There are two caveats that offset some of this growth. First, networks are increasingly looking to schedule content year round, rather than just the traditional 9-11 week Fall and 13-15 week Spring seasons. While streaming services have meant that off-seasons can still be spent catching up on TV, there are clear gaps in which new content can be released. In particular, many networks view Summer as the next priority growth area. 

Secondly, seasons are getting shorter. TV series are increasingly replicating the miniseries model – albeit on an recurring basis – rather than the traditional 22-24 episode seasons. At the upfronts, Fox announced that “24”, which ended its 8-season run in 2010, would be returning in 2014 as an annual, 12-episode “event series”. One of the drivers of this trend is the tight schedules of Hollywood actors, who continue to invade the small screen . Kevin Bacon, who starred in this year’s biggest new new drama , “The Following”, stipulated no more than 15 episodes be produced each year. Other series, such as “LOST”, spread its last 48 episodes over three 16-episode seasons, instead of 24-episode seasons (as it had done in the past) in order to  better fit story “arcs” and make its intensive production cycles more manageable.

While these changes  will increase “industry capacity” for individual series, it will not eliminate the underlying challenges posed by industry growth. Worse still, they will put additional pressure on TV economics. However, increased competition for viewer eyeballs has driven the broadcast players to launch more series starring Hollywood brandnames – Robin Williams, Greg Kinnear and Michael J. Fox will be the likes of Kevin Bacon and Kevin Spacey in the fall. In addition, networks depend on a series’ episode count to drive their ROIs. Behind every hit TV show are dozens of failed shows – most of which never even aired, but nonetheless cost millions to develop, film and audience test. Competition from more network or digital distributors is also driving up investment costs. With so many would-be buyers, a promising TV concept can no longer be secured by a pilot commitment. One of the reasons why Netflix beat the broadcast giants for “House of Cards” was its commitment to producing two full seasons (at a cost of $100M). Furthermore, long runs are critical to the amortization of upfront costs (pilots are typically the most expensive episode to film and involve significant investments such as set constructing, casting, marketing etc.). The sale of a series into syndication or to an OTT service such as Netflix, is also heavily dependent on the number of episodes produced.

Industry-advocates will argue that the cable networks have proven that short-seasons and high costs can still be profitable and that there is still an appetite for new TV series. That may yet be true. However, rising costs, splintering audiences and increased competition will slowly emaciate the profitability of individual series and compress returns. It’s worth noting that the newest entrants to original content – Amazon, Microsoft and even Netflix – neither depend on nor expect their new TV series to be profitable in and of itself. Unfortunately, that’s a luxury the traditional networks don’t have.

The post Follow-up: Putting the “Illusory Silver-Bullet” in Context at the Upfronts appeared first on Ivey Business Review.

Market behavior clearly illustrates the New Golden Age hypothesis. Movie stars are increasingly moving to the TV screen (from Ewan McGregor or Zooey Deschanel) and many TV stars are bigger celebrities than most movie actors (such as Kim Kardashian, regrettably). TV budgets have also exploded. Game of Thrones costs upwards of $60 million for a 10-episode season and many hour-long dramas at the Big Four broadcasters can cost $40-75 million per season ($2-4M/episode). Content has also become an increasingly important differentiator for cable networks such as HBO and AMC, which traditionally focused on films and one-off specials, but are now defined by and dependent on hits such as Girls and The Walking Dead.

This increased competition has made television even better – offering viewers more options and raising the bar for quality. In 2012, there was an astounding 268% more new scripted TV series premiering in the United States versus a decade ago. The 2013 season looks to be even bigger: Hulu and Microsoft have both announced plans to offer original content, while Amazon has already produced eight comedy pilots (which will receive full-season orders depending on viewer reception). Canada’s own History channel released two critically acclaimed and popular original series in 2012, The Bible and Vikings, with more due this fall.

The purpose of this new content is remaining the same: to drive subscriptions. However, if customers are being won on the margin (i.e. individual shows), how many of these subscription services will consumers really sign onto? Plus, with considerable overlap across each service’s underlying catalogue, consumers will essentially be paying for original content a la carte. This will also come with the need to manage redundant user accounts and fracture recommendation engines. One of the reasons aggregators exist is to simplify the user experience. Imagine if you needed a different cable box and remote for HBO, AMC and Showtime to watch your favorite shows.

Though it may seem that way today, original content is not a “silver bullet”. Though tablets and smartphones have increased the amount of content we can consume, we cannot watch everything. We’re getting to a point where there’s too much “good TV”. Even if we might consider subscribing to Amazon only for 1-2 shows we’re interested in, we may not need them to satisfy our TV needs. Increased programming availability has also fractured audiences. 30 years ago, hit shows could achieve more than 30% share of households. Today, Modern Family is an outlier at 5%. These same factors have also made developing a hit TV show even more difficult and prone to failure. With more potential buyers, content owners are rapidly increasing their prices. To quote Hollywood super-agent Ari Emmanuel: “I have never cared what something costs; I care what it’s worth… If it’s worth more to Google TV than it is for Fox, than I’m going (sell content rights) to Google TV (or Facebook)”.

With competition intensifying, viewership going down and costs going up, the notion of original content being a “silver bullet” may be as illusory as the monsters they supposedly slay. After all, Apple (and Comcast, and Netflix) have shown that aggregation and distribution business models can thrive. Original content may just be an opportunity to drive initial viewers to the service, whether individually (the nascent Amazon Instant Video) or collectively (to legitimize the nascent Subscription VOD industry).

At the same time, what will convince subscribers to pick Netflix over Hulu, or Amazon, or Roku? Even if they decide to pick two or three? They can’t compete by buying the same content – and the cost of exclusive rights should (in theory) consume all of the concomitant benefits. Furthermore, services such as Comcast’s StreamPix or Verizon’s RedBox Instance are often bundled free with a cable subscription and include the entire catalogue (including the current season) of many top-prated TV shows (reducing Netflix’s all-at-once advantage). That being said, original, high-quality may simply be the cost of staying relevent.

