This past Sunday, I had a long discussion about the NY Times article on Time-Warner’s new content-centric strategy with my father, who happens to be in the film business. While the article touched on some of the complexities that exist in the legacy value chains for both movies and tv, I thought it glossed over important details and ended up being somewhat contradictory. On the one hand, the author labels the move to spin off T-W Cable as “eviscerating the once-popular corporate notion peddled by business consultants and merger specialists that content and distribution should reside under one roof.” But just a few paragraphs down, he talks about T-W’s interest in NBC Universal, primarily as a distribution outlet for the tv shows T-W produces.
In theory, a pure-play content company would *just produce content* — it wouldn’t program (i.e. tv network), it wouldn’t distribute (i.e. movie studio), it wouldn’t deliver (i.e. cable/satellite provider). This type of horizontal focus (or modularization) is advocated by Clayton Christensen once a market of vertically-integrated solutions has reached a “good enough point” for consumers, because it enables the firms at each layer in the value chain to focus on what they do best and exploit best of breed solutions available in the rest of the stack to do the rest, thus maximizing overall efficiency and profit. In our terms, a company purely focused on making the best content is free to choose *whatever* distribution solutions will make it the most money from that content. In NewTeeVee’s analysis of this same NY Times article, they said “How we watch is all the same. What we choose to watch, however, is a different story.” In other words, distribution is the commodity and content is the differentiator. I couldn’t agree more if the only channel in question is online. But as long as content creators want to exploit their content beyond the Internet, there is a different set of rules, and those rules generally extend to what those creators can do with their content on the Internet as well.
Studios can no longer claim ignorance of what consumers want — Jeff Bewkes (T-W CEO) tells a story of how he was told by file-sharers “We’ll pay for movies if you give it to us the right way” — but, they are now claiming (however ironically) impotence to deliver it — that the major stakeholders in their other (more lucrative) means of exploitation, like Walmart (DVD), theater owners (theatrical, duh), and cable/satellite operators (PPV), won’t let the studios innovate too much online for fear of cannibalizing the other channels. As much as this may be true, the studios are pretty happy to have their hands tied because they already know how to (and do) make a lot of money from those other channels and they have barely started to figure out how to make real money online. Going back to Christensen, this is a classic example of an entrenched incumbent seeing disruptive innovation coming a mile away and doing nothing, as epitomized in this quote from the NY Times article:
But until technology forces Hollywood’s hand — Mr. Bewkes suggested that it would take three to five more years before high-definition videos are delivered conveniently over the Internet — the industry will retain its grip on sequential windows of release.
This all stems from the fundamental discontinuity of extending an offline media business online. In the offline world, control is the key to success — it is what enables the winners to exploit the inherent inefficiencies in the system at the expense of the losers and, to no small degree, consumers. In the online world, attempts to retain control generally stifle growth by limiting exposure — you have to be willing to let go of your content to a certain degree and you need to build business models designed to take advantage of that approach. Not only is this counter-intuitive to a lot of conventional media executives, who have built careers (and personal fortunes) retaining the tightest controls possible, but it may also be in direct conflict with other important revenue streams, as we see with T-W above.
Unfortunately, there is no easy solution for those trying to bridge the gap. Some companies, like the NY Times itself, are leaping across this digital divide while they still can and largely abandoning efforts to artificially protect their offline business from the specter of cannibalization. And, they seem to be having some success. This past Sunday evening, there were five NY Times stories on the front-page of Techmeme (the next closest sources were TechCrunch and CNET with two stories each), which should be driving some solid traffic to nytimes.com. By making their high-quality content available for free on the web, instead of holding it back to drive paying offline subscribers, the NY Times is aggressively driving readers (and thus ad revenue) to its online business. While those online readers may not be as lucrative as the offline subscribers today, there’s lots of room to improve online monetization if you have the readers, and offline readership is only going down and fast. On the opposite end of this spectrum is the Philadelphia Inquirer and their recent moves to consciously make their online offering *less* competitive in preservation of their offline business. T-W and the rest of the film industry seem stuck somewhere in the middle — keeping abreast of what consumers are demanding and giving them just enough incremental progress to remain satisfied without actually doing anything really disruptive to the studios’ other businesses. Christensen would argue that waiting too long on the offline side will preclude one from successfully making it to the online side when it’s finally more attractive (see Recording Industry). I guess we’ll see which side Bewkes and company end up on when “technology [finally] forces [their] hand.” ]]>
First of all, yes people, this blog is not (entirely) dead. I’ve been a bit busy with stuff over the last few months. In many ways, Flickr and Twitter have replaced this blog for cataloging my random acts of self-expression. And while there were a few subjects I felt worthy of real blog posts in that time, and I even started writing up a couple of them, I just haven’t had the time (or, more accurately, the attention span) to see any of them to completion. But today, I found myself writing a blog post sized comment on my friend Ian’s blog for the second time in a week. So, I figured why not leverage some of that energy over here. So, here goes…
Right now it seems that everyone is talking about Apple, and you can’t talk about Apple without talking about Steve Jobs. As a student of business and management, I find Apple since the return of Steve Jobs to be an extremely interesting case study which I’ve followed very closely. And for someone who’s never worked there, I think I’ve been able to glean some relatively deep insights into the company:
- I’ve been an avid Apple customer for the last 17 years, giving me a solid grasp of the history of their consumer product efforts
- The product I work on was originally Mac-only and is now competitive with features in OSX, so I know what it’s like to be an Apple ISV and competitor
- I work with a number of hardcore Apple fan boys (and one ex-employee/fan boy) — no less than 5 members of our team waited in line for the iPhone — so I get to observe first-hand the impact of Apple-mania even though I’m no longer as personally passionate about the company as I once was
- I’ve been able to attend the last 4 Stevenotes (2 MacWorlds, AppleTV special event, and this week’s iPod Touch special event) thanks to another Apple fan boy for whom I work, so I’ve experienced full power and glory of the Cult of Steve.
A little over 2 years ago, I sold the 200 shares of Apple stock I bought back when Jobs returned to be CEO. At $41/share, I made a tidy profit and an $18,000 mistake based on yesterday’s closing price (or, more depressingly, $21,672.35 based on the 52-week high). Why did I sell? Simple, I underestimated Steve Jobs.
I originally invested in Apple because I felt it was undervalued based on the assets that were in plain sight. Contrary to people who thought Apple was on its last legs and about to be steamrolled by the cheaper WinTel ecosystem, I believed strongly that the innovation and quality Steve Jobs brought to computers insured that Apple would lead the growing high-end segment of the home PC market and would be profitable doing so. When the stock started surging on the hype of the iPod, I sold because I felt the market was placing too much value on a non-core product line with unsustainable growth. Boy, was I wrong!
In reflecting on what I thought at the time based on observable facts and what has been subsequently revealed, one thing became self-evident: there’s always more to Steve Jobs than meets the eye. What he let’s you see about what he’s thinking and doing is what he wants you to see. Jobs has so deftly controlled his own image over the last 9 years that he has brought even the most intelligent observers to the point of tin-foil hat wearing conspiracy theorists. No man is infallible, but if appearance is reality, then Steve Jobs may be the world’s most perfect human. He has us all thinking that even things that appear to be mistakes are finely calculated maneuvers that we’re only meant to think were mistakes — every marketing misstep or accidental leak is actually by design in furtherance of the Jobs master plan. Somewhere between a smart guy, who’s really good at PR and more than a little bit lucky, and some superhuman demigod, who has already calculated every possible move on the board a decade out and is sitting there saying to the entertainment industry and to Microsoft and to the telcos “‘mate in 437”, lies the real truth about Steve Jobs. But it is a truth we will likely never know (and one could hypothesize that Jobs’ own pathology is such that he doesn’t know the real truth himself).
And so predicting what is next for Apple is really a game of picking a number on the range of Steve Jobs’ potential IQ. When I bet against the iPod, I was betting Steve was a talented product visionary but an average business man. I looked at the price point of the iPod and Apple’s historical inability to crack the mainstream (a problem that also afflicted Jobs’ intervening venture, NeXT) and said to myself that the growth curve in which Wall Street was putting so much value was bound to flatten as the high-end early adopter market became saturated (ironically, I realize I repeated this mistake only 2 months ago in dismissing the mainstream impact of the $500 iPhone). I also made the mistake of looking at the iPod and iTunes for what they were at the time and not what they could and would become. I didn’t put much faith in Steve Jobs’ ability to successfully negotiate Hollywood into enabling true consumer-grade digital media experiences. I strongly believe Jobs’ maneuvering of the entertainment industry will go down as one of the most brilliant feats of business acumen in our time and will ultimately be his most meaningful and enduring legacy — after decades of everyone from Sony to AOL to Microsoft trying and failing with tremendous displays of money and power to displace the preeminence with consumers that labels and studios had secured through their stranglehold on content, Jobs comes out of nowhere to do it with little more than elegance and cunning (oh and by the way, he now basically owns Disney — the flagship brand of the entertainment industry).
