Are we entering a world of the new portals?

tim_tams

Yes we are, and it has serious possible consequences for a whole range of businesses.

Gather around children for a story when grandpa was young (in internet years anyway). Once in the deep dark history of the internet portals were all the rage. They were the place that companies hoped you would use as your stepping off point into the internet. If you were part of their portal and had it set up as your home page then they could offer you services, and make money from you being there rather than you wandering around on your own. Truly capable search killed off a lot of these efforts by allowing people to more easily find what they were looking for although portals still make sense in a number of areas. For example here in Australia the Our Community organisation which supports about 80,000 community organisations has a grants portal (Our Community) which aggregates all of the grant information across the country. Essentially it provides a specialised aggregation and search service. The government also offers a portal called myGov which aggregates a range of government services, offering both specialised search services but also common identification and log in systems.

Besides these sorts of services we seem to be moving into a new era of portals based primarily on mobile systems. On March 3rd TechCrunch stated that “Uber plans to turn its app into a ‘content marketplace’ during rides“. I have long believed that Uber is a data and services company with the transport model being an interim stage, and this fits perfectly with that theory (confirmation bias anyone). As a transport company they are in a brutally competitive world. They have already signaled their intention to be in the autonomous car business, but I think that business is going to be an even more brutal fight that will require huge reserves of cash. That fight will include the existing car companies and a host of new competitors and some will inevitably lose, and have their whole business model destroyed. In those sorts of fights technology plays a role but quite often it is a last player(s) standing sort of a fight where people bleed cash until they can no longer operate. In that sort of fight it makes sense to have multiple possible strategies rather than a single win or lose one. If, in the interim period before autonomous cars are widespread Uber can build a huge trove of data and insight for autonomous cars, but more importantly insight into the movement of people, and what they do during and after their trip then they have a separate strategy. If they are not able to slug it out in the transport space then they can supply data and services across the whole sector instead.

A content market place for Uber makes sense. According to the TechCrunch article they now are providing 10 million rides a day and to a large extent those riders are a captured audience for them. They also know in advance where you or I are going and when we will arrive which is enormously useful information. If they know you are going to a shopping centre then businesses at that shopping centre would really like to know that so they can send you offers in advance. If you are going to restaurant area at lunchtime, or an airport the same applies. If they can tie your trip data to what you do after the trip by tracking you through their application and partner applications then the value of the data increases astronomically.

In this new portal era they are the aggregators of customers for other businesses but they are also aggregators of data that increases in value as time goes on. In some ways it is the perfect business – profitable while it is building a new capital asset that is much more valuable.

There are lots of other companies that are pursuing this strategy. WeChat in China now has enormous capacity inside its app that is intended to keep you inside their ecosystem so they can aggregate demand and sell it to other companies ( WeChat is morphing so Chinese smartphone owners will never have to download an app again). Facebook is attempting to copy them while also trying to copy Snapchat and is a huge percentage of people’s mobile we traffic (Benedict Evans).

All of this raises a very serious question. Where will the profit accrue to in this new world? Here in Australia we have had retail dominated by two major supermarkets although this is slowly changing. As a result they  have had the highest retail supermarket margins in the world, which have now crashed back to earth due to competition (see my post: Are The Two Major Supermarkets in Australia Doomed?). Through that time the suppliers of food into the Australian markets have been mostly constrained by having to supply to those two companies in large volumes. If you are Coca Cola or Mars this has not mattered too much but it has mattered to most suppliers (hence the high margins).

The advent of the internet and the capacity to connect to anyone around the world even if you are a one person business was supposed to break some of this  down, to usher in a new age of commerce. To an extent that has been true. However I have been working with a couple of businesses that want to use some of the new technologies to connect directly to the customer rather than going through the major supermarkets as “the agent of the consumer”. One of the key concerns is whether they are swapping one master for another. If they end up with channels going through systems and applications like WeChat or Facebook does the profit accrue to them or the platform, and how much can they rely on the platform continuing to deal with them in a fair and consistent manner. In part that question is answered by platform economics – if the deal does not work for the customers on both sides of the platform then the platform disintegrates. On the other hand if you are not key to the relationship between the consumer and the platform itself it leaves you in a very weak position.

