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:
http://money.cnn.com/2011/06/02/technology/pandora_ipo/index.htm
http://www.huffingtonpost.com/2011/02/12/pandora-to-file-ipo-looks_n_822315.html
http://en.wikipedia.org/wiki/FM_band
http://en.wikipedia.org/wiki/FM_broadcasting#Distance_covered_by_an_FM_stereo_transmission
http://www.arbitron.com/downloads/NetworkRadioToday_2010.pdf

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:
http://www.pcmag.com/article2/0,2817,2379665,00.asp
http://voices.washingtonpost.com/posttech/2010/11/smartphone_sales_to_pass_compu.html
http://www.huffingtonpost.com/2010/03/11/smartphone-sales-could-ov_n_494990.html