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Archive for the ‘Competitive Strategy’ Category

As consumers of digital content, we are all overwhelmed with a myriad of subscription and a la carte procurement options for accessing the movies and TV we want. Unfortunately, no one has the complete solution just yet. Hulu gives us a lot (not all) of the content from Fox, NBC, and ABC but generally lacks support of the cable operators and CBS due to unresolved conflicts with their respective business models. TiVo and other connected TV devices are reaching many agreements with content consolidators such as Hulu and Netflix, but no one has a fully integrated experience where content comes before the content provider’s brand, creating friction in the user experience.

What’s it going to take to get to the Utopia vision of watching whatever you want, wherever you want, without navigating multiple content silos or maintaining an excessive number of subscription services? Here are a few of the primary industry issues outstanding:

Effective revenue model for all parties involved

Content owners need to be fairly paid, which hasn’t happened yet. Netflix’s growth is amazing, as they have captured 60% of the movie streaming market; however, they have windowing rules that keeps desired content out of the hands of consumers too long. Without a dual subscription and ad model, they will likely struggle to establish a model that attracts desirable content and keeps everyone fairly paid.

Hulu’s ad effectiveness with respect to brand and message recall is 55% more effective than traditional advertising. This is translating to higher revenue returns for Hulu per half hour of prime time episode as compared with cable, cable DVR, and broadcast DVR; only broadcast is earning revenue higher per half hour of prime time episode today and the gap is closing quickly. For Hulu, breaking from its JV relationship with its founders is the critical next step to expansion.

It will be interesting to see what packaging and merchandising options develop with the union of Blockbuster and Dish, given the opportunity to marry strong content provider relationships with multi-channel distribution capabilities.

Maintain brand identity, but let go of brand dominance

Making users go to dozens of websites and apps will not work. Content silos must be broken down. TiVo is currently one of the best devices to make this happen as it owns the coveted “input 1” position on our TVs, meaning even our grandparents can easily get to the stuff they want to watch. TiVo’s latest product makes huge strides towards putting the content in front of users before the distributor’s brand and makes great strides at breaking down the windowing issue faced by Netflix by giving users multiple content access points. While TiVo has had many great successes, it is still a heavily considered purchase in comparison to its cable operator owned generic DVR counterparts. Recent partnerships between TiVo and operators indicates that this issue may resolve over time, as its patents and its phenomenally superior user experience are showing signs of winning out.

Emergence of open standards?

From payment systems to ad platforms, the industry may have to adopt open standards to allow everyone to play. The benefit? Ease of use for users and access to content will result in more use. Proprietary business models are great if you can make it work, however, network effects are somewhat questionable, which means being the keeper of all technology components may not be the right strategic move because movie and TV viewing has not proven to be particularly social, at least yet. We don’t care much about how many people are accessing content through the same distribution channel. We simply want the content. The fewer bills, logins, and time spent finding things, the more likely usage will increase for each player.

Blog Sources
Facts stated in this blog were gathered during executive discussions in John Schneider’s Management 162 Business Capstone course at Santa Clara University during the Winter and Spring 2011 school terms. Guests include Margret Schmidt, Vice President of User Experience at TiVo, Tom Fuelling, CFO of Hulu Networks, and Peter Moore, President of Electronic Arts. The point of view expressed in this blog is solely by John Schneider.

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Electronic Arts LogoThere is a lot of emerging competition for traditional video game makers. For instance, Zynga’s estimated $10B valuation is larger than EA’s, yet the firm only has a tenth of the revenue in contrast and a possible over-dependency on Facebook. This almost sounds like the dot com era again to me. How will this story end?

This is the question that my class discussed with Peter Moore, President of EA Sports, when he visited my class on May 16, 2011.

Peter opened by saying digital is the growth driver in the gaming industry. The gaming industry is expected to grow an estimated a 5-10%* from the years 2010 to 2014; while digital gaming alone has grown at a 67% pace to $20B in just the last two years of business. It sounds great, but there is a big challenge – growth isn’t coming from a single digital source.

What is inspiring about EA’s approach to digital is that they are taking it on with enthusiasm – no heads are buried in the sand. Everyone knows that they adapt or become irrelevant. The digital transformation for EA means that they must face disruption on multiple fronts. New revenue generating business models include micro-transactions, downloadable console content, game add-ons and advertising; shifting revenue away from traditional physical disc sales. Platform proliferation dictates an expansion strategy that crosses just about anything that enables true ubiquity for the gamer; allowing them to play where and when they want.

With such a wide array of changes and challenges present, Peter doesn’t ignore the business case for making smart digital decisions across ecommerce, merchandising and device platforms. His rigor is demonstrated in the ability to deliver 30% margins as an operating business unit.

