Wednesday, April 28, 2004

A Pitfall of Working at Home

Alas, I have never had the problem pictured in this very funny Sony Vaio commerical (which is "more or less" work-safe).

(Note: this is the first time I've attempted video on blogger, so let me know if you have problems. It worked okay for me)

Tuesday, April 27, 2004

Netflix Plans: Mail to Internet

In sort of an ongoing Netflix discussion that has been going on this site, I noticed yesterday that Netflix is talking about moving to internet delivery instead of mail delivery. This is one of those goals that "vision CEOs" fling around that the press and analysts eat up, but the poor saps down below have a tough time executing (yeah, I worked in a company with the same dynamics).

Why will this be tough to implement? There are a few things that come to mind:
1. Infrastructure - I have a high-speed DSL line coming into the home - to my PC. I don't watch movies on my PC, I watch them on my TV. How will the movie get from my PC to my TV (or to my set-top box or my Tivo)?

Yes, I can list a bunch of ideas that will make this possible (I would like a wireless connection between my set-top-box/Tivo and my PC), but the fact of the matter is that if Netflix offered the service today, I couldn't use it. And if they required me to buy a few hundred dollars of new equipment, I am not sure I would, which would be true of most the customer base. So from an infrastructure point of view, there is a serious problem to contend with until high-speed access to the TV (direct, through Tivo, or through the set-top-box) is commonplace.

2. Doesn't Own a Critical Piece of the Puzzle - As the article points out, there are several companies looking at this very obvious business model. So if a bunch of companies are going to offer this, who will be the winner?

Netflix's advantage is their customer base, plus the fact that these customers order and manage their account over the internet. Great. But is that enough to win in this business model when there are other critical pieces:
Content (Movies) - There are going to be serious copyright issues once movies start being digitally flung over the internet (look at music as an example). As noted in the article, most of the movie houses are starting or backing competing services for internet delivery, which will put Netflix at a disadvantage.

Equipment - As noted in point one, there needs to be a way to get the movie from the internet to your TV, probably through the set-top box with DVR (the movie would be uploaded onto the DVR/Tivo disk and be ready for viewing). And who provides the vast majority of set-top boxes to consumers? The cable companies! Think they would like to provide internet movie delivery? You wanna bet they are working on it already as a part of the cable package? Satellite service is a little different, but you can bet Rupert's boys are also working on this. If the equipment is provided gratis to customers and the feature as a part of the existing satellite or cable bill, it will be tough for Netflix to displace.

There is a connection between Tivo and Netflix since the Tivo pres is on the Netflix board, but I am not sure this will be enough to overcome the set-top box/cable cabal, which Tivo themselves seem to be leaning towards.

Capital - Netflix is public with a very high riding stock. But they will be entering this market against people with much deeper pockets (as noted in the article).
3. A Ready Business Model - When did you first hear promises about video on demand? I heard this being talked about in the mid 90s and there were at least a dozen attempts by cable companies and start-ups to provide this service on some limited bases. And they all failed.

Video on demand is the same as video rental if the selection is wide enough, is cheap, and if delivery is easy. But no one has made all three possible yet (if you have pay-per-view and Tivo, you have cheap, easy delivery and can watch when you want, but you have a selection problem). Sort of like video phones, it's one of those technologies that consumers want and companies want to provide, but technology bottlenecks have made both services out of reach for the mass market. Faster internet connections and better technology should make both possible in the coming few years, so the trick is to roll it out when it is ready instead of promising big and not being able to deliver.

Saturday, April 24, 2004

Business Books

A fellow Rice grad suggested I blog about the "Best Business Books". At about the same time a new blog appeared (hat tip to Business Pundit) that is all about business books and is even giving away free books if you come up with a cool name for the blog. So it seems time do an entry on this subject.

I don't read a lot of "business books". I find most of them are simply rehashing and repackaging concepts that have been discussed before, or are trying to sell books based on a new buzz phrase ("viral marketing", "guerilla marketing", "paradigm shift", the list is endless). For this reason you will find that my picks lean towards stories about business rather than theoretical or "how to" business books. And I don't include "self help" or motivational books in my picks (Think and Grow Rich, for example, is on a lot of lists).