Suffice it to say, I will never underestimate Mr. Jobs ever again. I may end up overcompensating by giving him too much credit in this and future analyses. But for right now, I’m just going to think of what I think the smartest person in the world would do (to the extent I’m capable) and bet that Steve Jobs has *at least* thought of that. If nothing else, it’s a pretty stimulating thought exercise, which is why I think so many smart people find themselves drawn to speculate on Apple’s strategy.
Ian and I are both pretty hard-core Clayton Christensen acolytes, and Apple provides the closest thing to a living laboratory for testing his theories (Apple’s lost early lead in the PC market is also one of the quintessential examples in The Innovator’s Solution). As I’ve written before, one of the basic principles of Christensen’s theory is that the basis of competition in any market is not static and changes based on how effectively customers’ needs are being met. At those inflection points — when multiple firms in the market are providing customers ‘good enough’ solutions to the problems they care about — the nature of the problems that customers care about start to change, which opens the door to disruptive competition. In a pre-‘good enough’ world, the integrated end-to-end solution (i.e. Apple’s approach) is superior. But after that particular problem has been solved satisfactorily by several competitors, continued focus on the superior solution for that problem has diminishing marginal returns and is often a hindrance to shifting focus to go after the new problem(s) about which customers care.
One could look at Apple’s integrated solution DNA and history in the PC market and say that it is bound to suffer the same fate in digital media, which is arguably the company’s new core business and why it’s no longer called Apple *Computer*. In the post that sparked this rant, Ian espouses just this theory (i.e. that the iTMS monopoly on the iPod will inevitably be replaced by an ecosystem of compatible music services). The substance of my long-ass comment was basically, “you’re dangerously underestimating the Jobs-ter.” A point which Ian subsequently concedes. Since I’m assuming Steve Jobs is smart enough to at least think of whatever ideas I can and since I wouldn’t run my iPod/iTunes money train head-long into a black-hole of Christensenian physics, I think Apple is looking to do the one thing a company can do to fight disruptive innovation — disrupt themselves.
If your strength (and arguably religion) as an individual is in the end-to-end user experience and you have a company set-up to execute on an integrated solution strategy, how do you keep from ultimately being undercut by competitors taking the modular/ecosystem approach? Simple, never let the market reach the ‘good enough’ point. I believe Steve Jobs plans to leverage Apple’s leadership (more like ownership) of the digital media space to drive consumer expectations in a new direction that only Apple can deliver for the foreseeable future. It’s basically resetting the clock on competition — while Microsoft and Sony and everyone else thought they were catching up in digital media, Apple has been busy changing what the game is about. By the time the competition has come up with a viable iPod/iTunes competitor, consumers won’t care because they’re too busy caring about that new thing Steve Jobs just unveiled. And the game of catch-up will begin again.
If you believe all of that, then the question becomes what is that new thing going to be? Assuming it’s going to be built on something we’ve already glimpsed in some form (which is not necessarily a safe assumption, but let’s go with it), there are two potential directions: AppleTV and the iPhone. I believe both will evolve, just as the iPod did, from being somewhat tangential offshoots of a core product line to being their own core product lines. AppleTV will grow over time to be an important force in the digital living room war that has been simmering for nearly 2 decades now and is ready to become full-fledged sooner than we might think, especially now that Apple’s in the game (remember how long digital music was around pre-iPod). However, I see that as a pretty direct extension of Apple’s digital media strategy, which is interesting but well-worn territory. What’s more interesting to me right now are the implications of the iPhone.