Netflix claims that it is using its acclaimed customer analytics engine to make smarter programming decisions. Their $100 million House of Cards investment, for example, was based on the individual popularity of Kevin Spacey, David Fincher and BBC Dramas. However, content production is not a science – and will not overcome the general content overload problem. In addition, they would need to serve each microsegment with several different programs to keep them engaged – a very expensive proposition. Focusing on only select users (such as House of Cards fans) would limit growth and make them essentially cable networks. At the same time, it may just be that original, high quality series is the cost of “playing the game” and staying relevant.

I don’t know the answer here. The future and sustainability of SVOD services remains controversial. What I do know, is that “original content” is not the solution it’s made out to be – and that it’s a great time to be a TV fan.

The post Original TV Series: The Illusory 'Silver Bullet' appeared first on Ivey Business Review.

LNG 101

In order to ship natural gas across oceans, it must be liquefied and loaded onto special boats – it is too expensive to build a trans-ocean pipeline. Cooling natural gas into LNG and shipping it across the ocean is still very expensive, costing roughly $3.80/mcf (thousand cubic feet) for Canadian LNG facilities selling to Japan, a large existing market. Cooling and shipping natural gas to Asia is a very expensive proposition which has traditionally made it uneconomic for producers who could sell at attractive prices domestically. More recently though, the North American price of natural gas has been depressed, and prices in Asia have been very high, over four times the natural gas price in Canada. Canadian natural gas producers have been eying lofty Asian natural gas prices enviously, and the price differential means LNG has very compelling economics.

The Asian Opportunity

In order to sell natural gas in Asian markets, billions of dollars need to be invested in the pipelines connecting Canada’s gas supplies with BC’s west coast, and the LNG facilities to cool the natural gas and load it onto tankers. A project led by Apache, a large American petroleum company, and Chevron, who bought out the project’s other two partners in January, were the first project to receive its export license in October 2011. Originally hoping to have made a final investment decision in early 2012, the decision has been delayed indefinitely, awaiting a long-term oil-linked contract with Asian buyers. Traditionally, LNG contracts signed by Asian buyers (primarily Japan and South Korea) have been linked to the price of oil, as natural gas could in many cases be burned instead. An oil-linked contract would have yielded LNG prices of $16-20/mcf in 2012 as an example (assuming a slope of 0.16).

One of the things an oil-linked contract implies, and one of the reasons that Asian buyers have been reluctant to give one to Chevron/Apache, is a high price. While the exact slope of the oil-link is negotiated, in a 2011 Macquarie report, recent oil-linked LNG contracts occurred at slopes of 0.14-0.16 ($16-$18/mcf average 2012 LNG price). Apache likely believed that they too could replicate those prices for their project, but was rebuffed because their price was too high (natural gas deals with the Russians have likely not occurred for the same reason). LNG buyers were savvy enough to notice that a long-term LNG contract at current prices, would give windfall profits to anyone shipping natural gas from North America. No buyer would be interested in securing massive profits for a seller, especially knowing they are currently accepting lower returns on other projects. While the addition of Chevron as a partner is a boon for Apache’s project – Chevron is a massive oil company, experienced in building and operating LNG facilities and contracting their volumes to Asian buyers, there are indications that Chevron is taking the same negotiating approach as Apache did. In a recent conference call Chevron’s CEO was quoted saying that LNG projects need contracts that are “something close to oil parity or the projects won’t get built.”

BC’s Crowded Coastline

While the Chevron CEO’s comments are likely posturing (a deal could probably be done yielding a wellhead price twice what they need to drill their gas wells), they must realize that time is of the essence for their project. The BC coast is going to become crowded with LNG terminals under-construction toward the end of the decade. Chevron and Apache’s project originally had a 2-3 year lead over competing projects, but delays in signing an appropriate LNG off-take contract has nearly removed all of that advantage. Losing that time advantage hurts Chevron/Apache on two fronts, 1) Chevron/Apache will be competing with at least two other very large LNG projects for labour and materials which will present significant pressures on construction costs, 2) Chevron/Apache will be bringing their LNG to market around the same time as many other LNG projects, weakening their bargaining position on sales price. The longer Chevron/Apache goes without a deal, the more their project is going to cost, and the more competition they will face in the global LNG market place – there are several LNG proposals in Canada, and dozens more in the Middle East, Russia, Australia and even the US. If Chevron/Apache does not want to play ball on price, then LNG buyers will take their business to someone who does.

A Better Strategy

Chevron/Apache need to understand that they are not going to get long-term contract at $16-20/mcf for their LNG project; $12/mcf is much more reasonable. Instead of an oil-linked contract, one linked to natural gas prices in western Canada with a $7-8/mcf premium, could potentially work out to be just as beneficial in the long-term. As LNG projects come on stream, western Canadian natural gas prices should increase as new gas is shipped directly to Asia instead of entering western Canadian markets like it does now.

If Chevron/Apache are so concerned that this type of contract structure will reduce their margins, there are things that they can do to lower their costs. Perhaps the single biggest thing they could do to lower cost is to divest its $1 billion pipeline – Chevron/Apache are the only large LNG terminal owners that are also building their own pipeline to their terminal. All other terminals have brought in a more experienced pipeline company with a lower cost of capital to permit and build their pipelines for them (Pipe Dreams, Fall 2011). By selling their pipeline, a significant capital cost and construction risk will be eliminated. Chevron/Apache will be able to invest the proceeds from the pipeline sale into assets that generate cash flow like oil and gas wells. The other big benefit is that Chevron/Apache will likely also pay less to ship their natural gas from the wellhead to their LNG terminal (due to the pipeline company’s lower cost of capital and more experience at controlling capital costs).

Chevron/Apache need to sharpen their pencils and negotiate a fair contract with Asian buyers if they want to make this project work. Prior to Chevron’s January 2013 arrival, ownership wasted away the projects competitive advantage seeking a windfall that never materialized. The addition of Chevron brings size and experience to the project that the previous ownership did not possess; potential customers will believe this project has greater certainty and will be more likely to provide a contract. Time is of the essence for this project. It would be unwise for Chevron to not use its skills and expertise to advance the project, instead wasting time with the same unsuccessful approach as previous ownership. If they don’t, their project’s customers and therefore economics might disappear entirely.