So my list of "best" business books isn't drawing from a very deep pool and are skewed towards historical story telling, so feedback in the comments if I sorely missed something you like. Note that many of the books on my list were required reading in business school so they may seem a bit dated:
1. The Prize - An outstanding read on the history of the oil business, plus lots of geopolitical discussion (would Japan have won the War in the Pacific if they hadn't missed the oil depot during Pearl Harbor?). Anyone even remotely connected or interested in this industry, or is interested in how oil has shaped and is still shaping world affairs should read this book (there was a PBS series based on this book which was "okay")

2. Liar's Poker - See the dirty side of the bond industry from a jaded, cynical point of view that gives lots of laughs. This was probably one of the most interesting reads I have had in all the classes I have taken. Unfortunately Michael Lewis's later book The New New Thing - about Silicon Valley - was a bit dry.

3. Barbarians at the Gate - Dramatic story of the RJR Nabisco LBO (leveraged buyout for you non-business types). I picked this up again a few years ago and find that it is getting a little dated, but it is still an eye opener on corporate excess, greed and the art of the deal (I hated Ross Johnson after reading this book, although James Gardner made him sympathetic in the HBO movie).

4.Competitive Strategy - The top theoretical book on my list and the basis from which I draw for nearly all my marketing analyses. If you want to do strategic marketing, this is your Bible.

5. Something by Tom Peters - Yeah, I know there are a lot of Tom Peters fans out there, and reading him does pump you up, but if you read one of his books, you pretty much have read them all. I read In Search of Excellence, Thriving on Chaos, and a few others, so just go find the one with the most recent publication date and you'll be okay.

6. The Goal - This is one of those books you read, think "whatever", and move on, but then find yourself thinking about it as certain operational business situations come up.

7. Rites of Passage - Maybe shouldn't be classified as a "business book", but as a "career book". I referred to it before while discussing Headhunters. It has lots of good information for managing your career and dealing with recruiters.

8. Extraordinary Popular Delusions and the Madness of Crowds - You think the Internet Bubble was unique? There was Tulipmania nearly 200 years ago, the South Sea Bubble and dozens of previous instances where speculation drove up assets far beyond what they were worth before crashing down and reeking financial havoc on countries and people. I read this a good 6 years before the internet bubble, and while I was more cautious than many, I still managed to get somewhat singed at the end..
I notice that I don't have Drucker and a few others, so there is a lot "required" reading that I didn't put on this list. In addition I didn't include Wealth of Nations and a few other economic texts since I don't consider them "business" books, as well as a few books sitting on my shelf that are pretty helpful (books on negotiating, doing business in Japan, etc.).

Now for a few business books that will never make my "best" list:
1. Who Moved My Cheese - I spent 10 minutes reading this in a book store (yes, the entire thing) and thought "If this is the best selling business book in America, it's no wonder that over half of new businesses fail." At least I didn't pay anything to read it.

2. Seven Habits - This is a whole cottage industry: Seven Habit of Effective People, Seven Habits of Effective Families, Seven Habits for Teens, you name it. But let's face it, if you want to read this book and don't already have a work ethic in place, you need a lot more help than a book can provide.

3. Anything by Gates - Bold statements of the obvious told in a way that will induce slumber.

4. My Years with General Motors - This is supposed to be one of the business "classics", and even though I find the automotive industry interesting, and admire Sloan as a business person, I found this book unbelievably boring. It figures that it is one of Gate's favorites (it has five stars from eight reviewers at Amazon, so note that I am not in the majority on this one).

Tuesday, April 20, 2004

Changing Brand Dynamics in the Cellphone Industry

What kind of cellphone do you have? A lot of people would say "Sprint" or "Verizon", but those two companies don't make cellphones, they sell cellphone service contracts.

This change in consumer awareness is sending tremors throughout the cellphone industry as noted by an article in Businessweek. Essentially, the power of the "brand" is changing from the cellphone Original Equipment Manufacturer (OEM) such as Nokia, Motorola and Samsung to the distributors (Sprint, Verizon, Singular, etc.). As the leverage of the big-name brands decline, smaller cellphone OEMs such as Lucky Goldstar (LG) and eventually Chinese manufacturers will make inroads into the market. The result will be similar to what happened in the PC market: commoditization of the hardware and manufacturing for basic cellphone units. The effects of these changes are starting to be felt. Just this week cellphone market leader Nokia announced disappointing quarterly results and they are expected to lose between three and five percentage points of market share in 2004.

The commoditization of consumer electronics has been witnessed in other segments: PCs, digital still cameras, MP3 players and scanners. In each of these instances value has to be captured through means such as distribution (Dell in PCs), driving up the technology curve (Canon in digital cameras), styling (Apple in MP3) or embracing commoditization (HP in scanners). The cellphone industry will have to follow suit:
1. Distribution - As the Businessweek article notes, the major cellphone OEMs have taken note of the looming changes in consumer awareness and are becoming more flexible and willing to work with the distributors, who will see their influence continue to increase.

2. Drive for New Features - Standard cellphone designs are available from the chip manufacturers, such as Qualcomm and TI, allowing manufacturing companies without R&D or design (i.e. Chinese companies) to enter the market and compete solely on cost. With all phones at the low end being based on the same design and being sold based only on cost, the OEMs will have to drive more features, many of which can be seen on the market already: built in cameras, Global Positioning Systems (GPS), PDA functionality, internet access, games, etc.

Over time, the "standard" low-end cellphone will keep adding features, meaning the bar will keep being raised on what a "low end" phone is. Qualcomm and TI are already working on base designs that include many of the functions listed above, so OEMs will be driven to keep adding more features and services.

3. Styling - Many observers have already noted that the cellphone has become a fashion accessory for many demographic segments, mainly younger people. Different colors, "swappable" face plates and other features can make a phone a better seller than one with the exact same technical features. Samsung in particular seems to have done a good job in the styling department and this is an area that many of the majors are trying to address.

4. Embrace Commoditization - In order to compete against the upstart Chinese manufacturers such as Ningbo Bird and TCL, the major OEMs already doing things to drive down manufacturing costs. All the top OEMs, including Nokia, Motorola and Samsung already have plants in China and will be increasing production there to service not only international markets, but the quickly growing domestic Chinese market. In addition, most of the top OEMs outsource manufacturing altogether, with Nokia outsourcing 20% of its production and Motorola relying on companies such as Pantech in South Korea for several of its product lines.
I am modeling a lot of this based on what has happened in other consumer electronic segments, but there are some major differences that the cellphone market has that the other segments don't: different standards (GSM, CDMA, etc.), regulatory issues, and even some political issues. Overall, however, I think as this market matures there will be more similarities than differences with the other consumer electronics segments.

Update: Motorola just announced great earnings.. This was a combination of Mot getting their supply chain in order after they publicly stated severe problems late last year, plus Mot getting closer to the carriers since they have recognized where brand loyalty seems to be heading (plus strength in their other divisions, including semiconductor, which they are spinning off later this year).

Monday, April 19, 2004

Economics Versus Marketing at Netflix

My posting on the price increase at Neflix was picked up at Business Pundit, which generated some discussion at Brand Autopsy and Ensight.

Their points are that price increases are inevitable, especially since a business's costs go up each year even if they don't increase capital investment (payroll, insurance, etc.). So raising prices is inevitable.

I agree, but my point in was more a branding issue than an economic one: If Netflix needs to raise prices, they should have done it in a way that would have locked in customers in what is a very new business model.

The business of renting DVDs by mail for a flat fee is fairly new. There is no patent on this business model (a discussion in itself), so Walmart, Blockbuster and other large companies have announced plans to enter this space. There is a good chance that Netflix could be squeezed out (my bet, bought out), or that they will become the "Apple Computer" of this consumer segment: an early pioneer with a small, dedicated fan base, but with market share in the single digits and prices that are higher (I should blog about the same thing happening to Tivo).

I thought a "pay 12 months in advance at the old rate" was a nice way to raise prices while locking in the current customer base. Those who want the old price paid in advance for it - and cash up front to a company is better than a price increase - and those who didn't want the pre-paid service paid a higher monthly price.

When 60 Seems Young

McDonald's chief executive died unexpectedly of heart failure at the age of 60 while at a franchise convention in Orlando. Among the various thoughts going through my head:
Wow, that's not that old!- This thought is probably the combination of my own aging, the fact that both my parents are very much alive at 66, and the American culture's continuing redefinition of "old" as the boomers age and as life expectancy increases. Already we are hearing that "40 is the new 30", and if this is true, 50 is the new 40 and 60 is the new 50. If you are curious, you can get your statistical life expectancy (scroll down to "Longevity Game") to see if you feel 60 is "old" or not . There is also a Death Clock, but I died earlier using this, so I recommend the other one.

