The swarming private equity firms around Yahoo obscure a more radical pairing and business model for the company. Yahoo is not a classic private equity play, given the company's iffy prospects and cash flows. The property would do best with an owner able to create new opportunities to consume content and advertising.
But who? Microsoft, an oft-discussed suitor, has plenty of issues attracting people to its search and content offerings, and it may not need to double down its best through trying to save a platform in decline. Apple would be a much better match. Read my post at Forbes to see why.
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How has Jeff Bezos built a company worth over $100 billion in one of the world's most competitive industries? While Amazon wins plaudits for its grasp of the user experience, on a strategic level the company keeps triumphing because it attacks competitors asmmetrically. The $199 Amazon Kindle Fire is a case in point. The formula underlying the Fire, as well as Amazon's other business model innovations, boils down to four components. Read about them in my post for Forbes.
Stephen Wunker is the Managing Director of New Markets Advisors and the Author of Capturing New Markets: How Smart Companies Create Opportunities Other's Don't (McGraw-Hill, 2011)
It would be easy to add to the criticism of MySpace by blaming the fall of the company -- which could have been as successful as Facebook -- on inept management. But that would be incorrect. MySpace failed because it did what people teach in business school. Unfortunately, those rules were formulated in estabilshed and relatively stable industries. Facebook's triumph shows how firms in new markets need to follow a different playbook. Read how in my post at Forbes.
Stephen Wunker is the Managing Director of New Markets Advisors and the Author of Capturing New Markets: How Smart Companies Create Opportunities Others Don't (McGraw-Hill, 2011)
Faced with an existential threat, many companies simply freeze. The migration of media to digital formats has vanquished former industry titans in newspapers, video rentals, and more. Yet Barnes & Noble is fighting back boldly and strategically. Read more about its smart response at my Harvard Business Review post
YouTube is looking to become far more than a home for self-produced content and pirated media clips. The Google-owned company is defining a new market between the cheap and charming videos which made it famous (what happens if we mix Diet Coke and Mentos?) and the far slicker offerings that dominate broadcast and cable TV. A significant disruptive innovation is coming.
For YouTube, disruptive innovation means leveraging the company's current presence on Internet-enabled televisions to create a new market space of viewers engaging with YouTube "channels." According to reports this week in the Wall Street Journal and industry media, the company plans to spend as much as $100 million commissioning low-cost content in areas such as arts and sports. It is not attacking (yet) companies like Netflix and Hulu that are offering some of the highest-end offerings of popular movies and TV series. YouTube believes there are plenty of viewers motivated to access niche content in an ad-supported business model that doesn't need to spend very big money for the latest hits.
YouTube has unique assets that enable it to build this new market. It is directly accessible via many Internet televisions, one of very few companies in that position. Its 100+ million unique visitors per month give it a reach more than 4x that of Netflix and Hulu, so it can build audiences fast. YouTube also has substantial upside to grab -- currently the average viewer spends just over 2 minutes on the site, less than a quarter of the Netflix average. Moreover, the company's revenues are only about 1% of the $70 billion U.S. television ad market. For all of YouTube's achievements in pulling viewers, it hasn't yet been much of a financial success.
The company can also derive benefits from its ownership by Google. For instance, Google is introducing social networking features that enable users to see what content their friends like. Following in the path of other disruptive innovations that create new markets, this feature introduces a totally new dimension of performance that traditional competitors lack.
Yet there are plenty of outstanding questions that affect how dirsuptive a move this will be:
- Will YouTube's advertisers come from existing sponsors of TV, which could exert pressure to conform to current notions of the TV experience? Or will they come from Google's vast array of advertisers who target niches?
- Will the new viewership come from YouTube's hard-core afficionados seeking new content? Or will they be marginal YouTube viewers who want the company to move in different directions?
- Will the channels adhere to commonplace categories such as "sports," or will they redefine content to create totally new categories such as "extreme women"?
A hint of the future comes from a recent interview of YouTube CEO Salar Kamangar in the San Jose Mercury News: "When you think about the impact cable had, we think we're in a position to have a similar impact for video delivery, like what cable has done with broadcast. In the early '80s, you had three or four networks. Now those three or four networks are responsible for 25 percent of viewership, and the cable networks are responsible for all the rest. Right now, the fraction of traffic that is Web video is small relative to broadcast and cable, but it's growing at a fast rate. What's amazing is that the Web enables you to build a kind of channel that wouldn't have made sense for cable, in the same way cable enabled you to build content that wouldn't have made sense for broadcast. You couldn't have done CNN with the broadcast networks; you couldn't have done MTV with the broadcast networks."
If that is Mr. Kamangar's vision, YouTube's disruptive innovation has barely begun.
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Long tail business models sell small quantities of a very large number of items. They are the antithesis of blockbuster business models, which sell large quantities of a few items. The idea, first popularized by the authors Clay Shirky and Chris Anderson, has been exemplified by the book retailing of Amazon.com. As an Amazon employee once stated, "We sold more books today that didn't sell at all yesterday than we sold today of all the books that did sell yesterday." (Amazon was never known for its pithy marketing).
This week, Amazon took its long tail strategy in a totally new direction, offering its Prime customers (those who pay a $79 annual fee for free 2-day shipping) a wide selection of streaming movies and television shows, for free. The move is a direct slap at Netflix, a company that started with a focus on renting hard-to-find, long tail DVDs but which has moved increasingly toward popular blockbusters as its video streaming operations ramp up. Amazon will not have nearly as many recent and popular releases in its free offer as Netflix, but for people who are open to Amazon's viewing suggestions it's hard to beat free.