The post Giving up the Liquid Link appeared first on Ivey Business Review.

“While I understand the imperative for PC builders to increase R&D spend and focus more on differentiation, how big of an issue is this really for Microsoft? Even though hardware manufacturer fortunes have been in persistent decline, Microsoft continues to sell its OS licenses. In addition, the PC market may “self-correct” with Dell’s departure. As vendors exit, the pricing pressures for the remaining participants (e.g. HP) will ease pricing issues and this increased margin will enable them to invest in and market their innovations.”

While the logic above is fair, it’s overlooking a few key points:

• First, it’s never good to have a partner who is dependent on your service fail and for the time being, Microsoft still needs hardware vendors to drive their sales. Furthermore, the death of Dell’s consumer PC business (the third largest in the world) would send a pretty discouraging signal to the remaining vendor.
• If prices did go up, it’s possible that a new Asian vendor would enter the market – especially as tablets and laptops converged. It may not seem like it in North America, but the third and fourth largest smartphone vendors in the world (by units) are Huawei and ZTE.
• Finally, the consumer electronics industry is increasingly about end-to-end experiences. To some extent, this has always been the case. However, today’s vendors and ecosystems are slowly achieving parity in terms of manufacturing quality, touch screen capabilities, app catalogue, content stores etc. As this occurs, the richness and depth of the experience will become the key differentiator. Unless Microsoft does more to control this experience at all endpoints, it will not be able to compete with Apple and Google’s increasingly refined and expansive offerings.

Another email (lightly edited) said the following:

“Microsoft has been making shoddy products for years. As you yourself say, ‘Few PC customers would claim any of the big consumer brand names… make great, reliable or high quality computers, let alone innovative ones.’ Why is it a problem now?”

This is true. Microsoft has had significant and sustained growth in both sales and earnings. What the company hasn’t been able to do, however, is grow its share price. This means the market has compressed its multiples at a rate almost identical to its growth across various metrics. This hints at an underlying problem for the company. Clearly, shareholders do not have rosy expectations for the company going forward.

I actually believe the issues faced by the company are far more significant than the market currently recognizes. This is for four primary reasons, each interconnected, tough to resolve and critical to Microsoft’s ability to remain relevant to consumers.

1. The PC market is dying and Microsoft’s ability to monetize remaining sales is diminishing

Global PC sales seem to have hit a global ceiling. 2011 was the first time since the dotcom crash that unit shipped decreased year over year (by 1.2%) and despite coming off of a down year and featuring the new Windows 8 operating system, Q4 2012 unit sales were down a shocking 14%. As sales of Microsoft’s two largest product lines (Windows and Office) are primarily driven by new PC sales, this is obviously a problem. However, the company’s problem goes beyond unit.

Like HDTV’s before them, consumers have stopped demanding (read: paying for) technical improvements, such as are increased processing power, graphics, RAM and so on. This, in addition to natural reductions in component costs over time, has resulted in significant decreases in the average sales price (ASP) of a PC. Today’s Windows computers have an ASP of only $420, down some 25% since April 2010. This reduction provides Microsoft with reduced headroom when pricing its operating system, which is typically sold to the PC manufacturer, who then recoups it with the consumer purchase.

Historically, Microsoft has charged OEMs $50-85 for Windows licenses. When PCs cost between $500-2,000, this licensing fee made up only 4-10% of the overall retail sales price. As sub-$300 netbooks emerged in 2009, Microsoft began cuttings its fees to as little as $15. The company had feared that PC vendors would otherwise look to free OSs, such as Linux or Google Chrome OS, to preserve their dwindling margins. With ASPs down more than a third in 2009, it’s hard to imagine there per unit license fees have remained stable.

While Microsoft continues to have 85-90% market share, little of this still drives revenue today. Windows XP, for example, is still running 25-35% of PCs despite being close to 12 years old and replaced by Windows Vista in 2007, Windows 7 in 2009 and Windows 8 in 2012. Analysts have typically assumed that these users will “have” to upgrade eventually – and they will – but with such infrequent upgrade cycles, its bottom-line impact is a fraction of what the company would like it to be. Consider the fact that while 90% of Fortune 500 companies have deployed the iPad, only 66% (on average) have upgraded from an OS four times older than the first iPad.

Lastly, Microsoft’s consumer PC business is quickly losing share. Over 35% of those under 35 are buying Macs – a figure that grows every day. Over time, this will diminish Microsoft’s ubiquity advantage and force more CIOs to support Apple products – to say nothing of demographic implications. As more and more and more people use iPhone or iPad, this will only get worse.

Microsoft’s traditional market is slowing; its prices are becoming compressed; much of its share isn’t driving revenue and its losing ground on active sales.

2. Struggling Mobile Share

While the PC market may be decline, mobile devices are expected to grow more than 17% per year for the next five years. Unfortunately, the company is struggling to establish itself in both the smartphones and tablet markets.

As of Q1 2013, Windows Phone has less than 5% of both global and North American smartphone sales. This is despite universal critical acclaim, strong carrier marketing support and often $100-$200 discounts to relative Androids or iPhones. I’ve used the phone extensively – and there is a lot to like – but it simply isn’t connecting with consumers. On the tablet front, IDC is estimating that Windows 8 will run on only 4.7% of tablets sold this year.

Low adoption is causing a serious app problem for Microsoft’s nascent OS. Google has announced that it has no intention of releasing its apps (Gmail, Google Maps, Google Talk) until a more significant user base is established. Similarly, a number of “tier 1” apps, such as Instagram, Pandora, Hulu+ and the Wall Street Journal, are still missing.

The other interesting thing here is that Microsoft monetizes Windows Phone devices the same way it does with the Windows OS: it charges manufacturers a license fee. However, this fee is estimated to be between $5 and $15 dollars for smartphones – a far cry from its PC fees. Though its table fees are higher (approximately $30), it’s facing considerable pressure to reduce the prices to compete with $200 Kindle Fires and Nexus tablets. Unless Microsoft can find new (and significant) ways to monetize the mobile market, even significant gains in market share will not offset the cooling of the PC market.