If we use that thinking and go back to Uber then I do not believe that a coffee shop at my local shopping centre is going to have the clout or expertise to efficiently partner with Uber to market specials through their App. It seems far more likely to me that another aggregation platform for coffee shops (and others) will partner with Uber and connect up the systems required to send me a notification of a special as I am on my way, or take my order via the Uber app as I travel . That means if there are three coffee shops at my local shopping centre, and Uber has a significant transport footprint, as soon as one of them has joined up the others are forced to do so or lose customer traffic. In that case none of the coffee shops actually wins because the actual customer levels between all of them are likely to be the same (ignoring any marginal traffic that may come from signalling). However the two aggregators (coffee shops and Uber) are going to want a cut of the action so it is likely that the profit margins of the coffee shops will fall.

So in a world that promised better contact and relationships with customers for small businesses the result may actually be less contact, more distant relationships, and less profits as a result. The advantages go back to the portal holders.

Of course in a modern world there is always the opportunity for the coffee shop to make a direct contact with me when I come to their shop. If they can establish a contact with me via my messaging App of choice (WhatsApp in my case) then they can form a direct relationship. However that relationship lacks a geo-location and proximity/arrival time context so unless my messaging App can supply that then the direct relationship is at a significant disadvantage. It also lacks the sophistication to be able to take my order, so unless another aggregator can link to my messaging app and provide those services the friction of the relationship will be too high. And so the dance continues.

The whole process is complicated by the fact that people actually use very few apps. In theory the coffee shop could have an App that does all these things and connects with me but given the limited real estate on my device and the fact that most people only really regularly use 5 apps that is not going to happen.

It is going to be very interesting to see where all this goes in the not too distant future.

p.s. – for those of you not from Australia the picture is one of Arnotts Tim Tams which one of the major supermarkets tried to force a price reduction on but was unable to do so because of their popularity. Therein lies a lesson. You should try them, they are awesome.

Addendum

An additional point is that this means that the brand reputation issues that are afflicting Uber today are far more important than might be thought. If one of your key strategy pillars is that people need to trust you to share their data with you then your culture, behaviour and leadership become critically important. Because of the network effects of the data collection and utilisation if volume falls in broad terms but data sharing falls more then capital value of the company falls far more rapidly. I am sure that the board is having that discussion with the CEO right now

 

 

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Are The Two Major Supermarkets in Australia Doomed?

Yes but it will be a slow train crash

Following stories in the Australian Financial Review and News Limited last week (Amazon delays Australian launch to September to include fresh goods and Amazon to ‘destroy’ Aussie retail ) I decided to complete this analysis which has been kicking around in draft form on my system for a few weeks.

It is not just Amazon that is the problem. A combination of threats on margin, volume, and customer traffic is threatening the existing business model of the major supermarkets. Not all have to be successful for there to be major effects. To understand how that is happening we need to understand the business model.

A long time ago I tried to get ex Woolworths Chief Executive Paul Simons to come on board to market Australian Pork by becoming Chairman of the Australian Pork Corporation. That bid failed but something he told me about the supermarket business when we met has always stuck in my mind. Paul told me that there were five things that attracted people into supermarkets and while they were there they bought a heap of other stuff. Those five things were discounted bacon, Coca Cola, Pal Dog Food, fresh meat and fresh vegetables. A quick look at the Woolworths weekly specials catalogue for Victoria for the week starting August 31st (when I first started putting together this article) shows discount bacon, a discounted leg of lamb and a discounted whole duck front and centre on the first page. That is followed by  a full page spread on fridge mate packs featuring Coca Cola and two full pages of double points on fresh fruit and veg.

woolworth special august 31 2016

Source: Woolworths

 

Given that was the early nineties we could probably add rotisserie chickens, specialty pet foods, Huggies, petrol vouchers, and reward points to the list. That does not change the point that there are major group of items that get us in the shop and we buy other stuff when we are there. We certainly might buy half price Edgell Red Kidney Beans when we are there over another brand or product because they are on special but it is not going to get us in the door.