Amazon can make this model work because its long tail selections are much less expensive to license than blockbusters. It also has a totally different business model than Netflix, gaining a substantial bump in sales of physical products from people who sign up for Prime. The video offer entrenches Prime with customers and entices new customers to sign on to Prime. It targets people who may not watch enough videos to justify a monthly Netflix subscription, or who just haven't gotten around to signing up for a video service. It is a classic disruptive innovation -- catering to people over-shot by existing offerings with an inexpensive and highly accessible service that excels on a totally distinct set of performance criteria.
While Amazon plays this creative offense, it finds itself ironically on defense in its core book retailing business. Even as traditional rivals such as Borders implode due to antiquated business models, the sleepy public library poses a threat. E-books are continuing their rapid ascent in publishing, and public libraries are moving quickly to offer patrons this option. Because the number to be lent is limited, library e-books are a poor alternative to Amazon for reading hot new releases, but they may be a cost-effective way for libraries to offer patrons access to hard-to-find books. Tellingly, Amazon refuses to make its Kindle e-book reader compatible with the format used for most public library lending. Public libraries do not have marketing muscle to make readers aware of this option, and they may move more slowly than Internet giants, but as Amazon knows with its video offering, it's hard to beat free.
There are three morals to this story:
- Long tail business models create new markets, especially if they can make experimentation with unfamiliar purchases easy and if they can leverage new purchase occasions. Amazon is doing both these things with its video offering, thereby expanding the overall size of the video streaming industry.
- Disruptive innovation occurs in unstoppable waves. Just as Netflix disrupted Blockbuster, Amazon disrupts Netflix. Just as Amazon disrupted Borders, public libraries disrupt Amazon. Market incumbents can try to delay disruption, as Amazon has done with its Kindle, but ultimately the new business model wins over a set of foothold customers that empower its further growth.
- To avoid being swamped by waves of disruption, companies should watch out for becoming vulnerable as they march up-market into blockbuster territory. As Netflix became increasingly focused on big hits, it exposed a flank for attack. The company is now facing a tough choice -- it can ignore Amazon's advance on the theory that it does not appeal to Netflix's most important customers, or it can create a parallel business model to defend itself. Given that Netflix's CEO Reed Hastings is a fan of disruptive innovation, we might expect the company to choose the latter course, but there are many executional and positioning challenges to overcome in the dual-track approach.
Long tail business models are compelling territory for disruptive innovation, but like any other business model they have a life cycle. If it does not stay fleet-footed and watchful, the disruptor can become the disruptee.
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New markets can be hard to predict, but it is much easier to assess whether a company has a solid process for creating new sources of growth. To follow up on its enormously profitable core market in PC search advertising, Google has struggled for years to make investments in new markets pay off. Herculean projects such as Google Earth and Google Books have resulted in scant revenues. Today, however, the company's stock was up over 11% (that's more than $20 billion in market value) due to clear financial signals that Google's next wave of growth is arriving at last. The bounce in shareprice indicates just how pervasive skepticism about Google's growth prospects had become. While the skeptics had right to doubt several of the firm's individual ventures, its process looked on-target to deliver success.
Google has done much right. It sources ideas widely and encourages staff to build internal support for concepts among peers (rather than through hierarchy) to move them forward. Then it invests very small amounts of money and time to build early prototypes and trials these with real users via GoogleLabs. Many ventures are killed before they end up costing the company anything substantial. The survivors have been vetted through market-like mechanisms. Granted, the software industry is particularly well-suited to this innovation model, but Google has made the most of its context in being a paragon of the marketplace of ideas.
The company went astray when it abandoned this model in pursuit of a few "visionary" quests (beware projects whose main selling point is their visionary status). Google Earth was a costly endeavor to put the geography of the entire world online via satellite maps. It's fascinating, but not very commercially useful. Perhaps the company could have started by piloting Google California? Even more grand was the company's effort to take pictures of every street in the country. These projects took the flaw of being overly visionary to far too literal a level.
By contrast, the company made a bet on its Android operating system for mobile phones that presumed uncertainty about how the market would develop. The project was expensive, to be sure, but it was flexible about how it would make money. Now mobile advertising is on pace to generate over $1 billion in annual revenue for the company.
Google's move into display advertising through purchasing Doubleclick was a good example of pursuing portfolio strategy. While many corporate growth portfolios consist of either very modest initiatives or swing-for-the-fences big efforts, Doubleclick fell squarely in the middle. It was a reasonably safe bet built on a solid track record. To make an analogy to personal investing, in a world where companies seem to own either Treasury bills or cement plants in Uzbekistan, Doubleclick was a moderately-risky value stock.
Moreover, both Android and Doubleclick strategically leveraged the core. They exploit existing advertiser relationships, move the company into adjacent markets, and defend against disruption through asymmetric sources such as firms focused on mobile search. While these moves create the next waves of growth, they are far from random bets on new markets.
Many firms would have whacked away innovative efforts when early projects created few results. While the company has scaled back on its Google Earth-type moonshots, it has consistently maintained investment in smaller ventures even when the doubters' chorus grew loud. As venture capitalists will attest, there are few sure bets in new markets. Those who succeed must have enough ventures in play to assure that a handful will be winners.
Google today reported that its new ventures were generating more than 10% of revenue. The businesses are profitable and highly scalable. As a result Google looks less like an investment in paid search and more like a broader play on improving how people get useful information -- an industry with seemingly limitless headroom for growth and innovation. While being an execution machine in paid search, it is a venture capitalist (with enormously strategic and proprietary assets) for the information economy.
Few companies manage to pull off this feat -- it requires careful thought and balancing of priorities. Yet success can be exceptionally lucrative, as Google's $20 billion gain today illustrates quite well.
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