Monday, June 6, 2011

From FM to www

Following this growing trend of Internet IPO's we have the new entrant. Pandora, the Internet Radio has recently filed to raise 142$ million dollars in Stock Exchange. The company serves as a virtual radio station that offers users to stream in a "freemium" model, where they can stream for free supported by ads or paying a yearly fee and receiving this service without ads.

Looking at traditional radio, this is a break from the past, a clear example of how distribution of a product changes and interesting given the case for tech IPO's in the tech industry. The industry used to work very differently than what we are seeing now. The value chain of the industry used to hold a special place for radio stations but now it is fading away.

In years past, due to frequency issues stations had to gain a permit to operate in a certain frequency for a specific radius. This permits for around 100 different stations in a metropolitan area, regardless of their size or population. These stations would purchase or create content and transmit it to the public with advertising behind it. Thus their revenue's were driven through advertisement by content distribution. This is very similar to Television broadcast, with the great differentiation that content is much easier and cheaper to produce and reproduce (ie: cost of a TV set vs. a radio set). This created a highly localized industry with a certain type of natural monopoly with limited amount of stations in different genres of content. Due to cost savings, some stations consolidated into larger holdings, but the individual stations stayed mostly the same.

Then came the disruptive business of satellite radio and now internet radio. Satellite radio, which I will not focus on, simply played on the idea that a person could buy a special receiver that received a satellite signal instead of radio frequency. This allowed for national stations that had a much larger coverage, didn't need government permits and allowed for a seemingly unlimited number of stations. Potential drawbacks is the need to pay for this service and a more costly hardware (which is provided by the company that offers the service). This was the first disruption to the industry but the real one came with internet radio.

Internet radio solves most of the distribution problems: it is not necessary to buy a specific piece of hardware (thus removing them from the value chain), just to have a device that connects to the internet and can reproduce audio; there is a seemingly unending stream of these apparatus with smartphones, tablets, laptops, pc and others, though none is specifically for radio. There is another dependence on hardware which is the dependency on bandwidth and thus network providers; without this infrastructure, it probably wouldn't exist. Another issue is the amount of stations you can have due to limited frequency, in the internet your limit is endless, since it consumes much less bandwidth than video for example. In terms of content is becomes much easier for talk radio to flourish since production cost in virtually non existent and in terms of distribution as well (where bandwidth is the major driver) while for music content it is more difficult since they have to negotiate with the music industry same as radio.

With this new IPO we're seeing an industry as old as many of our grandparents fade away into a more modern different way of doing business. One thing is for sure, the demand for audio content is not diminishing any time soon, and radio as well hasn't died. What is changing is how this service is distributed and it is another of the industries that are going from analog to digital, and give way to new companies. Saying that radio is dead is not correct, a quick glance at Arbitron's (the Nielsen comparable to radio in the US) study for last year and radio is still going strong and has high penetration within the country no matter the demographics. Undeniably though the advent of network technologies and personal computing devices have allowed software to be developed to change the way we listen to radio, and apparently it has been successful as Pandora can demonstrate. Whether the company will be successful long term is yet to be seen but the industry is promising and continuing IPO's no doubt prove for an interesting tale of digital business

As always I would like to thank the following sources for their valuable information:

Sunday, June 5, 2011

"When you play the game of thrones...

... either you win or you die." This is a quote from the new series A Game of Thrones, but as you might notice I like using references to movies or series to explain real life stories. Groupon, a fabled company, start up of the year with a revolutionary business model. For those of you who don't know the company, it is an Internet startup that specializes in coupons; not in the traditional way, but offering massive offers that only happen when a certain threshold of users buy into this offer. For example their might be a 50% off offer for a spa, but it will only occur when a certain number of people buy into the offer. It is an easy way to offer companies to market themselves, users to get good deals and Groupon. Their advent to business had its apex in December 2010 when they rejected 6$ billion offer to be acquired by Google, saying they were better off on their own.