Later I chaired a board where a senior executive of one of the major supermarkets was also a board member. He told me that the supermarkets did not make money out of selling things. Their main two sources of income were the cash difference between when customers paid and when suppliers got paid and selling prominent shelf space to suppliers. While the story is illustrative of the business model rather than a statement of fact it does help understand the model.

If we look at the cash from customers as a source of of revenue then inventory turnover is important. The faster the inventory turnover the more money the supermarkets get in before they have to pay their suppliers.There are various numbers available for supermarket inventory turnover rates. The Inland Revenue Department of New Zealand reports median turnover of 14 times with a range of 10-19 for large supermarkets and grocery stores). The ratio of sales to inventory in the Woolworths annual reports 2011-2015 vary from 12.46 to 14.81 although these are affected by their non supermarket sales. Because this is not an investment analysis I think that it is safe to assume that the inventory turnover for Woolworths and Coles supermarket business would be at the higher level of the IRD estimates. If we use 16 x turnover that is equal to turning over inventory every 22.8 days. If the average payment terms to suppliers is 90 days (personal experience) that means that on average the supermarkets have customer cash for 67 days before they have to pay suppliers. With daily sales of  Australian Food and Liquor of $115.4m that is a whole lot of cash in the bank. Of course lower interest rates will have damaged the revenue the supermarkets receive form having that cash on hand.

When we look at paying for products to be on shelves and supplier rebates it was reported in The economist last year that In Australia supplier rebates had boosted margins for the major supermarkets by 2.5% point to 5.7% over the past five years (Buying up the shelves)

The other part of the business model puzzle is that the supermarket business is generally a low margin business once all costs are taken into account, although margins in the Australian market have been higher than the rest of the developed world. The Woolworths five year financial summary  to 2015 shows that margins for the Australian Food, Liquor and Petrol operations have been between 6.63% and 7.20% before interest and tax. While this is generally a low margin for businesses it is 30-42% higher than the margins in the Woolworths New Zealand supermarkets in the same report.The margin before interest and tax for 2016 fell dramatically to 4.43% as Woolworths lowered prices to compete with Coles and Aldi. The margins before interest and tax for Coles supermarkets in 2016 and 2015 were 4.73% and 4.67% respectively ( http://www.wesfarmers.com.au/docs/default-source/Quick-guides/2016-full-year-results-shareholder-quick-guide.pdf?sfvrsn=2).

While this net margin is quite low the gross margin is much higher For example the gross margin for Woolworths was 25.37% and 26.19% for 2016 and 2015 respectively ( Woolworths Financial Reports (pdf )) .

The gross margin is essentially sales minus the costs of purchasing goods for sale. This means that the difference between gross margin and net margin is all the other costs such as property leases, energy, staff, etc. This is a critical point because it means that the contribution to profit of the last customer or the extra sale is much higher than the average across the business. What this means is that if I drive down the road and turn left to shop at Woolworths or turn right to shop at Coles the loss in sales to the one I do not choose is very high. Whether I turn right or left both those businesses still have to pay their staff, pay their energy bills, pay their property leases, etc. That means that if roughly 18% of customers disappear and they cannot adjust their costs then their profit disappears, and adjusting high fixed costs like leases, staff and energy is very difficult.

The same applies to sales volumes. If the same amount of customers go through the door but buy 18% less in volume the supermarkets do not make 20% less profit, they make virtually nothing if the same costs structure remains in place.

So the supermarkets run a high turnover, low margin, high fixed cost business where they make lots of money on inventory turnover and payments/rebates from suppliers. This gives is the basis to look at their strategic future. Attacks to their profitability can come from primarily three points:

  1. Lower margin business forcing them to reduce margins as Woolworths has done in 2016 to combat the threat of Coles and Aldi in particular. This may be extended further in a major Amazon push into fresh produce.
  2. Customers being drained away so the high costs structure causes problems for profitability.
  3. Customer numbers staying the same but buying less every time they go to the supermarket.