3. Windows 8 – Microsoft’s Future or a Dead End?

Windows 8, released in October of 2012, has not had the reception Microsoft hoped.

• David Pogue, the New York Time’s Technology Editor: “Windows 8 means insane, productivity-killing schizophrenia. The Windows 8 learning curve resembles Mount Everest.
• Phillip Greenspun, a prominent Internet expert at MIT and Harvard: “(Windows 8) is a Christmas gift to someone you hate… Suppose that you are an expert user of Windows NT/XP/Vista/7, an expert user of an iPad, and an expert user of an Android phone… you will have no idea how to use Windows 8.”
• Jakob Nielsen, a leading user interface/experience expert: “Microsoft has now thrown the old customer base under the bus…. Windows 8 encompasses two UI styles within one product. Windows 8 on mobile devices and tablets is akin to Dr. Jekyll: a tortured soul hoping for redemption. On a regular PC, Windows 8 is Mr. Hyde: a monster that terrorizes poor office workers and strangles their productivity.”

How Windows 8 will sell in the long-run is unclear. However, the early indicators are not encouraging. The PC market typically incurs a “pop” of up to 40% when a new edition of Windows is released, as many would-be buyers had delayed their purchases in anticipation.   Despite that, unit sales were down more than 14% year over year in the holiday quarter.

The most ominous sign for Windows 8 may not be its market performance, but how it has impacted Microsoft internally. Steven Sinofsky, Microsoft’s Windows chief and heir apparent to CEO Steve Ballmer, left the company only days after Windows 8 was publically released and denigrated by the press. While there are conflicting stories surrounding his departure, the timing is hard to rationalize being anything but related. It’s worth noting that when Sinofsky’s vision for Windows was chosen, his two primary competitors (Robbie Bach and James Allard, who were responsible for the Xbox) were let go. were down more than 14% year over year in the holiday quarter.

4. Business Model Inversion

Microsoft is facing a fundamental inversion of the consumer electronics business models. The company has traditionally made its money via licensing its OS to vendors and by selling software such as its expensive Microsoft Office Suite to end-users. However, the mobile market appears to operate under different economic principles than the PC market: Android, after all, is license free, and software (or “apps”) sell for a fraction of the prices Microsoft has historically charged. As Horace Deidu writes, “…consumers (or IT buyers) would have a hard time justifying $67 for an Office license for every tablet when most apps are either free or under $10. Apple charges $9.99 each for iOS versions of Pages, Numbers and Keynote which can be installed on several devices.” Apple views software, applications and content as a sales driver for highly-profitable software – the opposite of Microsoft’s traditional business model.

This inversion is likely behind Microsoft’s first foray into consumer PC hardware, the Surface. While the company had previously designed the Zune MP3 player and two generations of Xboxes, this represented a dramatic shift for the company. It was also particularly dangerous. Coming out with the Surface meant directly competing with hardware partners (such as Acer, HP, Dell) – many of whom have publicly stated their feeling of betrayal. Though Microsoft received adulation for the Surface’s slick hardware and design aesthetics and accessories, many agreed with the Verge’s summary that “(The Surface) tries to do everything, but misses doing anything really well.” The product is estimated to have sold only 1M units during Q4 2012 and Q1 2013. To put this anemic performance in perspective, Apple moved 3 million new iPads in its first three days of availability.

The Rest of Microsoft

While Bing has been reasonably successful from a branding perspective, it has yet to make a series dent in Google’s growth. The company’s share of search remains above 2/3^rds in the US and over 90% in parts of Europe. Though Microsoft has about 1/3rd of Google’s market share in search, it has less than 1/10th the revenue.

Though the Xbox is believed to have been a cumulative net loss until only recently (and represented only 1.68% of operating income in 2012), it has actually become the company’s shining star. Despite its age, the console has continued to pick up steam over the past few years (in no small part due to the innovative Kinect motion sensor). In the United States, it has been the top selling console for the past 26 consecutive months. More importantly, as video gaming consoles replace cable-set-top boxes and household entertainment platforms, the Xbox is giving Microsoft a meaningful access point into to its target consumer’s lives. Though they have yet to use it to successfully drive sales of its other mobile devices, it is keeping Microsoft relevant and providing a building block for their ecosystem.

Where Microsoft is Today

Microsoft is in a tough position: its legacy business is in decline, it is struggling to gain traction in mobile and is facing pressure to fundamentally reinvent its business model. Furthermore, Windows 8 has not only failed to boost sales, it has “made PCs a less attractive alternative to dedicated tablets and other competitive devices” according to market research firm IDC.

There is perhaps no graphic more instructive than the below:

In 2004, Microsoft sold a record 56x the number of Apple devices. In 2013, IDC estimates it will drop below zero for the first time, with Apple devices outselling Microsoft’s by 10%.

The majority of Windows 8 criticisms focus on the OS’s massively reimagined and touch-focused user interface (previously known as “Metro”). The company’s goal here was and is commendable. They asked themselves how they would design Windows today if they had to start from scratch, rather than how they could incrementally improve upon the user interface and mechanics first established in the late 1980s and early 1990s. In addition, they looked to create a consistent user experience across all of their devices (the Xbox, Windows Phones, Windows PCs and Windows Tablets would all adhere to the same design and usage principles). In doing so, they would also make it easier for software and app developers to Write Once, Run Anywhere. At the same time, Microsoft recognized the need to support business users – and so they enabled Windows 8 to run both the Metro UI, as well as one that resembles their more traditional UI.

However, the changes turned out to be so dramatic that business, consumers and “power users” alike felt alienated.  Most criticisms focus on the need “schizophrenic” interfaces and the removal of the classic “Start Button”. More importantly, some have argued that Windows touch-focus and (over)simplifications crippled their ability to do work (as opposed to consume content). Looking at this trend above, it’s not hard to see how Microsoft though that consumers wanted a vastly different and simplified version of Windows. In addition, it explains not only why the company would want to take such a dramatic gamble, but also how they might have rationalized a bad one.