First let us look how their business works. The industry is online marketing, more notedly digital coupon marketing. The value chain is as follows: Groupon provides a platform through which companies market their goods via coupons. Initially we have companies who want to increase their user base, Groupon captures them and sorts them through their geographical zone and via the Internet offers them to users based on the city where they live. This is a very simple model where Groupon really aggregates businesses who want to partake in this service and offers them to their unique user base. Distribution is simple as it is digital and consists mostly of emails; the real trick is getting offers that people want and being local based, since there has to be physical presence to redeem these offers. Hardware and software play very small roles since the company is not dependent on it; they do have apps and are supported on Android, PC, iOS, etc..., this is not they key to their business, it is as described before.

Having analyzed the way Groupon does business, why have they been so successful? They brought forth a relatively new business model and made it very local. They continually expanded from country to country and didn't focus on having headquarters but much more so in offering relevant deals for local users that were beneficial to them. Their pace of growth is vertiginous (from 37 to 8,000 employees in less than two years, better than the Federal Government...) and has contributed to them being so publicized and have generated so much fuss.

Fast forward to the future, in an age when the second digital bubble is being speculated, Groupon is out hunting for an IPO. Most would hurry to chomp up the Groupon stock, and why not they have lost  527 million dollars in less than two years. Yea, you've heard right, they still haven't made money, something eerily similar to what happened in 2000, albeit they have a steady revenue stream which not all bubble companies had before. I'm not claiming that Groupon is a bubble company, but it does take a little pause to see what is really happening.

Competitors have come in droves, mostly small companies, until the beginning of this month, the first giant awoke, Google. The company that offered to purchase it out has decided to just go around them and offer their own similar service, Google Offers. They have set their first office in Portland, Oregon, as being second has its advantage, go local first. Lets have a look at Groupon's main cost driver, marketing. They spent 180 million dollars in the first period of 2011 to attract new customers, and guess their main avenue of doing this, well Google of course. What does this all mean? Seemingly (and my opinion) the strengths of this business are twofold, getting good local deals and user base. In both it may seem that Google has the experience and working knowledge, catering to local business for advertising and gathering so much users to its webpage that internet is often known as "Google". I also wanted to mention Facebook Deals; user base, just 600 million active people over the world.

Definitely nobody can fault Groupon executives as cowards, but they have engaged in a Game of Thrones. By rejecting a 6 billion dollar offer they effectively declared an all out war where they were first comers but not necessarily the be all of the industry. They are playing for everything or nothing now. The novelty of the business model and first comer advantage maybe coming to and end and the nitty gritty starts. Competing against giants who have deeper pockets, and more importantly have a stronger position in terms of distribution and can effectively replace them on the value chain. Of course execution is king, but Google and Facebook have a nice record at that. Was it folly to reject 6 billion and get out when the getting is good? I would think so, but we'll have to see this real life game of thrones evolve in front of us.

Thanks to these references for their material

When Business is not Business as Usual

When you bring yourself to think who has been consistently on top of the worlds notorious richest man list, the founder of Microsoft comes up, Bill Gates. He has amassed a vast fortune with his company, being the virtual leader of digital interaction through Windows OS and less so through Microsoft Office. He held the power of the value chain of the computing industry, at a critical bottleneck, software. Thus every PC sold (apart from Mac and several other OS such as Linux) had pass by and get the Windows stamp. The only other player to hold a similar power position within the industry was Intel with their processing chips, though they faced more competition. The rest of the value chain was a bunch of hardware producers that offered relatively similar products while competing on price.

What allowed Microsoft to do this? Well they took advantage of technology and how it allowed people to have access to it through the PC. Something had to run these PC's and therefore Microsoft hegemony becoming a platform and cementing itself deeply into the industry. This has been true from the early 90's till 2010, the year that marked a shift in the personal computing industry; another newer kind of device outsold PC's for the first time in history, the Smartphone.