Lets look at each of those individually:

Customer numbers staying the same but buying less every time they go to the supermarket.

This is the most serious threat to the long term viability of the supermarket businesses. The threat is analogous to guerrilla warfare or asymmetric warfare. Only some of the attacks need to be successful for the supermarkets to be in trouble. People will still go to the supermarket but there purchases will be reduced.There have been lots of efforts to look at direct delivery models with varying success but we are now reaching the point where multiple models are developing that have a good chance of being successful. This is devastating for the supermarkets because if 40% of people reduce their purchases by 30% that is a 12% reduction in  overall sales. But the supermarkets will still have to operate their existing business model to retain the other 60%of customers  as well as to be able to retain the people that have reduced their purchases but are still coming into the store. Lets look at some of their threats:

Dollar Shaver Club

dollar-shaver-club

These guys run a direct delivery service for razors direct to your door. They combine an irreverent marketing attitude with social marketing that gives you free blades if you recommend a friend.  They promise to reduce your costs of shaving and take all the friction out of the process. I don’t use a razor any more as I use clippers to manage my George Clooney like designer stubble, but if I did use razor I would sign up today – no longer buying that product from the supermarket. A small individual purchase perhaps but they start to add up.

Blue Apron

blue-apron

Blue Apron promotes direct delivery of all the ingredients you need to prepare a healthy great tasting meal. I met with one of the Nokia trends scouts in Austin Texas a few weeks ago and she is an avid fan. As Blue Apron delivers the exact amount she needs to make a meal there is no waste and she said that the service is not costing her any more money than shopping for the ingredients. It is estimated that Australians throw away about $8 billion dollars of food a year (fact checked by the ABC) so certainly there is a cost saving there. While they are not yet in Australia the business model is one that is easily transferable here.

Youfoodz

youfoodz

Youfoodz is a company that will deliver a week’s worth of fresh (non frozen) meals direct to your door in Australia. You can choose all meals or a proportion of meals and snacks. I have done a cost comparison on their service and while they are slightly more expensive than making your own food for quality meals the difference is not large. Again there is no waste and for the time poor there is no shopping or preparation to be done. For people working long hours or running their own businesses where more time means more money this is a very viable alternative.

Amazon Dash

amazon-dash-button-washing-machineAmazon Dash is a programmable button that you can put in your house. The example here is one of putting one on your washing machine so that when you run out of washing powder you just push the button and washing powder is delivered into your house. It takes all the friction out of buying and I imagine them building in services integrated with Alexa (the interactive home system) so that rather than just buying your normal brand the system can queue up order requests and talk to you about special offers, etc at your convenience. Once adoption gets high enough then Amazon can use its considerable logistics and information system to package up multiple orders, supply weekly orders based on your usage, and give you special offers.  It has not really caught on yet but the system is adding more and more brands and Amazon is pushing it out to more countries (Amazon triples Dash Button brand lineup, orders surge 75% in Q1  andAmazon brings its Dash buttons to the UK, Germany and Austria for ordering staples with one touch). It has the smell of a long term strategy to harness all of their capabilities into an offering that makes sense, especially for dry goods.

So if we think of an example household of an above average income couple (the most attractive customer) that are busy with work or their own business you can imagine a combination of all of these services. They use a service like Youfoodz to have a couple of meals pre-supplied on their two busiest days of the week when a combination of work and commitments for kids activities have them stretched. They use a service like Blue Apron once a fortnight for a lunch or a dinner where they want to cook but want to eat healthy and not think about recipes or shopping. They use Dollar Shave Club for monthly supplies of razors. They install Amazon Dash buttons for washing powder, toilet paper, paper towels, dish washing liquid, and cereal and it all gets delivered. Gradually Amazon influences them through their Alexa to buy more dry goods because the marginal cost of freight is so low the system is cheaper. Convenient and lower cost is a killer combination.

They still go to the supermarket they always went to but slowly but surely the amount they buy there until it is down to 50%. Some families at that level then start questioning the trip to the supermarket and start changing their total shopping habits.