Going Forward:

Microsoft is a powerful company filled with very smart people (it files more patents than both Apple and Google combined). It has a massive user-base, close to $70 billion in cash and is the clear leader in business and productivity services. It’s also willing to make dramatic and dangerous changes, as evidenced by Windows 8 and Microsoft Surface. However, it is facing not only significant challenges internally, but formidable competitors in the market. In addition, it was estimated that the company lost 5-30 employees to Amazon, Apple and Facebook for every employee it took from them. The company’s lack of traction has also led to many writing them off – just look at the cover of The Economist’s December 1^st 2012 issue.

Some things will need to happen:

• CEO Steve Ballmer, who has held the role since January 2000, should be replaced. As Marisa Mayer has shown, a new leader with a fresh vision is often better positioned to energize the base and set a new direction. Of course, this is neither a sure-thing nor a quick-fix, but it’s hard to see how the 14th year of Ballmer’s leadership will inspire change.
• In 2010, Ivey Business Review wrote about rethinking its operating model. I think the conclusions and recommendations are still true.
•  Microsoft should dramatically rethink their Windows 8 UI and strategy. Until the OS is more than year old (covering two holiday quarters), it is unlikely the company will commit to any serious changes. In fact, most believe that Windows Blue, the company’s 2013 update to Windows 8, will further marginalize the traditional Windows UI in favor of Metro. This is a dangerous path to take and one already adorned with warning signs. Furthermore, as Apple’s Mac OS X & iOS and Google’s Android and Chrome OSs show, ecosystems do not need to be identical across all devices.
•  Microsoft should extend its manufacturing beyond tablets and gaming consoles into smartphones – and potentially laptops. With Surface, the company proved it can craft hardware as well as, if not better than, the leading consumer electronics giants. Expanding into new devices categories will allow them to better manage the transitioning of their business models and ensure a high-quality user experience from end-to-end. Furthermore, as more hardware is available, consumers will increasingly differentiate between Microsoft’s proprietary experience and the (spotty) one’s provided by independent OEMs. This move does have its costs; Microsoft’s vendor partners will, rightly, feel betrayed.

  In the case of smartphones, Microsoft has only one material OEM partner, Nokia. Not only has the company failed to ignite consumer attention, its handset business has received more than $2 billion in “support payments” ($250M a quarter) from Microsoft. Developing a phone in house is therefore both logical and would not significantly detract from Windows Phone’s market presence. That being said, the move would push Nokia (which has received continued acclaim for its hardware) to release Android phones, which would fortify Microsoft’s competition. However, given Windows Phone’s limited success to date, this shift is more likely to come at Samsung’s expense than Microsoft’s.

  With many PC manufacturers failing to “delight customers” (as Steve Jobs might have put it), looking to exit the market (such as HP and Dell) or trying chip away at the Windows hegemony (Dell, Asus), Microsoft should put neither faith nor priority on their needs. In the medium term, they will also have little choice but to continue releasing Windows PCs. In addition, Microsoft should target only key consumer segments and ignore desktop PC manufacturing in order to focus internal development efforts and leave room for committed vendors targeting business/enterprise users (such as Lenovo) or price-conscious users (Gateway).

  Either way, it’s essential that the company unveil strict minimum PC functional and hardware requirements (as outlined in my previous article). Finally, any of Microsoft’s efforts will be contingent on their ability to execute in these new hardware categories (which are not sure things) and may be futile without additional changes to Windows 8 (per the above).

• Find a way to rapidly bolster its presence in mobile. Here, there’s seemingly only one real (quite imperfect) option: Research in Motion. There have been rumors of a Microsoft acquisition of the company for several years now, and in many ways, they still make sense. The company has more than 70 million smartphone users, considerable internal talent and strong carrier support. In addition, their corporate strengths align well with much of Microsoft’s enterprise business. The problem here is that the acquisition would result in yet another fracturing of Microsoft’s already-schizophrenic OS/UI. Though Google and Apple support 2-3 different OSs across their devices, the two Windows UIs and RIM’s BB10 OS lack aesthetic and structural cohesion for dual support – even if they were split between business and consumer segments. Cutting either the Metro UI or BB10 operating system would also be devastating to internal moral, as both companies have been working on them fastidiously for more than two years. While many analysts expect Microsoft to acquire Nokia’s handset division, they effectively have already – and the purchase would do nothing to boost their role in mobile.

Microsoft faces few good options today – none of which are clean, simple or solutions in and of themselves. Every day the company is growing less important and less relevant in the mobile space, despite growth rates to large they ought to raise all boats. At the same time, its competitors are growing stronger and building ecosystems with increasingly high switching costs. Microsoft will keep moving forward and hope that Windows 8 takes off by the end of the 2013 holiday seasons. By then, it may be too late. And that’s a shame.

Update: On 16 April 2013, BGR reported that Microsoft’s summer update, Windows 8.1, may include the return of the Start button and an option to skip over the Metro UI on start-up. In recent months, thousands of users had been been installing third party workarounds to do the same.

The post Responses to 'Craptops' and Thoughts on Microsoft's Challenging Future appeared first on Ivey Business Review.

Unlike its peers, the FT drew a clear line in the sand early by erecting a paywall in 2002, implicitly valuing their content above peers who chose to give it away for free. In addition to some brilliant foresight, to evoke the infinitely quotable Clintonism, it also took some serious brass. Breaking down the institutional barriers between the legacy print and nascent digital operations to function as a single unit has been paying dividends ever since, while continuing to plague the FT’s rivals elsewhere. You can draw a direct line between this structure and the FT’s ability to stay the course with their digital first strategy, even when they too suffer the ills of an industry’s fading fortunes.

The envy is truly well-deserved.