This all happened because the phone industry was able to flourish on its own being no competition to Microsoft and eventually through R&D technology gave manufacturers the ability (such as Microsoft had with Windows) to offer more and more modern devices that allowed users to access the internet and solve their personal informational requirements. Unequivocally similar to history past, software was the real key to success and fast forward to today and the players are Apple with its proprietary SW and HW, Android with their own SW, while a whole host of manufactures develop phones to be used with this SW and then there's everybody else, which is where Microsoft is situated.

They key question is whether Microsoft should be worried that their traditional cash cow business in under threat. Common sense would say yes, since for the majority of users (excluding power users which use high resource applications) can satisfy their computational needs on these devices, as well as numbers that have seen a decrease in sales in PC and increase in Smartphones and experts and analyst opinions agree that this will be the case. Of course Microsoft's behavior confirms it as well, partnering with Nokia and acquiring Skype. On a side note, but I will not go into this, because it is another matter, Google is also attacking directly Windows OS in their own platform with Chrome based OS.

So how does a multi billion dollar platform and industry pillar seem to die in such a relatively quick manner. The first thing is that consumer behavior is a determining factor, and how they respond to new offers in the market determines which player can survive and which not. Another more interesting note is that acquiring a power position in the Value Chain of an industry will not guarantee you success perpetually; after you win a certain standard war or establish a platform the threat may come from a totally external source of the industry, as cellphones were to PC's. Microsoft has established a proven successful distribution chain with its products and a solid manner of capturing value, but they failed to see how customer behavior will dictate the future of it. Another key learning from this is timing, if Microsoft had switched to the smartphone\PDA model before 3G networks and other technological advances had occurred they would probably had failure, since shifting your position in a distribution network or value chain will only make sense when the numbers and context make sense.

I would like to quote a rather known quote but nonetheless a useful one: "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!" So said the queen to Alice, but what Lewis Carroll forgot to mention, at least in context to this  discussion is that it does matter towards where, when and with what you run towards customers.

I would like the following sites for their research provided:,2817,2379665,00.asp

Tuesday, May 31, 2011

Console vs Portable?

Something is happening to Nintendo's Wii which has been unheard of in its existence, hardware sales forecast have been declining, and projections say it will fall second to PS3 by Q3 2012. The Wii came about to be a low technology platform that was friendly for all users, while relying on established franchises for software rather than investing in new Intellectual Property. They turned the industry around, where the norm was to create increasingly high tech products and target the hard core gaming audience. Competitors have realized this and have released similar functionality on their consoles and apparent saturation may have been reached for the Wii.

On another side, which is sometimes overlooked, another of their star products continues to strive, the Nintendo DS, with the second largest Hardware base in Video Game history, at around 145 million units sold. As other competitors have fallen behind on traditional "mobile" gaming Nintendo has gone strong in this aspects with new models being sold almost yearly (DS, DSi, DSi XL, 3DS) with the same proprietary software model, including some new features, such as WiFi and an internet browser. Information on the margins for these Hardware products aren't public, but due to the difference in price one could assume that the Wii has higher margins, specially due to the fact that they sell much more accessories through it.

What do experts think? That the purchase of software has been reducing in terms of number of consoles in existence, a major indicator that a new platform may be on the horizon. Add this to the news that the PS4 is already in development and it seems that a new generation of console wars may be coming. With distribution moving continually towards digital and technical specification wars escalating, business might be changing for Nintendo. Traditional players have the threat of micro payment gaming online, companies such as Zynga (with their social application games) and a seeming consensus that the future and big bucks may lie away from consoles and more towards mobile and online.

If we look at this objectively, a recent study by PWC forecasted that a in a 30 month period Video Games will be a 70 billion dollar industry, with 40 billion coming through traditional distribution platforms. This doesn't take away from the current trend towards more online mobile gaming; so we can see there is an established way of doing business and a growing trend, but certainly no the death of traditional distribution.