The problem with all this from the major supermarkets point of view is that they don’t really have a strategic response that makes sense because of their legacy model. They cannot abandon the majority of their customers so their model stays the same and their margins get steadily eroded.

If they reduce stock lines then they slide more towards an Aldi/Costco model and they don’t want to go there. If they move to more and more online systems they can sort of compete but they still have to supply their standard customers and that model is based on big stores based in solid catchment areas. If they close one of them or move to a small store model a lot of customers probably end up with their competitor who did not close. So neither wants to be the first to do that. It is a little like the banking branch model problem. Less and less transaction are being carried out in branches but people will not travel far to conduct those less frequent transactions so banks keep branches open for fear of losing customers.

At every step of the way their business model is eroded:

  • Lower customer traffic/less spend per customer reduces cash held in the money market.
  • Lower customer traffic/less spend per customer erodes margins as there are less customers/customer dollars to spread non cost of goods costs over.
  • Lower customer traffic erodes the capacity they have to charge for shelf space. It is a bit like television advertising rates. If you have less eyeballs watching your shows you cannot charge as much for advertising.

The final straw in this nightmare scenario for the major supermarkets may be Amazon moving its vision to applying its impressive logistics and intelligence systems to support a national network of independent specialty shops. This is where the high margin customer of the future, who has already reduced their supermarket purchases as described above, may be headed. If that is the case then the major supermarkets are caught trapped in a legacy business model they cannot get out of and assailed on all sides.

Only 5% of each attack has to be successful. No-one has to destroy them.

What Happens When all the Friction has Gone?

The quick answer of course is that you slide right off.

friction sole-115156_640

I am fascinated by the continuing questions of what is the collective result of us making logical individual decisions that make economic sense. Adam Smith of course would say that this is the invisible hand of the market where we all benefit from everyone acting in their own self interest.

I am constantly telling clients and conference attendees that they need to remove the friction in relation to their interaction with customers and stakeholders. Through our level of connectedness and the developments in mobile technology we are training a generation of people that they can get what they want now. Want to be reading a book? Search on Amazon and it can be on your reading device before you board the plane. Want a TV show, click on your Netflix app, want to reach someone call them on their mobile. The list goes on and on.

Friction is anything that gets in their way about the capacity to do something, and especially if they have made a decision to act rather than just browsing. This is both a customer retention strategy and a talent retention strategy. If inside your organisation people cannot get the same level of capacity to do stuff they can in their daily lives they are less likely to stay.

It is  a clear economic benefit to reduce friction and increase the likelihood that someone will buy your products or services or will stay with your organisation. There are clear first mover advantages but the question is what happens when we have all done it and response time is down to milliseconds.

My thinking on this today was prompted by an article in MIT Technology Review:

Buy buttons are coming to Pinterest and will reinvent online commerce, the company claims.

The article describes the possibility of you seeing a recipe on Pinterest that you like and the capacity for you to click on a buy button that will buy the ingredients on Instacart which has a one hour delivery service. That theoretically means if you feel like it you can scan for recipes on your train trip home, click on the buy button and have the ingredients delivered for you to make dinner. This all makes sense from an logical economic part from Pinterest who will obviously make a cut for that transaction. If you see the recipe and leave the site without making a buy decision they get nothing. There are a number of other implications to this as well:

  • It is likely to be higher margin business for both Pinterest and Instacart (and other providers that participate) because your purchase is partly an impulse buy and you are not comparing prices.
  • It is aimed at the time poor consumer as much as anybody. You may have planned to shop on the way home but a late client call or an unexpected meeting with your boss had delayed you so this service provides a way for you to deal with this problem.
  • It means that the competition to attract and retain platform users for this sort of business is likely to get even more brutal. Accessing those high margin customers who may contribute 80% of your net profit will be vital.
  • Tracking and data profiling of the customers will become even more important and probably more invasive.

More and more organisation are going to be heading down this path in order to reduce any barriers for their customers.

So back to my original question.

