The Market Takes Bewkes and Jobs to School

It was 2006 when I last set foot in a Blockbuster store. In 2008 my family cancelled cable television. A high-speed Internet connection and a $9.99 monthly subscription to Netflix satisfy my family’s video entertainment needs.

The incumbents claim they are not worried about families such as mine. Last December, Jeffrey Bewkes, the CEO of Time Warner, said dismissively of Netflix, “It’s a little bit like, is the Albanian army going to take over the world? I don’t think so.”

And now it’s about to get even worse for the incumbent media and cable companies. Netflix just purchased 26 episodes of a new series “House of Cards” starring Kevin Spacey. Maybe Bewkes should talk to the former management at Blockbuster who watched their seemingly invincible position vanish as they too sneered at Netflix.

But what could Bewkes possibly understand about competition and innovation? Time Warner, like all cable companies, built their market position in a way far different from the way Netflix has built their position. (Note: In 2009 Time Warner Cable became a separate company from Time Warner.)  Netflix grew by building a culture of innovation that consistently delivers entertainment to consumers inexpensively and creatively.  Time Warner, like all cable companies, built their market position by government grants of monopoly power; and that unearned market power allowed them to be oblivious to consumer needs. Apparently Bewkes literally cannot conceive of his privileges eroding; his dismissive attitude is not surprising.

“Of the many deals the [media] industry has made with Netflix,” Bewkes said, “this has been an era of experimentation, and I think it’s coming to a close.” Bewkes is projecting rather than correctly reading the market: Time Warner doesn’t innovate much, and they do little experimentation. Think of the USPS, your motor vehicle administration, or a Soviet made car and you have an idea of the type of products monopolies produce. Unfortunately for Time Warner, Bewkes doesn’t get to dictate how much experimentation other companies in the media industry engage in. If one company doesn’t want to sell to Netflix, surely other companies will.

There are two ways to earn profits—by turning to government for grants of monopoly power, subsidies, and protection or by satisfying the most urgent needs of the consuming public. Over the years, a corporate culture develops that supports the pursuit of either unearned privileges awarded by government or just rewards from consumers for a job well done.

Instead of focusing on competing, Bewkes depends on government to protect his eroding position. If with government’s help the cable industry is able to protect its position, Bewkes can charge them premium prices for the media he sells. Bewkes is not alone in relying on government. Will it surprise you to think of Steve Jobs in that same light as Bewkes? At first appearance, Jeffrey Bewkes and Steve Jobs would seem to have little in common. One man runs a company partially built by a government grant of monopoly and the other has run a firm known for its cutting-edge innovations. The connection is found in the way Jobs is responding to the eroding market position of his iPhone.

Over 2 1/2 years ago I wrote a blog post “Android Changes Everything.” Contrary to conventional wisdom, I predicted: “Android will beat Apple and any other closed operating system.” I wrote:

There are smart developers at Apple who have apparently made a pretty good product in the iPhone. But a handful of smart developers can’t compete against many smart developers, and pretty good can’t compete against great. Planned development can’t compete against the decentralized forces of spontaneous development. Self-organizing systems are more powerful than a thousand Steve Jobs; and they rarely behave as experts… predict.

And now less than three years later Wired’s current May 2011 issue cover blurbs “Why Android Beat the iPhone.”  The author Fred Vogelstein writes:

The competition is only going to grow more heated. Android doesn’t just use different carriers, different manufacturers, and different software than the iPhone; it represents a different vision for the entire mobile industry. Apple exerts complete control over the iPhone. It builds the hardware. It designs the operating system. It runs the marketing campaigns. And it curates and polices its App Store, refusing programs it deems potentially offensive or a threat to its own business….

Android, by contrast, prides itself on its lack of control. It gives away its operating system for free to anyone who wants it—though manufacturers must submit their phones for testing if they want to access its app market or run optimized versions of Google apps. Android doesn’t review apps before they’re added to its marketplace, pulling them only if users complain, and manufacturers can and do modify the look and feel of the OS on their phones.

In short, Android will continue to morph faster than the iPhone, and Android’s market share will continue to grow. Apple, of course, made the same mistake at the dawn of the PC era by refusing to license their operating system. Steve Jobs apparently is unrepentant about his earlier decision. Instead of following Android and opening up their operating system, Apple “is waging an all-out patent war on anything Android.” So, like Bewkes, instead of focusing on competing, Jobs is looking to the government to protect his eroding position. That strategy is likely to work as well for Apple as Time Warner’s reliance on government has worked for them.

Market forces are impersonal; they have no sense of entitlement, and they don’t care that Steve Jobs is a cultural icon. Market forces reward companies that devote their full energies to serving the consumer. Bewkes and Jobs may believe otherwise, but they will continue to be schooled by the power of the market.

Advertisements

11 Responses to The Market Takes Bewkes and Jobs to School

  1. Frankvv says:

    Barry,

    Although I concur that protectionism breeds compliancy and prevents innovation, I don’t agree that Apple currently falls into that classification. Yes, Jobs had taken the approach in the past that protecting their innovations and not opening up their platforms to others was the best course of action for the organization. And in the early 80’s the MAC operating system was leap years ahead of the DOS based systems. Even today a MAC operating system requires less computing power to perform a function than a PC does. The Apple Computer Company, if they had allowed others to innovate and help feed the development of their software, may very well be the leader in the marketplace today. Instead they teetered on the edge of existence, remaining a niche player in the computer business for.

    Now, I am a little biased, since my family has grown up on Apple computers and products. Our first home computer was an Apple II in 1980, and I am typing this on an iMac. But my work computers have always been a Window’s based products and the reality is that the Microsoft operating system, even today, is the dominate player. This I believe is true, at least in part, because of Apple’s protectionism approach to product releases. However, today the company appears to have learned its lesson, at least to some degree. They have innovated in a big way; iTunes, iPod, iPhone and the iPad, all game changers.

    I believe that the company has a adopted a two tiered strategy; innovate and protect your intellectual property for as long as you can, with emphasis on the innovation component. Is that a bad strategy? I don’t think so. Could more innovation occur if the company opened themselves up and allowed more outside developers access to the company’s software and hardware platforms? Perhaps. But maybe the company is dumb like a fox. Initially everyone thought the company was silly for only choosing one cell phone carrier to partner with and sell the iPhone. But that strategy seems to be paying dividends. When the contract expired, they signed on a second carrier giving the company a controlled approach to gaining market share. This paced approach has limited the number of product issues (they have had some) and allowed the firm to hold their profit margin, while at the same time garnering incredible customer loyalty and marketshare. The April 21, 2011 edition of the Wall Street Journal indicated that;

    Apple on Wednesday posted a quarterly profit of $5.99 billion, up 95% from year-earlier quarter. Revenues rose 83% to $24.67 billion. Apple’s quarter was stoked in particular by sales of the iPhone. The company began selling its iPhone 4 through Verizon Wireless in February – its second carrier in the US after an exclusive arrangement with AT&T Inc. ended. The company said it sold 18.6 million iPhones over the quarter, more than double of a year ago. That figure was also 15% higher than the December quarter, which is typically Apple’s strongest period since it is fuelled by holiday sales…(Kane & Sherr, B1)

    In the last few years Apple has done a marvelous job of introducing a new version of its product just in time to take the wind out of the sails of competitors. The Android may have some superior features, but I imagine that if Apple is doing what Apple seems to be doing bested, they will trump that with the release of the inevitable iPhone 5. But in the same breath, I do not believe there is anything wrong with an innovative company protecting its intellectual property. There are companies and countries that support the cloning of innovative products at the expense of the innovators and inventors. In my mind that is wrong. But protecting the intellectual property rights should not be done at the expense of innovation. If a firm begins investing all of its resources in protecting what it has, they are climbing a slippery slope toward their inevitable demise.

    Now, your Comcast example is right on the mark. I am one of those sucker-customers that has converted my phone, Internet and television to Comcast. And in return I have watched my monthly bill creep up to now over $200 a month (no that is not a typo!). It is time to reevaluate my ROI on this “investment”. Probably I don’t need a land line anymore. And I could put up an antenna and get a bunch of local digital stations – enough to satisfy my family’s requirements. I would miss Showtime and HBO, but perhaps Netflix or some other service would alleviate that problem.

    Reference:

    Kane, Y, Sherr, I., Wall Street Journal, April 21, 2011. Article retrieved from: http://online.wsj.com/article/SB10001424052748704570704576275350324616010.html?KEYWORDS=iphone+power++apple%27s+growth

    • Frank,

      Thank you for your very thoughtful comments. I agree with much of what you write.

      For sure, Apple is no Time Warner or Comcast; they have been a leading innovator. That being said protecting intellectual property is a ploy often used to block competition. We can all agree that if someone breaks into your office and steals your blueprints, government has the duty to respond. But if someone is inspired by your design and then improves on it, where is the crime? We should all go to jail for being inspired by others.

      In any case I still maintain that Android–because it is open source–will soon widen the technological gap between it and Apple built phones and tablets.

  2. Frankvv says:

    Barry,
    The Android might surpass the iPhone. My son has one and it is not bad – but I still prefer the iPhone’s interface – so far. The Android’s open sourced concept might gain traction, particularly with Apps, provided that the inventors can find a way to get paid for their work. Linux software, which is an open platform that, when it came out, many software programmers thought would revolutionize the software business. Although some developers love it, and it is popular with server platforms, it did not surpass Microsoft. Some business don’t like it because they feel that whatever they create in it can easily be duplicated by somebody else, eliminating a reasonable opportunity for a competitive advantage. I think the Android has some potential in taking market share, but I would not count Apple out of the game. Defending one’s patents is the right thing to do. A patent is only good for 17 years, but in the technology game, 7 months is a huge window and I believe Apple is trying to buy some time by defending their patents. I suspect that the next generation or two of their products are already on the drawing board. The tablet, for example, will eventually kill the lap top computer, and the desk top is basically a dinosaur. Perhaps the Android will force Apple to “Think Different” in terms of how it tries to protect itself, but somehow I doubt it. You can only load iTunes on an iPod, iPad or an iPhone, which has proven to be a smart move for them, and frustrating for the competition. So far nobody has been able to garner the same traction in the digital music side of the equation. But if Apple just sits back and rests on their current “i” success, they will inevitably succumb to a better mouse trap – or two.

    • Frank,

      No doubt we will be amazed at what products are out there in 10 years!

      Patents are a creation of government and not of the market. If you and I event the same thing in our garages independently of each other and I beat you into the patent office, you are deprived of the fruits of your labor.

      • Frankvv says:

        Barry,
        Yes, if you beat me to the patent office I am out of luck, at least on that iteration of the product. I still have the opportunity to create a different variation of the product, just so long as I don’t incorporate your design ideas in my product. So, I take it that you see patents as a form of unnecessary protectionism? In a true free market, should patents be none existent? By the way, who invented the telephone; Alexander Graham Bell or Elisha Gray? Bell certainly beat Gray to the patent house, so he “wins” in my mind 🙂 ……

      • Frank,

        Yes, I don’t believe in patents but I do believe in copyrights. To prove a copyright infringement you have to show theft, to prove a patent infringement you do not.

      • John A Wood says:

        Barry
        As theft has to be proved in the case of copyright but not with patents you believe in copyright. That makes sense. Rather than do away with protecting unique invention the same criteria could be used with design and also applied to trade marks etc to protect intellectual property against theft but not limiting the possibility of co-creation of a unique idea or the further development of such an idea. Your thoughts please?

      • Exactly, John. You have clearly expressed the exact position I hold; I agree completely with you.

  3. H says:

    Professor B,
    I love my Droid!
    H

  4. Frankvv says:

    Barry,
    In my first post I tried to post a quote that was more than 40 words long and thus should have been indented. How do I make it all pretty and indented like you do when you reference another source?

    • Frank,

      I fixed the quote. As blog owner, I have added editing functions; but you should be able to add a blockquote with html. I will email you the code as putting the code in this response adds a blockquote.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: