70% since last April, when I asked:

How long can Netflix's luck last?

The Netflix mania reminds me of the TiVo mania five years ago. All manias reach a peak, but so far the Netflix peak is nowhere in sight.
I referred to “the reality distortion of the SV view of Netflix” — arguing that the enthusiasm for Netflix in the Bay Area might be atypical for Middle America. (A reader also pointed out that Netflix faces relatively low switching costs.)

On Tuesday, analysts downgraded Netflix shares. But why didn’t they downgrade them beforehand — particularly given the ongoing stream of bad news all summer — the ill-advised price increase and the (subsequently reversed) plan to split its businesses.

Some “experts” are now discovering that competition is possible in what has long been a commodity distribution business. As I said in July and again a month ago, that’s particularly true for electronic downloads.

Schmputerian pundit Holman Jenkins argues that all this bad news is good news for Netflix — even as he points out that Netflix has failed to win electronic distribution deals for 90% of the content it has one physical discs. He also argues that the price increases are necessary to pay ever-higher fees to access downloadable content.

Instead, he sees a silver lining out of 100 days of fiascos: a wounded monopolist (or rather monopsonist) is no longer as much of a threat to the movie industry, so perhaps they won’t gouge Netflix so bad in the future.

I see just the opposite lesson. The Netflix (and kiosk) businesses worked because with physical discs, the distributors could arbitrage the studio’s pricing to the sell-through market. For all-electronic content, there is no such gray market reasonableness restraint on studio greed, and so the studios will continue to jack up their prices until (it appears) we will never see a $10/month rental option again.

The fallout for that would be death for the pure-play distribution channels such as Netflix. BlockBuster (owned by Dish) might last a little longer, but is subject to the same pricing cartel. However, Amazon, Apple and Wal-Mart are all going to be around a decade from now — and can afford to be price followers in a commodity market with low switching costs.

The more serious question is how loyal are today’s millennials to full-length Hollywood content? Will they pay more for a Netflix (or equivalent) streaming subscription? Or will they just occupy themselves with free YouTube videos, as seems to be the habit of today’s teenagers?

Certainly any movie industry strategy that forfeits a generation of loyal listeners is as idiotic as ignoring (or suing) the Gen X’ers who were “sharing” MP3 files rather than buying CDs. We all know how that picture turned out.

Monday, October 17, 2011

Strategy straw men

It’s no secret that consultants, academics and other authors are prone to offering pat answers to complex problems, whether in managerial books, textbooks, HBR article or other managerial proscriptions.

(Mr.) Jo Whitehead of the Ashridge business school argues in an FT article Monday that strategy textbooks and strategy classes focus on superficial application of complex theories rather than sophisticated application of basic (and memorable) theories:

The root of the problem is that everyone wants to discuss something new and sexy – leaving the basics behind. Professors have to research frontier issues, which typically mean rather esoteric subjects such as collaborative strategy, stakeholder engagement or Web 2.0. Students want exciting cases and flashy new ideas.
While the direction that he advocates makes sense, there seems to be no evidence for the (mythical)) straw man strategy professor. Another argument
Advice needs to be given on how to make the best use of limited data
First, many MBA classes assume that managers will be working in a large corporation with unlimited resources — while entrepreneurship courses have traditionally been taught in this direction.

He adds:
Without such changes we will continue to churn out business people who can talk about the latest sexy concepts in strategy but, when required to come up with one, default to overly simplistic approaches such as Swot analysis.
Teaching basic application of key concepts to all levels of students was my major goal for 9 years of teaching strategy at SJSU, and most of my colleagues as well.

Another problem with the straw man was the broad brush argument. I've taught undergrads, 20-something MBA students, and executive MBAs. Undergraduates have to understand what a manager does, while an existing manager has to be sold that you have some clue as to what you’re talking about. An approach suitable for one audience is going to fall with another.

Finally, the article concluded with the obligatory plug:
Jo Whitehead is the author of ‘What you need to know about strategy’ (Capstone) and a director of the Ashridge Strategic Management Centre
It turns out, this is the second of his two strategy books for managers. Meanwhile, his bio notes his former role as VP and director of BCG (the people who brought us the infamous if now forgotten 2x2 “cash cow” framework).

So while I am sympathetic to Mr. Whitehead’s desire to improve strategy teaching and make it more realistic, I don’t think his complaint represents the typical business school (or at least the typical US teaching-oriented business school). Plus if one were to investigate where superfluous “new and sexy” theories come from, I’d be inclined to start with consultants, book authors and directors of b-school strategy centers.

Sunday, October 16, 2011

Death of the once-great Motorola

Robert Galvin died last week at aged 89. The second of three generations of Galvin CEOs at Motorola, he was clearly the best, guiding the company to its period of greatest success (1959-1997).

In addition to serving as Motorola president, CEO and chairman, Galvin was chairman of Sematech and helped create the Six Sigma movement in the United States. For more than 20 years, Galvin was a Notre Dame trustee and later fellow. His funeral mass will be held Tuesday in Winetka, Illinois.