Once everyone has removed every possible friction with customers it ceases to be a key competitive advantage. In my work with clients on business models we differentiate between survive competencies and thrive competencies. The survive competencies are the ones that you need to have just to play in the game. Thrive competences are the ones that will grow your organisation and its success. Over time many thrive competencies transfer into the survive category. A sort of commoditisation process. My work is partly about helping people think what the future will look like so they can refine their strategy and allocate resources. Lack of friction will no longer differentiate you in the future.

So what should you do:

  • First of all by all means continue to work on removing friction. It will give you short term advantage the faster you do it and you will need it just to survive in the future.
  • Think through the sorts of organisations and platforms that are likely to capture the attention of your high margin customers or your key stakeholders. You will need to figure out how to maximise your presence there while minimising your dependence on them. If you give up your key contact to the customer to someone else you are handing over power. If you have arrangements with them like Instacart might have with Pinterest make sure that you are in a position to collect customer data.
  • Think through how you support and maintain contact with those customers who are the ones that will promote your business and recommend your product. You may even want to support them establishing profiles on sites like Pinterest.
  • Concentrate on the one enduring competency. Delighting the customer. Removing friction will help that but in the end it is the experience that the customer (in the widest possible sense of the word) has with your product or service that counts.

Tell me what you think

Paul Higgns

The Smart Business Model Play in Solar Energy Solutions

In conjunction with the announcement by Tesla on April 30th that they are supplying home battery storage systems (Tesla launches a stationary battery aimed at companies with variable electricity rates and homes with solar panels.) Solar City in the USA has announced that

Using Tesla’s suite of batteries for homes and businesses, SolarCity’s fully-installed battery and solar system costs are one-third of what they were a year ago

Just think about that for a moment. A model which has dropped in price by 67% in 12 months. That is disruption on a major scale.

The solar panel business and the battery storage business is likely to be a continually brutal Darwinian space and require huge capital to supply the necessary scale because of the structure of the technology and the cost reductions that are occurring.

This raises the question of what is the smart play in this space and I think it is in staying away from the panel and battery technology space and playing in business model innovation at the layer above that.

There has been considerable comment on what is happening in the cost curve reductions in solar panels and battery storage including:

Why Moore’s Law Doesn’t Apply to Clean Technologies

and a counterpoint from one of my favourite analysts/writers Ramez Naam:

Is Moore’s Law Really a Fair Comparison for Solar?

who embedded the following graphic from Nature Climate Change

Nature-Climate-Change-Batteries-Cheaper-than-2020-Projections-800x488

looking at the falling prices in battery storage.

I think both articles make excellent points but the main issue is the cause of price change over time which has been 60% annually for transistors and 14% annually for solar (over 37 years) according to Naam. Analysis of the two articles indicates that the change in transistors has been far more driven by technological innovation while the pace in solar has been more by the classic cost learning curve and move to scale.

Which brings us to the smart play. My view on the key drivers when thinking about business strategy:

  1. Just as many solar manufacturers have bitten the dust over the last decade the same will apply to battery manufacturers and start up battery companies in the next decade, as well as being a continuing issue in the panel industry.
  2. One of the main problems with Lithium Ion batteries is the charge and discharge cycle lifetime. From a cost per kWh storage point of view the shorter the life cycle then the higher the cost as the initial capital costs have to be depreciated over less energy usage. Therefore alternative battery storage options have to be a key competitor in the space. There is lots of investment going on in technology development. So to win you either have to have the capital backing that companies like Tesla boast or pick the right technology and take the development risk.
  3. Particularly at a household level the costs are related as much to installation and deployment model as to cost of the technology (just as transistors are only a fraction of smartphone or tablet costs).
  4. At the household level adoption issues beyond costs will also be critical.

So while there will be clearly winners in the panel and battery space the risks and capital required are enormous. There are better opportunities in deploying innovative business models in the space including:

  • Models for landlords that get around the issues of the landlords bearing the capital costs and tenants gaining the cost reduction on their power bills. This includes leasing and income sharing models driven by algorithms.
  • Efficient and low cost installation models that drive down the costs of installation and maintenance.
  • Financing models that allow installation for people that otherwise could not afford installation.
  • Community models that integrate use of the grid into distributed generation, storage and consumption models that reduce costs to consumers while improving the income for local generators and renewable energy systems

There are parallels for this in other sectors. The sports clothing company Under Armour is pursuing a strategy for fitness apps to complement its sports clothing sales. That strategy is hardware technology agnostic in that it integrates with a range of technologies that users are adopting. This means they do not tie themselves to any particular hardware solution and avoid riding on top of a technology that fails.