Peter Moore in John Schneider's Spring 2011 MGMT 162 Class

Peter Moore's visit to John Schneider's MGMT 162 course

With Peter’s second visit over the past year, one thing becomes evident. EA and the gaming sector are in for a wild ride. It is truly exciting to watch a large firm embrace Schumpeter’s theory of creative destruction; one that encourages the opening of new markets by tearing down traditional business models and placing emphasis on redesigning industry boundaries as new technologies introduce tremendous growth opportunities.

* Source: PwC Global Entertainment & Media Outlook 2010-2014

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Photograph: Susana Bates/Reuters

Analysts are questioning Microsoft’s $8.5 billion purchase of Skype this past week for good reason. Skype isn’t turning a net profit and Microsoft wasn’t truly in a competitive bid. This sets up the question as to what synergies can be created between these two firms that drives such a valuation. We’ve all heard about Skype’s role as a key technology across many Microsoft technologies such as Xbox and Outlook, but I think there is one focal area that takes the lead over all others – mobility.

Microsoft announced Windows Phone  7 Series at Mobile World Congress in February 2010 with the goal of re-invigorating their position in the smart phone space, one they pretty much created but have since lost. In a recent opportunity to meet Robbie Bach, Retired President of MS Entertainment & Devices, he emphasized the point that they learned that MS had made a key mistake in the past by allowing handset manufacturers and carriers to manipulate the user experience on the phones with little to no restrictions (which can be likened to the approach Android is taking today). Now Microsoft is tightening controls and limiting what modifications, if any can be made. With this new strategy and reach into both enterprise and consumer markets on a global scale, what was missing until last week?

Microsoft did not have a unique value proposition. Nothing to disrupt the space. Apple has the tightest user experience and ubiquity across devices. Android is in just about everything now. In order to thread the needle between these two heavyweights, Microsoft needs something that changes the current market trajectory which looks to be building towards a duopoly a few years out.

Let’s look at the dynamics on the buy side of the industry, specifically the carriers, as an example of what could happen next. With AT&T’s recent proposed acquisition of T-mobile, Sprint is concerned with extinction due to its relatively low market share. Until now, no carrier has been a big advocate of changing their lucrative business model by allowing highly integrated VoIP calling that negates the use of their airwaves for voice transmission. Why would Sprint or another carrier consider disrupting the industry with a low cost VoiP solution that uses MS Windows 7 and Skype? The simple reason is that that Microsoft can create cross subsidies with search advertising through Bing. Suddenly, the carrier doesn’t lose financially. The consumer wins as well with lower subscription costs. Thus, the industry is disrupted with a network effect between search advertising and VoiP.

Microsoft captures market share, perhaps just enough to be worth $8.5 billion.

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Robbie BachRobbie Bach, recently retired President of Microsoft Entertainment and Devices Division, visited my Business Capstone class at Santa Clara University on February 11, 2011. Robbie’s experience spans an array of amazing accomplishments including his role as CMO of MS Office and leading the effort to bring Windows Mobile 7 to market this past Fall.

One of the most interesting discussions was related to the introduction of the Xbox. Robbie was tapped to bring Microsoft’s first gaming console to market at a time when Sony and Nintendo dominated that space. This may be hard to remember now that Microsoft is a dominant player with approximately 25% marketshare. Having no formal experience in console gaming, Microsoft recognized the prospective power of this space with respect to fulfilling the vision of “the connected home.” Microsoft knew they needed a seat at the table.

Robbie focused on two key principles for ensuring he had the right organization in place to enable innovation and commercialization of this new product. What struck me the most was his emphasis that “a more disciplined process might have killed the project” and so he really had to strike a balance that ensured they could think like entrepreneurs, while executing manufacturing and distribution on a global scale. The following are the principles he outlined in the discussion:

Separation from the core
Robbie and his leadership team made it clear that they would not join the effort to introduce the Xbox unless they had independence from corporate headquarters. They could not operate effectively under its structure and needed the flexibility to organize the way a game manufacturer operates, rather than the way a computer software company such as Microsoft historicaly operates.

Measuring the market and then setting internal goals
The first order of business for Robbie and his staff was to run game theory simulations to understand how the industry players might react when Microsoft made its debut. By knowing the potential outcomes, he was able tailor his go-to-market strategy. This effort followed with what he called the “3/30/300 documents.” First, he had a 3 page document outline the core principles of the initiative. Second, he had a 30 page document produced that outlined the execution strategy. Finally, the team produced a 300 page document that was the detailed specification for the Xbox console.

The rest is history. Robbie successfully introduced the Xbox in only 18 months from the time he received the assignment.  As a result, he was able to gain 25% market share and build the platform for subsequent console releases.

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Hulu's logoFor Q4 2010, ComScore reported that Hulu is watched twice as much as the 5 major TV Networks online combined. Just as this report was released, my class was fortunate to have Tom Fuelling, Hulu’s CFO, visit class to talk about the video rebroadcasting industry and Hulu’s market position.