This is just like Junkins - I experienced a similar situation on the inside while working at Texas Instruments. Jerry Junkins, our CEO, died at 58 of heart failure on a business trip in Germany. The "unofficial" story circulating in the ranks at the time is that he literally slumped over in the car while being driven to a customer. As the article notes, Jerry didn't have any history of heart problems, so this was a big surprise within the company.

How Will This Effect McDonalds? - Believe it or not, there are whole bodies of research on company performance after high-level executives die in office (PhD candidates in business have to research something). From what I remember, the results of these studies were pretty obvious: it depends if the company has a succession plan in place, which seems the case here. I will say, however, I think TI was an exception. I don't think Engibous, who succeeded Junkins, was the obvious successor (there was something of a power struggle among various factions after Junkins died), but once he was in place, he did a great job of leading TI to divest non-core business and take advantage of the ensuing tech boom in the late 90s.

Friday, April 16, 2004

Plastic Chips and Paper Disks

I think some of the more fascinating things we are going to experience over the next 5-10 years is the introduction of new types of low-cost, high volume materials for electronics components. Two examples of early stage research were announced yesterday:

New CD/DVD Disk Made of Paper

Researchers Unveil Plastic Semiconductors

There are several benefits these technologies will bring:

1. New Economic Cost Structure - While the variable costs of using paper over plastic for DVDs and using plastic instead silicon are obvious, less obvious are the huge savings in fixed, capital costs. It takes several billion dollars to produce a state-of-the-art silicon fabrication site ("fab"). It is likely that these technologies will dramatically lower the cost to open a plant (not including the basic R&D), changing the economics of the entire industry.

2. New Product Designs - One of the more exciting aspects of these technologies will be the movement away from flat, planar silicon structures to organic, plastic substrates, allowing the creation of curved, see-through, or even "bendable" products.


Actual Examples of See-through and Bendable "Computer Chips"


The most promising product for this technology is a flat-panel screen (or laptop) that you roll up, like a newspaper. Another product I would like to see is one of those displays/monitors on sci-fi shows that are see-through until you turn them on (which will now be possible).

3. Disposable Products - Many people will argue that cellphones, PCs and other electronics are already "disposable", but with the advent of these types of materials, new products and business models that haven't been possible will become economically feasible.

This is in addition to the typical benefits that we already see in the electronics industry: cheaper, smaller and faster.

Tuesday, April 06, 2004

Cellphone Cameras - They're Here, They're Staying

Techdirt links today to several clueless analysts who say that cellphone cameras are just a "fad" or that they should be stomped out (Dvorak is becoming more and more a curmudgeon in his old age). Techdirt (rightly) dismisses these claims, and I am posting here the same comments I left in the Techdirt comment section
These analysts need to get out more as well as look at the history of the digital still camera (DSC), which surpassed film cameras in volume last year. The first DSCs had really poor quality - barely better than toys. Add a learning curve, customer demand and Moore's law and you have great, low cost DSCs on the market today. Same thing is happening to camera phones. Here a few of the camera phone trends:

- 1.3 Megapixel camera phones will be the dominant resolution by numbers sold by the 4Q of this year. In fact, ALL new camera phones by the majors going into production use at LEAST 1.3 megapixels. The only phones with lower resolution are for secondary markets and by the lower tier cellphone manufacturers.

- 2 Megapixel camera phones are already hot items in Japan. Quality on these things is GREAT. The screen swivels back and around so it is pretty close to handling a "real" DSC.

- Market data has worldwide penetration of cameras in cellphones at 25% this year and 33% next year, and it would probably be higher if the supply chain could be managed. Individual cellphone vendors - think the top brands - plan to have as many as 2/3 of the phones they produce to have cameras by the end of this year with no plans to back off that number in 2005, 2006, 2007...in fact it will go up.

- The carriers (Sprint, Verizon, etc.) love them since it raises ARPU - average revenue per user - so are going to eventually give the camera away for free anyway to make more in the monthly statements, which is already pretty much the case in Japan and Korea.

A fad? Just like cellphones themselves are a fad, I guess
.
The interesting part will be seeing how all the players in the camera phone supply chain work out and which business models succeed. This is what I am getting paid to do and it is extremely interesting to both watch and participate in.