That is the smart play here

Paul Higgins

 Full disclosure: I have recently worked for the sugar milling industry here in Australia on energy transition scenarios. I may in the future have a financial interest in community models.

Major Disruptors of the Next Decade Section 3 – The Uber Pivot

This is part of a larger series on major disruptors. You can see the previous post in the series at:

Major Disruptors Section 2

The posts so far have focused on both the gains to be made from driverless car technology and the disruptive effects of that technology on various industries and landscapes. The next post was supposed to be on opportunities from driverless cars rather that disruptions. That post will be along soon but meanwhile lots of people have been asking me about the Uber business model in relation to driverless cars.

Uber has worked by displacing the taxi industry to a certain extent by harnessing unused capacity in vehicles in our communities but also by bypassing regulation and maximising the use of application and location technology. Given that the company has been valued at US$18 billion according to its latest funding round, (Taxi app Uber valued at $18 billion in new funding round) and my view that driverless car technology might be fully implementable in 10 years the question has been how does the company valuation make sense when the model is likely to be completely wiped out?

Firstly I think that the business model does have some short to medium structural problems. It is highly possible that the taxi/driver based car system is the one that will be initially replaced in the implementation of driverless cars. If this becomes clear then I think that Uber will have trouble retaining drivers and gaining new drivers in the transition period before the implementation period becomes practical. Who is going to invest in a vehicle or throw in their job, or turn down a job if they are likely to be replaced in one or two years. This is is similar to the problem that the car manufacturing industry will have close to a full scale implementation that I mentioned in my initial post.

The second issue is one that a lot of companies are facing right now and more will in the future. In a world that is changing more rapidly and where disruptive business models or technologies can turn up from anywhere how do you maintain a strategy and a profitable business model that has longevity? Market valuations are supposedly based on the forward view of cash flows (market irrationality aside). In a world where you business model only lasts for 10 years or less how do you maintain a valuation, especially if those cash flows are negative while you rapidly expand? The only way that Uber can do this is a long term vision of pivoting their business model significantly and that model has to be one of being a significant player in driverless car models. In the meantime they have to maintain a profitable or funded model that makes sense to people. In the longer term the game has to be one of using that platform to accrue a huge amount of data and expertise around customers and their travel requirements. It may seem crazy to have a 10 year plan to expand to hundreds of cities just to create a new business in the future but that is what is necessary in these times for lots of businesses. To me it is the only way that the current valuation makes sense.

 

What is your business model/strategy to deal with these sorts of issues given that as Gary Hamel has said “somewhere someone is making a bullet with your business’ name on it”.

 

 

Medium, Tumblr and Community Based Business Models

It has been a while since I wrote something here. Life has been getting in the way. However I noticed something form my colleague and friend Stowe Boyd which stimulated me to respond. Over at Tumblr Stowe posted:

Medium becomes more Tumblrish

Hamish McKenzie noted that Medium had become significantly more of a curated experience  in its recent facelift. But I think in his positioning of Medium and Flipboard as two competitors for our attention, he misses something important

He concludes with:

“I find it interesting that Tumblr seems to be changing so slowly — hardly at all — since being acquired by Yahoo. And one of the obvious ways to draw more interest to Tumblr would be the simple avenue of making the curated topics a/ public and b/ better looking. Right now they look like the (relatively unappealing) Tumblr dashboard, and there is little or no room for advertisements.”

“But I have made several of the curated topic feeds — like Tech and Design — a part of my central daily practice. I have not done that with Medium, although I do use Flipboard every day, too”

You can read the whole post by going to: http://stoweboyd.com/post/69485777176/medium-becomes-more-tumblrish

My response to this is:

I am one of the Tumblr tech curators/editors and I am not sure about how I feel regarding advertising on the curated areas of Tumblr. On the one hand I can understand the appeal and like Stowe have made looking at the curated areas part of my daily information practice. I can also understand that the service needs to make money to sustain itself and I am supportive of that as long as it is done in a way that is not intrusive on the reader/community. On the other hand I am somewhat leery of Tumblr/Yahoo making money on top of my voluntary efforts. I would need to balance off that against my view of my contribution to the community and also any value I feel the extra profile of a public and promoted page may do for me and our business.

This is the delicate balance of some of these new business models where the community is producing the product. Too delicate an economic business model may imperil the economic viability of the service, and too intrusive a model may damage the goodwill of the community and therefore make the whole thing evaporate or at least to a level that is non viable. Fundamentally I think that this is easier outside of a large company where transparency can allow the community to make finer grained judgements about the economic model and what it is delivering as long as it is transparent. That is much harder inside a larger company that tends not to publish data on the individual performance of its parts in a way that is clear for everyone to see.

I would be interested in comments.

Paul Higgins

Which of the Dinosaurs will Survive?

The Guardian newspaper has launched an online Australia version of its newspaper:

Guardian Australia launches with promise of ‘fresh and independent view’

In my view this is part of the future of newspapers and marks the continuation of what I see as a major extinction event where there will be a further massive loss of newspapers around the world. This is due to continuing evidence that digital pay models and digital advertising are not replacing the old business models in terms of revenue per reader. Therefore I think that the media landscape in general and newspapers in particular will divide into a few distinct business models:

1/ The Global Giants.

There will be some very large newspapers that will survive and prosper and they will do so by reaching a much larger global audience and therefore garnering enough revenue to maintain good levels of quality, stories and investigative journalism. The Guardian is an example of one of these that may survive and the story they have done on the bushfires in Tasmania, Australia is a case in point:

Firestorm

A compelling story, told in a superb and mesmerising way that has local content and interest but also has a wider global audience and interest.  That global audience includes those that have bushfires issues in their own communities but also those people interested in great human interest stories. It also not a “normal” newspaper story.

The key initial ingredient that the newspapers have that might survive with this business model is a great and trusted brand. So newspapers like the New York Times, The Times, and The Guardian are good candidates.

However that great and trusted brand is only a ticket to play in the game and does not guarantee survival. A lot of well known newspapers are going to try this strategy and only a few will survive. Two other key components are going to be required. The first is continual investment in the assets required to tell great stories – journalists. The second is patient capital because this is going to be a long and bloody fight and the organisations involved will need deep pockets:

NOTE: The Guardian bushfire story was notified to me by Michael Cote who is a climate adaptation consultant and runs a blog on Tumblr (Climate Adaptation) where I follow him. This is a mark of how these stories will be accessed and promoted in the future. A story about my country was relayed to me by someone I have never met who lives in Massachusetts.

2/ National Champions

These are the newspapers/media outlets that will survive by focusing on key national issues that are not of interest to a wider global audience. Their stories will include stories at a national politics levels and investigative journalism focused on national politics and local corporate issues as well as sport which appear to drive a huge amount of “eyeball” to use the jargon.

I think that the model of ow this will work will be far more varied. Possibilities include the creation of crowd funded journalism models where people agree to fund specific investigative journalism. They also include the loyal readership of such a newspaper/media outlet being an asset that can drive revenues into the larger global entities that survive and generate income by doing so.

3/Local/Specialised

This is going to be much more fragmented and localised and also far more prone to non profit business models. The development of web based technologies has made both the creation of content, and the connection to an audience much more effective and has vastly reduced the costs. That will allow a continual flowering of new models and possibilities.

A journalist friend of mine is always talking to me about how important a strong and independent media is to the strength of our countries and our communities. I totally agree with him but a “you will miss us when we are gone” has never been a great value proposition.

There is going to be lots of churn and extinction in this space and I think we all have a responsibility to think about how this will all work. I for one am keen to support crowd funded investigative journalism models as part of my contribution.

Paul Higgins