All this being said reports are that Nintendo will come with a High End product to rival the new generations to come with high processing capabilities and 3D support. This seems to be radically different from what is said in this post and increasingly similar to what their competitors might do. This means, probably another traditional console war, in which over time the most consistent winner is Sony with most absolute HW and SW sales through all their platforms. How will Nintendo maintain its advantage from their competitors is hard to know, specially if they do the same as them. There is a significant amount of money to be distributed in the future of video games, but can Nintendo effectively compete?

This is hard to say, specially if they go from not being technologically proficient machine to one that is. If asked a visionary might say that the future of gaming will be totally mobile and digital; but numbers might suggest something different, business as usual (indicated by high investment from traditional players).

It would be interesting to see if their next console would gravitate towards being more portable and less "techy", competing in a different market than Sony and Microsoft. They would then maybe enter in direct competition with tablets and smartphones, a whole other battle in of itself. It seems that the battle lines may be drawn between traditional console gaming and more portable online gaming, with Nintendo going back to business as usual; respecting the difference between both.

Why doesn't Nintendo come up with another seemingly disruptive business idea and try to combine console and portable? They seem like a smart company and the time probably hasn't arrived yet, and more interestingly, it may never arrive.

Thanks to the following sites for information:

Sunday, May 29, 2011

Google and Time's Person of the Year

Going forward, Google will have its biggest challenge in dealing with Time's most famous person of the year, YOU. Why do I say this? Well in my opinion this mammoth of a company will find its greatest challenge in the future, and probably in their existence with your sense of security and privacy, as well as how you are being probed by a company.

This doesn't convince you? Let me illustrate an example that might give you an idea. As a digital business man/woman you're contracted by a growing company to help it "develop its business", and one of your ideas is to move IT operations to the cloud (email), with Google. How comfortable will you feel relying on a professional solution platform, that consistently revises your data and uses it actively. Do you think an older generation that is not used this will approve of you decision to let another person to be completely privy to what you and your customers share. Now apply this to your personal email, where potentially you have very personal information as well as credit card numbers and other small things you wouldn't want others to see.

You can ask yourself, why does Google do this, why probe around. Well the answer is easy, and they can't say it clearer, through the systematic analysis of your data they can (through their mythological algorithms) deliver contextual ads to you which might be of interest and more importantly increase their click through rate. A personal example; I recently booked a trip within Europe and while I received confirmation of it to my email, suddenly ads were appearing through my Google navigation of hotels in that exact same city. To my taste a little bit to personal...

It is true that now a days most digitally native people wouldn't actually mind this as much (as proven by a biased survey in my Digital Business specialization class) but I believe this will change as our life becomes even more mobile. All our interactions are becoming digital and mobile (in which Google will surely win, in my humble opinion) and we're being exposed more and more to digital probing. I would say I am overreacting, but another example might complete the loop on my story. Imagine your a Digital Native, and you really don't mind that your email and personal information (such as maybe personal finance documents) are being probed; then the digital September 11 happens. One security failure, one big PR disaster, when one person like you is completely exposed to the public, terrorist use this information to strike, credit card numbers are released or a case of corporate espionage. How do you feel now?

The point of all this is that Google has clearly shown in the past that they are experts in creating value for users and how they understand user experience. As well they have monetized this by advertisement, and are expanding to other sources, such as SaaS; they are very healthy monetarily. Albeit this they rely on knowing the customer intimately, and as time goes forward this becomes a wholly holistic view of the person, from the people they interact with to their location and financial information. This can spur discontent within the populace and rejection of their services to a certain degree where it has to be managed and dealt with (an idea is a pay for service "sans" all the revision of your data). This discontent can be brought to a tipping point through any major scandal which would become viral and raise people's awayness of how their are exposed digitally and increase opposition to such behavior by corporations. As said before, I believe that if Google continues in its current state of business it will continue to prosper, but I see a latent problem with users privacy and data security.

Unfortunately for this blogger, this is probably a told you so post, in which if Google properly manages the problem it will never become an issue, but if it explodes, I can certainly say I told you so...

A brief video from Google related to the subject: