The Market Takes Bewkes and Jobs to School

April 21, 2011

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.


Time Warner Cable Tries Socialism and It Doesn’t Work

July 16, 2007

Time Warner Cable is known for having terrible customer service. No wonder, since they rely on the failed ideas of socialism to run their business.

Though socialism has been shown to be a failure throughout the world, its ideas still enamor many academics, intellectuals, and businessmen. Businessmen? You may be surprised to see them listed with academics and intellectuals as supporters of socialism. Most businessmen themselves would indignantly scoff at this assertion.

One of the failed ideas of socialism is relying on centralized decision-making; that means substituting the will of one person or small group of people for the on-the-spot knowledge and day-to-day decisions of many people.

For instance, the former Soviet Union instead of having a market system for food distribution had five-year plans. These plans specified which crops a farmer would grow, which train or truck would transport each crop to each city, which stores would stock which products, and how much of each product they were allotted to sell.

No matter how refined the five-year plan was, the result was the same—food rotted in farmers’ fields, transportation was inadequate to get the food that was picked into the cities, and little food was stocked on store shelves.

The idea that centralized decision-making can work has been shown to be theoretically impossible and centuries of failed experiments have confirmed that it does not work.

Yet many businessmen in the United States persist in utilizing centralizing decision-making. Why? They may arrogantly believe that they are smarter than everyone else; and thus, they should make all the decisions.

My own inconvenience is not the point of the following little tale.

Ownership of our local cable company had been transferred from Adelphia Cable to Time Warner Cable. The local town office of the cable company is still in the same building. From the outside it looks like only the name has changed, but there is one big difference. Time Warner Cable believes in centralized decision-making.

Our home, which is on a small side street, needs a new cable buried across the road. We found this out when the local installer was unable to complete our installation. The installer did promise that the additional work would begin within 48 hours.

After a week went by, we called Time Warner Cable in another state? Why would we call another state? We do not have the phone number of the local cable office. It is Time Warner Cable policy that all calls have to be routed to this central office.

After several rounds of phone calls to this “foreign” office and being told a different story each time, we decided to drop in at the local office of Time Warner Cable.

We were actually able to speak to the manager and he was very apologetic. He had our work-order; but other than that, he could give us no information. He explained he was literally not in control of his own crews. The management of his own crews have been taken from him and transferred to this out-of-state office.

He had no way of knowing when our job would be done. Under the former policy of decentralized decision-making, he explained, the job would have been done in a few days. Now, he explained to our frustration, it may be months until the job would be completed. He promised to call us in a few days.

When he didn’t call, we returned to the local office and learned from the secretary that our installation was scheduled. She was surprised that no one had called to tell us. We were not.

A few days later, a Time Warner employee showed up to mark the road. He told us that he didn’t know when the work would be completed. He didn’t know that our installation was scheduled and hoped that the road cut would be completed in time.

Apparently decision-making at Time Warner Cable is not only centralized but information is not even shared. Every employee that we encountered was a decent human being trying to do a good job, but their hands were tied by the policies of Time Warner Cable.

The failed ideas of socialism at work indeed! Human intelligence is not utilized, jobs are not getting done, customer service costs escalate for Time Warner Cable, and everybody is frustrated.

There is enough theoretical and empirical evidence to convince anyone that centralized decision-making can never be efficient. Because they don’t understand this, the leadership at Time Warner is destroying their shareholders’ equity.

Destroying shareholders’ equity is a bold claim. Yet, every time Time Warner Cable employees cannot efficiently coordinate among themselves and their customers, money is lost. Not only that, consumer ill will is created. Isn’t customer good will among an organization’s most important assets?

Currently Time Warner Cable “has no plans to pay cash dividends on its common stock in the future, and expects to retain future earnings for use in the operation and expansion of its business.”

Good luck to their shareholders! Future expansion of their business depends in part upon innovation. Innovation can not easily occur under a regime of centralized decision-making. Innovative organizations, such as W.L. Gore and Associates, use flat hierarchies with decentralized decision-making to promote a culture of innovation. They don’t use the failed ideas of socialism.

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