I nearly met Galvin at what was likely his last public appearance, a dinner Sept. 8 in San Diego in which the Marconi Society gave him their a lifetime achievement award. Unfortunately, a massive power failure shifted the event from the Scripps Aquarium to become a candle-lit garden party, in which the mingling was cut short when the sun went down and the light disappeared. Galvin was at the event in a wheelchair, but we never spoke.

The Marconi Society prepared a very professional retrospective of Galvin’s life with Motorola, including interviews with Galvin and key associates. The 7-minute video was intended to be shown at the banquet, but without AC it was passed around among the 100 attendees on two battery-powered laptops.

The video included an interview with the (famous) Marty Cooper, who ran the Motorola project that produced the DynaTAC handset that was produced during the 1970s for the licensing trials.

Another interview was with yours truly. My original dissertation plans focused on the efforts of AT&T and Motorola to bring out cellphones during the period 1960-1983. I argued that Galvin brought two key contributions of Motorola to the cellular industry:
  • pushing for competing cellular licensees for every major market, rather than replicating Ma Bell’s landline monopoly
  • the ongoing push for miniaturization of the handset — being the first with a portable handset.
Something I hadn’t previously heard — although it was in the NYT obit — was Galvin’s story of how he got the FCC to approve his proposal for a 2nd license. He brought a portable handset to the Reagan White House, and Reagan himself asked a staffer to direct the FCC to grant Motorola a license.

It’s so very sad how Motorola has lost its way since the days of Bob Galvin. He can’t escape blame entirely, both appointing his son Chris to mismanage the company and greenlighting the $7 billion Iridium boondoggle that sapped the company’s resources at a time when Nokia (and later the Koreans) was eating its lunch.

Even without a happy ending, the world is a better place for people like Bob Galvin, Ken Olsen and others who created something that didn’t previously exist, harnessing technology both to serve customer needs and create economic growth. I’m guessing in my lifetime we will probably say something similar about Steve Jobs, when (like Motorola and DEC) the remnant of Apple has been commoditized into a shell of its former self.

Wednesday, October 5, 2011

Steve Jobs, 1955-2011

Eight years after he was diagnosed with pancreatic cancer, and less than two months after resigning as CEO, Apple Chairman Steve Jobs died today.

Even in his absence, Apple Inc. is showing the perfect sense of style that Steve imbued to the company he co-founded 35 years ago. The website shows a picture of Steve

which then leads to a simple message
Steve Jobs
Apple has lost a visionary and creative genius, and the world has lost an amazing human being. Those of us who have been fortunate enough to know and work with Steve have lost a dear friend and an inspiring mentor. Steve leaves behind a company that only he could have built, and his spirit will forever be the foundation of Apple.

If you would like to share your thoughts, memories, and condolences, please email
The company issued a brief official statement:
October 5, 2011

Statement by Apple’s Board of Directors
We are deeply saddened to announce that Steve Jobs passed away today.

Steve’s brilliance, passion and energy were the source of countless innovations that enrich and improve all of our lives. The world is immeasurably better because of Steve.

His greatest love was for his wife, Laurene, and his family. Our hearts go out to them and to all who were touched by his extraordinary gifts.
The San Francisco Chronicle was the first to post (as is common for newspapers) the pre-written obit, updated with today’s news, and accompanied by seven photos. (The San Jose and New York papers were slower to respond, and the Los Angeles Times obit, while it had interesting tidbits, was not nearly as good.)

Even having read most of the Apple histories, I learned a few things from the Chronicle’s story. While Steve (son of an unwed graduate student) didn’t have a lot in common with his adoptive father,
[Steve Jobs] considered it lucky that his dad, a machinist, moved the family to Mountain View when Jobs was a boy and gave him a workbench in their garage.

"My father, Paul, was a pretty remarkable man," Jobs said in a 1995 oral history for the Smithsonian Institution. "(He) was kind of a genius with his hands (who) spent a lot of time with me ... teaching me how to build things, how to take things apart, put things back together."
Both the LA and SF obits talked about his rivalry with Bill Gates — Gates praising Jobs in the former and Jobs scorning Gates in the latter.

My own life was changed by Jobs and his creation, the Macintosh. From its release in 1984, I sought to make my living around this magnificent machine, which I did for 16 years until becoming a full-time college professor in 2002.

Of course the Jobs I era (1977-1986) at Apple was separated from the Jobs II era (1997-2011) by a string of horrible CEOs who did their best to destroy the company. (Convinced they were going to succeed, I went back to grad school to learn a new trade). Beyond what I’ve said earlier, there is little I can add to these and other testimonials to the contribution Jobs made to the computer, electronics, entertainment and publishing industries.

The Chronicle summarized his contribution thusly:
Jobs was considered by many to be the greatest corporate leader of the last half century, and indeed his numerous successes rank him alongside Ford, Disney and Edison as a giant of American business.
Both the Chronicle and the Times quoted Jobs’ thoughts on death from his famous 2005 Stanford commencement speech as did the local ABC affiliate. Here is the longer quote in context:
No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
My prayers go out to Steve’s widow, Laurene, his two teenage daughters and his two adult children.