The launch of the iPod Touch proves that the iPhone is about more than a wide-screen iPod or a mobile Internet device. Everyone kinda writes off the phone part of the iPhone, but it’s the only compelling reason I can think of for Jobs to create an inferior product (for the same price as the iPhone, the iPod Touch delivers 2x storage and WiFi in a smaller package with all the same features except a cellular radio, a (not-so-great) camera, and bluetooth) and encumber himself with burdensome telco partnerships (not only are they a pain in the ass to deal with in general, but they’re probably dictating terms on the iPod Touch, like no bluetooth). I think Jobs is looking to do to the telcos exactly what he did to the labels and is trying to do to the networks and studios. AT&T thinks they got a great deal by being the exclusive launch partner for the iPhone, but that was just Steve dangling some short-term candy in front of them so they wouldn’t realize that he’s slowly coming up behind them with a knife. What exactly it is that he’s after isn’t entirely clear to me yet. But, it’s gotta be communications oriented. Since the days of cellular voice are numbered and I don’t think Apple wants to own the network, my hunch is that his play is for the address book (for these purposes, I see calendar as an extension of address book — they’re both views into the people with whom you interact). The most valuable (and thus complete and current) electronic address book that mainstream users have is on their mobile phones. And once they’re syncing those mobile phones to iTunes in order to manage their digital media, then Apple has their address book/calendar as well. What does Steve have in mind for unlocking the value of all that personal information now in his control? Social-enabled iTunes? iChat and Mac Mail for Windows? Some form of .Mac social network? Whatever it is, I guarantee the telcos (and whoever else will be threatened by this move) won’t realize it until it’s way too late.
So, have I given Mr. Jobs too much credit? Who knows? All I do know is that I had fun doing it. Dreaming up the most awesome business strategy possible unencumbered by convention is rarely more than an intellectual exercise, except in the case of Steve Jobs’ Apple. No wonder the man is so revered that he not only has an impersonator but the impersonator is unbelievably popular too. Despite everything above, I’m not entirely a starry-eyed Steve Jobs worshiper. In fact, I think the two biggest potential weak points in Apple’s seemingly impenetrable armor are directly attributable to the downsides of the personality traits that make Steve Jobs such a business virtuoso.
Even if he doesn’t (appear to) make mistakes, Steve Jobs is a human being and has human passions. His passion and humanity are probably his greatest assets in his role as product visionary. The extent of his ability to put himself in the shoes of the user, despite being far from the typical consumer, is something that is unparalleled in any CEO I can think of. This self-awareness and empathy, albeit in a clinical form, is at the heart of Apple’s ability to time and again lead consumers where even they had no idea they wanted to go. However, the essence of the human condition is that our passions are a double-edged sword that can supersede reason for both good and bad. Steve Jobs’ ego and temper are no secret, and his great success may be directly attributable to these passions (one of the most insightful commentaries on his personality I have seen states: “most of his business moves are still in reaction to having been fired by Apple back in 1985”). But they may also prove the most likely source of a true misstep by Jobs (past ego-driven foibles are well chronicled, but Steve’s always come out on top) and thus Apple, either at the hands of a savvy opponent or, more likely, a lack of self-restraint.
The other potential liability I have seen is likely also the flip-side of one of Jobs’ great strengths: his uncanny and supremely self-assured sense of taste. Social software has been one of the few areas of recent consumer technology innovation in which Apple has not played any role. When I heard Jobs speak about iLife at MacWorld 2006, I realized that Apple got media creation (iLife, Aperture, ProTools, FinalCut) and they got media consumption (iTunes, iPod, AppleTV), but they were totally missing the boat on media discovery/attention management. They’re now starting to add more social features to iTMS (like the My iTunes widget), and I speculate above that the iPhone is the first salvo in a social software offensive for Apple. But it’s clearly something that has not been in Jobs’ or Apple’s DNA to date, which is particularly notable given the enormous attention that social software has been receiving across the consumer technology industry. My personal opinion on why is because Steve Jobs has no problem knowing what he likes and can’t imagine why he’d ever need someone else’s help in figuring that out. And so the true value of powerful recommendations and other social attention management functionality in his digital media experiences eludes him for now. But, this is a man capable of unbelievable personal growth and who obviously believes “foolish consistency is the hobgoblin of little minds.” So, I wouldn’t be surprised if this potential weakness becomes a source of great strength — just as Jobs’ need to disprove his ‘cool, but not mainstream’ reputation resulted in the iPod, one of the most wildly successful global marketing campaigns of all time.
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