Tom opened up with Hulu’s mission statement, “To help people find and enjoy the world’s premium content when, where and how they want it.“ A mission statement focused on the end consumer of their product was definitely expected; however, he went on to say: “as we pursue our mission, we aspire to create a service that users, advertisers and content owners unabashedly love.”

What a great statement for my class to hear. At the heart of competitive strategy is an understanding of the industry forces driving profitability and what, if any, resources and capabilities a firm can cultivate to establish a leading position. Born out of industry disruption caused by the ability to distribute video over the Internet, Hulu was somewhat formed as a defensive posture by Fox and NBC to protect themselves against YouTube and other sites illegally

Tom Fuelling, Hulu's CFO

distributing their content. That being said, Hulu understands no one wins if users, advertisers and content owners don’t all obtain value out of the venture.

Hulu, under the working title “NewCo.,” was laughed at when it started out due to the poor history of major media companies working together to deal with such type of attacks.  This was epitomized by its nickname “ClownCo.” From the time Jason Kilar, the CEO, started, the goal was to release a beta product in 10 weeks. To this end, he removed the cubes, modified the refrigerator to house a beer keg, moved out of the corner office and into a room adorned with whiteboards, and wrote a 1,100 word “culture manifesto” aimed at establishing a frugal meritocracy

The rest is history. They now have 30 million users and revenue of $260 million. And that is just 36 months after starting out in Fall of 2007. Ads on Hulu are 55% more effective than the same ads on traditional channels, making a compelling case for advertisers to pay attention to them. To sum it up, TechCrunch ate its words when it released an article, “Happy birthday Hulu. I’m Glad You Guys Didn’t Suck.”

Now Hulu has new challenges. The owners no longer fear YouTube the way they used to in 2007. Consequently, ABC has now created its own iPad App ton control its own distribution, and other networks are more hesitant to concede control of their most popular content to Hulu. And then there is the success of Netflix as a competitor.

Hulu is at a crossroads so to speak. It has already moved to a hybrid advertising and subscription model. Does it now move towards a cable operator model? How will international expansion work? Does it IPO and gain independence from the major networks? Time will tell, but it sure is great having the opportunity to listen to visionaries tell their story such as Tom Fuelling did in my class on February 9, 2011.

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Analytics and optimization are a crucial part of any product or marketing campaign, but analytics programs are useless unless acted upon. The ability to iterate and improve what exists is what separates the players from the leaders.

Measurement of increased impressions, leads or conversions is just a start. These trailing indicators suggest where your investments might have paid off and what might be going wrong, but they won’t tell you how you can improve. What your team needs is an optimization program that invites innovative and forward thinking.

Most innovative thinking doesn’t occur as a brilliant flash of light from a singular genius. It comes from a combination of a deeper understanding of your customer’s need, the ability to anticipate how those needs will change, a clear business vision and a well thought out analytics and optimization program.

This combination leads to winning ideas that enable you to design ahead of your competition. For the customer, that means a better experience that exceeds their expectation. It shows someone has been thinking about what they need and it allows  you to create distance between you and your competition in the mind of the customer.

I recently shared this concept in the context of the Global Total User Experience at the Smart Seminar on Globalization hosted by Medialocate. Here’s a bit on what I discussed at the event.

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PieIs the competition making you feel a bit crowded? Are too many competitors providing a similar offering, but for a lower price? Is your quarterly forecast based on the hope that your competitors will soon misstep?

If so, it is time to shift your focus from improving your execution and time to look at your market position. Instead of fighting for a bigger slice of the existing pie, it is time to find a new position – one that doesn’t force your product and marketing teams to decide between a differentiated market position or a low cost leadership position.

What if you could provide value and cost leadership to your customers?

Southwest Airlines does it every day. They are a low cost provider, and yet they boast some of the highest customer satisfaction ratings in the airline industry. They were able to create uncontested market space and exploit it. The competition has been trying to take a bite out of their pie for decades.

What about a more recent example, you might ask?

You don’t have to look hard for examples, such as Microsoft’s recent announcement of the upcoming release of Office 2010. The main focus of this new software release is to help Microsoft Office maintain relevance in the face of low cost online alternatives, such as the one from Google. As most disruptive innovations start out, Google Docs made its appearance without a clear market position back in 2006. Questions like “Can I trust Google with my documents?” abounded. Now fast-forward to 2010, where large and small corporations are switching over to Google Docs, because Google has earned trust and relevance in the marketplace. Whether Google will be able to sustain a long-term advantage over Microsoft is hard to see at this point. If one thing is true, it is that Microsoft throws everything they have at the competition when it sees a threat.

The point is that both Google and Southwest didn’t do anything particularly brilliant. They simply took advantage of new market positions that their competitors were unable or slow to address. By doing this, they were better off than taking the competition head on, while gaining a first mover advantage. Most importantly, sharing the same pie can mean you end up with a very small portion. These examples illustrate that sometimes you have to go back and bake a whole new pie – one that people are willing to line up to eat.

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