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.


Lessons to Learn from Blockbuster’s Final Act

January 19, 2011

The Wall Street Journal reported yesterday that “after poor holiday sales and new estimates for a costlier turnaround, [Blockbuster] is asking bondholders for an additional $200 million to $250 million to be used after the chain exits court protection.” You may be wondering who would return their phone calls?  Perhaps those investors willing to listen use sunk costs in their decision-making and reason incorrectly, I’ve lost so much already; perhaps if I stay the course, I will get some of it back.

When my twins were younger, Blockbuster almost seemed like a fine place to get a video.  I say almost because even then on a Saturday night, they rarely had in stock any movies my wife and I wanted to see. But Blockbuster was an easy drive from our home, and a couple of hours sitting in front of a movie were welcome after two toddlers finally got to sleep.

Even then, the genesis of Blockbuster’s destruction was apparent: long lines at peak hours, too few copies of popular movies, short windows of rental for popular movies, and late fees that enraged their customers. They behaved like they had a monopoly; and for awhile, they almost did. But their management mistook a temporary market advantage to mean that they didn’t have to innovate and that they had a license to piss off their customers. But Blockbuster faced real and potential competitors; they were not the post office.

Every time a customer had to make an extra trip to avoid a late fee, every time a customer came home empty handed because there was nothing to rent, Blockbuster’s failure to consider the experience of their customers opened the barn door to potential competitors.

As is often true of the arrogant, Blockbuster’s leadership was blind to shifting consumer demand. Initially, Blockbuster literally laughed at Netflix. Greg Sandoval tells the story of how in 2000, Netflix CEO and co-founder Reed Hastings approached  Blockbuster CEO John Antioco about forming a partnership. Barry McCarthy, then the chief financial officer of Netflix, was in on the meeting; in his words,

I remembered getting on a plane, I think sometime in 2000, with Reed [Hastings] and [Netflix co-founder] Marc Randolph and flying down to Dallas, Texas and meeting with John Antioco,” McCarthy said in the interview “Reed had the chutzpah to propose to them that we run their brand online and that they run [our] brand in the stores and they just about laughed us out of their office. At least initially, they thought we were a very small niche business. Gradually over time, as we grew our market, his thinking evolved but initially they ignored us and that was much to our advantage.”

Later, Blockbuster tried to copy Netflix; but they made little inroads as their corporate culture couldn’t match that of Netflix in delivering a superior customer experience. In my book The Inner Work of Leadership, I tell how Netflix supports their innovative culture with strong corporate values and minimal rules for their employees. With Hastings at the helm, Netflix employees are guided to align their behavior with nine values: judgment, innovation, impact, curiosity, communication, courage, honesty, selflessness, and passion. Hastings writes,

Lots of organizations have lofty value statements; but sometimes they are not reflective of what the organization actually values. To understand the real values of a company, watch how people interact with one another, who gets promoted, and who is let go.

At Netflix we value—and reward—the … nine behaviors. The more these sound like you, the more likely you are to thrive at Netflix. Feedback on how employees can improve in these nine dimensions is frequent via online 360 reviews. We do our best to push each other to embody these values fully.

The particular values of Netflix are not the point. The organizational culture of Netflix supports employees living the organizational values, and that is something to emulate. Valuing values has worked for Netflix, and the results are impressive.

One CEO laughed at competitors; the other CEO built a strong corporate culture that valued serving consumers. Who came out on top is no surprise. The market creates new wealth by rewarding entrepreneurs based on who can serve the consumer the best.

When Blockbuster is finally gone, it will seem like jobs have been lost. But what the unobservant will not see is that all the while Blockbuster was decaying, better and more fulfilling jobs were being created by Netflix. Remember that the next time a politician tells you about bailing out another firm or industry. At best, government subsidies transfer wealth from one group to another. Ultimately, they destroy wealth and lead to stagnation.

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