But efforts to draw lessons and recipes for success from the FT experience, as numerous commentators purport to do, should come with an important caveat. The FT’s case is unique. Not just unique in the sense that they carved out a strong, profitable niche (they have) or that they avoided many of the legacy issues that their peers do (they do), but instead that there are some characteristics of the FT’s business that are exceeding difficult to replicate. That is, if they are possible to replicable at all.

Style

During the age of print’s monopoly over news, each of the world’s most powerful newspapers linked its value proposition directly to the scope of their coverage. The New York Times’ mantra of all the news that’s fit for print, for example, was not a creed for curation but, rather, collection(1). But in modern times, adherence to such scripture is impractical. In an age where there is no limit to the content that’s available, despite traditional newspapers seemingly clinging to the contrary, there is limited value in making a doomed attempt to synthesize all of the world’s information. That is before one even considers the operational limitations of doing so on a daily basis. Instead, in the face of information overload, what’s truly needed is someone to make sense of it all. This is where the FT steps in.

Certainly the FT has its purely reporting and informational pieces as well but, more so than almost any other English daily (with the possible exception of the NYT), its pages are dedicated to opinion and commentary(2). At face value, it’s a risky proposition to assume a position of authority to comment on the day’s events. Yet through the careful cultivation of the individual brands of its most prominent reporters like Gillian Tett or Martin Wolf, the FT has amassed a stable of credible and often beloved commentators whose readers will follow their every move. This too carries with it some risk – witness the Daily Beast’s experience with Andrew Sullivan – so the FT has been careful to ensure that its brand has always grown alongside its powerful ambassadors to ensure readership long after their departure. The FT has skillfully personified itself not as a source of a selective few producing great commentary but instead as a great many producing selective commentary.

Such a barrier is certainly not insurmountable for rivals: the arms race for talent to fill the pages with editorial content is an ongoing one in the newspaper industry and merely needs a thick skin and a willingness to spend. Yet the FT brand is the barrier that makes it hard to compete. The trust they have with their readers, which ultimately allows them to reach the full economic potential of their editorials, is easy to breach but hard to build or maintain.

Content

One of the ways to become that trusted advisor is focus. Just as globalization has forced specialization on the average worker, so too has the internet spawned the revolt against the generalist newspaper. Presented with so many more options, readers have identified their clear preference, through the prevalence of aggregators, for acquiring their news from a variety of sources. Blogs in particular, once dismissed by traditional news organizations as the epitome of noise on the web, have become a highly valued source of content given their propensity for specialized expertise.

It flows logically – and is hopefully painfully apparent – that clearly the FT has made a wise strategic move by setting their sights on the business reader. As a group that can point to the tangible financial benefits to the news they read, they’re most likely to be willing to bear the cost. This is a powerful proposition for employers as well, who are increasingly taking advantage of corporate subscription offers. These companies reap the reward of more informed workforce, while the FT locks in another competitive advantage through these often enormous and “sticky” relationships.

What’s more interesting, however, is that the FT’s segmentation goes one layer deeper. Unlike other business news publications such as the Wall Street Journal, whose focus includes individual stock and financial planning tips aimed at the small investor, the FT’s content focuses on particularly high-level issues that target the upper echelons of business executives; such as the detailed coverage of fiscal and monetary policy or global economics. Even non-business content shamelessly flaunts stories or advertisements for expensive Swiss watches, extravagant Parisian fashions or brash Italian cars that are far out of reach for your average business news consumer.

Ultimately, the lesson is not just to pick a content area ripe for detailed commentary as many have tried. Instead, the problem needs to be approached backwards by thinking about a clearly identifiable, differentiated and somehow underserved customer and then to be uncompromising in your pursuit of their editorial needs.  In doing so, it wouldn’t hurt to pick a reader who’s highly affluent, influential, and willing to pay, either.

Geography

Perhaps the most underappreciated part of the FT story is the benefits it accrues as a simple byproduct of being on the threshold to Europe. The British press has always benefited from its former global power status: few corners of the globe were out of reach for the empire, giving their papers the first opportunity to present truly global coverage. But even with the empire now long-gone and British influence no longer hovering over the day-to-day lives of billions, there remains a unique advantage to its position as the Anglo-speaking world’s representative in Europe. For decades, Britain’s banks have used their linguistic and cultural similarities to link yield hungry American investors to their capital starved neighbours on the continent. This is why, even in the face of turmoil throughout its financial system, the City is poised to remain one of the world’s banking capitals.

The FT’s experience has mirrored this advantage. Through the work of institutions like Britain’s banks, capital is now global and it’s been critical that business and investing information keep pace. By taking a decidedly Euro and business centric focus to its content, the FT has effectively captured this niche; its content is beloved by the world’s business elite as a result.

This particular ingredient in the FT’s recipe for success is perhaps the hardest of all to replicate. An eager competitor would need to find an equally enticing “cultural crossroads”, with capital on one side desperately searching for investment opportunities on the other, that just so happens to have its own dearth of English-speaking coverage. Such opportunities exist (3), but not all of them have the advantage of being a former empire.

So what can we learn from the FT’s story? Plenty. They picked a content strategy that aligned with their available resources and stuck to it. They integrated the disparate bureaus and pieces of their newsroom into a single unit, aligned by a common purpose and set of objectives. And at every turn, they’ve been proactive in addressing potential future problems – even if that means upping their nose at the world’s most influential media company.

Still, attempts to copycat without the same incumbent advantages is folly. The FT has staked a claim to the financial and journalistic landscape, and while they’ll continue to be courted into partnership endlessly, it’s not a niche they will be ready to share.

——–

(1) In one infamous incident, Adolph Ochs, the legendary New York Times publisher and owner, complained loudly whenever his rivals included a horse race result that his reporters had omitted.

(2) Newspaper apologists (including myself) will argue that there is still value in the digital age of a single source of truth. This is perhaps even more prevalent given the commitment to misinformation of some of the more dubious sources. The fact here, however, is that the market has shown a willingness to pay for value of commentary, not generic news updates.

(3) Personally, I believe there may be opportunities in Asia for a dedicated, full-service bureau that reports English language news.

The post The Times are Good appeared first on Ivey Business Review.

Last week, Matthew Yglesias wrote the following about Amazon:

I like Dropbox. I like it so much that on Monday I upgraded from the 2GB free version to the one where you get 100GB of storage. It costs $99 a year. Then today I looked at the pricing for Amazon’s competing service. They’ll sell you 100GB for $50 a year. Plus they’ll give you 5GB for free. And unlike Dropbox, Amazon offers intermediate options. You could get a 50GB account for $25 a year. As I say, I like Dropbox. And I’m already paid up for a year, so I won’t be switching any time soon. But it’s hard to see how the company can compete with Amazon rushing in, offering a superior free product, and cutting Dropbox’s prices in half. Apple tried and failed in an effort to purchase Dropbox several years ago, but I think in the long term the founders will end up wishing they’d sold.

How can Amazon afford to offer such crazy prices? Well, storage is getting cheaper and cheaper and Amazon has achieved great scale and efficiency with operating large servers. But even better, Amazon doesn’t earn meaningful profit margins on any of its lines of business so there’s no need for Cloud Drive to be any different. It’s all about growth for them, which makes Amazon every possible competitor’s worst nightmare.

This presents an interesting challenge for regulators. Though predatory pricing (where a company sets prices low and/or below cost in order to drive out or away competitors) is illegal, many of the products and services offered by the global tech giants are essentially “investments” intended to drive the rest of their business – not eliminate competition. Furthermore, the fear of predatory pricing is that after eliminating competition, the remaining monopolist will raise prices. While Amazon would no doubt like to raise prices (assuming volume remained unchanged), they don’t need to – their goal was adoption, not the ability to control market pricing. Unlike many predatory monopolists, they are likely not losing money at current prices either. But again, it would be hard to view Dropbox (or any others) being squeezed out of the industry as a good thing, even if it was due to their higher internal cost structure.

Historically, Amazon’s cloud business would likely have been regulated. Yglesias’s description of Amazon’s “great scale and efficiency” being “every possible competitor’s worst nightmare” sounds like a natural monopoly. After all, the service, in which a central “asset” is distributed across a geographic network, is remarkably similar to that of fixed-line telephony and electrical power. Furthermore, it would costs tens of billions to replicate its server and content delivery network infrastructure. And yet, it’s not only possible to imagine a competitor coming after them, it’s likely.

Over the past few years, the scale and scope of the Big Four tech companies (Amazon, Apple, Facebook and Google) has expanded tremendously. Despite having largely different business models and pursuing different dollars, they are converging on the same set of same products, services and solutions. Here, Amazon is actually a perfect example. The company has invested over $100 billion to create its hyper-efficient warehouse and fulfillment operations around the world. This, not to mention their razor-thin margins, would suggest impossibly high barriers to entry. However, in March, Google announced that it would be piloting a partnership with companies such as Target, Walgreens, Stables, American Eagle, Toys “R” Us and number of small local businesses to provide “low cost” “same day” delivery in San Francisco. Not only is Google invading Amazon’s business, the reverse is also true. In 2011, Amazon forked Google’s Android operating system to offer its own line of (be)low-cost tablets. Not only is the Kindle operating system designed by Amazon, it cuts Google out of the entire user experience. All apps, content and browser-based activities are provided and managed exclusively by Amazon.

Today’s ecosystem wars are being fought on a scale that’s not only unprecedented, it largely flies in face of corporate strategy and regulatory theories. In many ways, this is great. Rapid innovation, intense competition and subsidized-to-free products and services are all great for the consumer. What’s more, no technology giant can successfully insulate itself from the threat of disruption or enslave it’s users. Just look at Microsoft. Despite widespread fears that it was unstoppably large at the start of the millennium, it now finds itself marginalized in everything from mobile to social. However, these same market forces paint a frightening picture for successful, mid-sized software/XaaS companies. Those that aren’t acquired by a tech giants or don’t operate in a particularly specialized vertical are in real jeopardy of having their business models disrupted, if not destroyed. This isn’t in anyone’s interest. But, as I wrote four years ago, “you can’t punish a company for being innovative, nor for giving its products away for free.” What is a regulator to do?

Update: Two days after this article was published, Fairsearch Europe (a group backed by Microsoft, Nokia and Oracle, among others) filed a complaint against Google with European antitrust officials. In the filling, Fairsearch argues “Google’s predatory distribution of Android at below-cost makes it difficult for other providers of operating systems to recoup investments in competing with Google’s dominant mobile platform.” Thomas Vinje, the legal lead for the groups claim, argues Android is “a deceptive way to build advantages for key Google apps in 70 percent of the smartphones shipped today.”

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The deck below kicked off the day. It catalogs three companies who failed to go beyond their status quo and two that successfully redefined their business to meet new growth opportunities. We wanted to focus on well-known case studies, but provide detail and context that’s typically overlooked and critical to understanding their mistakes. That Kodak was reluctant to embrace the digital camera market is well known, for example, but few know that they were the first to invent it. But Kodak didn’t just marginalize the product – they canned it. When Netflix introduced video streaming, they disrupted a business growing 15%+ a year: their own. Though many debate on sustainability of this new model, their tenacity has given it a customer base to defend that’s larger than that of any U.S. cable company.

Please note: This presentation has been altered for outside consumption: in 2013, it was used for internal training at Accenture’s Strategy College in Chicago. You can download it at the end of this page.

As an aside (and though it pains me as a Canadian and former CrackBerry users) RIM’s downfall personifies why I love what I do. In two years, the company went from 93% smartphone share at the world’s largest smartphone distributor  to 6%. If that’s not a “first-mover advantage”, I don’t know what is. In no other industry can a company’s mistakes and complacency be so dangerous.

The post Deck: Lessons for Technology Innovation and Innovators appeared first on Ivey Business Review.

Dr. Williams has two decades industry experience in international firms, mainly in information systems and innovation projects. Originally from the UK, Dr. Williams has also lived and worked in Germany and The Netherlands. Prior to joining Richard Ivey School of Business in 2010, he spent three years as Assistant Professor of Strategy at Amsterdam Business School.

Chris holds his PhD from the University of London in the UK, an MBA from the Open University Business School and a BSc (Hons) from the University of Durham.

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• Full social and commenting features to fully engage readers in a discussion about articles including through Twitter and Facebook
• The creation of an Alumni Blog so that all Ivey graduates – including those who did not write for the magazine – will have the opportunity to post their business strategy insights.
• Old content becomes relevant again with the introduction of the complete IBR archives
• The addition of “Most Read”, “Most Commented”, and related articles to improve the overall content discovery process
• An improved IBR Team section – so you can see the individuals behind the magazine

As always, we sincerely thank you for your feeback – and we hope that if you have any comments you will contact us and let us know.

Sincerely,

Ivey Business Review

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• “Decreasing revenues in the market for desktop and notebook PCs and the significant uncertainties as to whether, or when, this decrease will end”;
• “The overall difficulty of predicting the market for PCs, as evidenced by the significant revisions in industry forecasts among industry experts and analysts over the past year”;
• “The ongoing downward pricing pressure and trend towards commoditization in the desktop and notebook personal computer market”; and
• “The increasing usage of alternative PC operating systems to Microsoft Windows.”

The PC market has looked better. In 2012, sales declined for the first time since the bursting of the dotcom bubble (by 1.2%; from 352.8 million units to 348.7 million units). Despite the poor omen, the decline is hardly large enough to be fatal. Surely it’s possible for Dell – public or private – to stake out a sustainable future in some corner of the market. After all, Apple’s Mac division saw unit growth of 9% in 2012 (up 33% versus 2010) and made more than $6.5 billion in gross profit, despite holding less than 5% share of total PCs shipped. Yet Dell may yet be right, which begs the question: How did it come to this?

In its quest to monopolize the global computer market, Microsoft actively encouraged its partners to offer increasingly inexpensive PCs. Low prices, the company correctly hypothesized, would drive adoption, which would drive ubiquity and in turn, the level of standardization that has entrenched the company’s products since the early 1990s. The unfortunate consequence of this ‘race to the bottom’ (which the vendors readily accepted) has been continued damage to customer experience and customer expectations – to the point that both the Windows and PC vendor brands seem irreparable. Few PC customers would claim any of the big consumer brand names – Dell, Acer, HP, Gateway – make great, reliable or high quality computers, let alone innovative ones.

This is because most of these customers have been suckered into what many affectionately call “craptops.” Earlier this year, prominent Windows journalist Paul Thurrott covered a Best Buy ad telling readers to “Upgrade to the latest technology”. Featured alongside the tagline was a $370 Toshiba with considerably outdated specs – but Microsoft’s three-month old operating system, Windows 8. Unfortunately for buyers, the laptop did not support touch, upon which the OS is essentially (but not critically) based. A quick look in this week’s flyer tells a similar story: a $330 Lenovo and 6-pound $280 “top deal” HP. Not only do these laptops have even worse specs, they, of course, have no touch support. For years, consumers have been buying underpowered, albeit cheap Windows PCs full of preloaded software that simply cannot run smoothly. It’s no wonder none of these companies, Microsoft included, aren’t seen as innovative. Consumers literally cannot use their products.

At the same time, Apple has been promising and delivering a tightly controlled user experience that guarantees a leading and consistent experience on any of its lines and with any configurations. When the company expanded iPhone availability in the United States to two carriers, it ran nationwide ads showing two identical iPhones, one on AT&T and one on Verizon, performing all of the same tasks identically. You can bet neither company was pleased, but the message was of paramount importance to Apple.

Despite the slow but very steady rise of Apple and its methods, Microsoft continued to reinforce price competition in the Windows market by releasing ever-cheaper, low-end editions of its Windows operating systems. Naturally, these had fewer features and rarely supported newer hardware or specifications. If a PC vendor wanted to support a cheaper Windows edition, the computer’s components better be budget too.

This culture permeated through the vendors, affecting far more than their low-end units. Here, HP is a great case study. Despite the catastrophe of HP today (and his ignominious resignation), former CEO Mark Hurd’s reputation remains shockingly intact. Under his reign from 2005 to 2010, the company displaced Dell to become the world’s largest PC vendor and saw its share price increase more than 110%. However, during this time HP also reduced its R&D budget by 18%, despite a 37% increase in revenue. As a result, the company’s R&D as a percentage of sales plummeted by more than 40%. During this same period, Apple’s R&D spend almost quadrupled, while sales grew 250%, resulting in a 75% increase in R&D/sales. By 2010, HP was spending 15% less on R&D per year than Apple – despite having a dramatically larger portfolio of consumer products and an enterprise services division offering network and information security solutions, enterprise hardware, network switches, routers and more. While the metric is by no means a sufficient condition for innovation, it’s not hard to see why HP’s products failed to ignite consumer interest. What is less obvious is how Dell thought its products might magically improve year-over-year (until a few months ago) Today, Macs are estimated to make up between 75%-90% of the $1,000+ PC market.

There are signs that Microsoft is starting to understand that it must go beyond simply selling Windows licenses by enforcing rigid standards on its vendors. For the Windows Phone, which it released two and half years ago, the company set minimum hardware requirements and even mandated hardware button layouts to ensure consistency. However, it has yet to bring this approach to its PCs. It needs to. And step one should be rich, multitouch capabilities on any new Windows 8 computer.

Even still, it may be too late. Many customers upset about their most recent ‘craptop’ purchase may not consider the brand for their next purchase. Alternatively, they may simply defer the purchase of a new laptop due to doubts that the “latest technology” will be any better and get a new smartphone or tablet instead (which is likely not made by any major PC vendor and runs an OS other than Windows). Furthermore, Microsoft may struggle to compel vendors to follow new standards, having previously betrayed them by releasing its own PC, the Surface (a product the company claims to have released as a result of the lack of innovation coming from the partners).

Microsoft and its partners need to act fast. However, it took American car companies many years and sales cycles to recover from a reputation for poor quality. Unfortunately for Dell, it seems even tomorrow isn’t soon enough.

Please find my follow-up and responses to reader questions here.

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