Using BATNA to Create Leverage

If you're trying to gain concessions or get a better contract price, raise the value of your best-alternative-to-negotiated-agreement, also known as BATNA. Apple seems to be doing this with the Apple TV. Some quick thoughts:

  1. Apple is creating an Apple TV app store with interactive, subscription-based sports content apps from MLB and possibly the NFL. This creates a way for sports content providers to reach their audience directly, without licensing the content to a cable sports network like ESPN. This kind of distribution alternative improves the value of Apple, MLB, and the NFL's BATNA relative to ESPN, which has historically aggregated sports content and made it available through ESPN's cable channel. As Apple aggregates interactive, subscription-based sports apps from content providers like MLB and the NFL, and the audience for these apps grows, Apple's BATNA improves while ESPN's BATNA declines.
  2. The Apple TV app store makes Apple an aggregator of interactive app content, or content that can be manipulated by the app software infused into this content, versus static television content that cannot be manipulated. Aggregated, interactive app content increases Apple TV differentiation. The content specificity enabled by the Apple TV app store and by convenient/fluid Siri search also disaggregates cable channel aggregators like ESPN. ESPN provides an aggregated sports "buffet" rather than only covering specific sports like MLB or the NFL.
  3. The Apple TV app store will draw user time/attention away from the cable networks, likely hurting television ad sales.

Apple's efforts create pressure on cable networks to negotiate with Apple, as the value of the networks' BATNA -- preserving cable channel aggregation and/or the current system of lucrative affiliate fees that networks receive from cable companies -- goes down, while the value of Apple's BATNA -- a varied offering of subscription-based, interactive/specific app content -- goes up.

Given these dynamics it seems likely that major cable networks like ESPN and Disney will eventually offer interactive, subscription-based content apps through Apple TV. And the outcome probably won't be all broad-based, buffet style content apps or all highly specific content apps: a subscription-based ESPN app will likely exist alongside a more specific, subscription-based MLB or NFL app. Users will have more than one choice, depending on the job-to-be-done. Casual sports fans might prefer the ESPN app while hardcore baseball fans might prefer the MLB app.

I should say up front, I could easily be wrong about all of this. There are strong structural impediments to the changes detailed above, as noted by Ben Thompson at stratechery.com. Only time will tell.

The author owns stock shares of Apple. 

Blockbusters and Winner-Take-All Effects

In my last post I talked about Anita Elberse's Blockbusters, and how companies like Netflix seem to be moving away from "long tail" niche strategies toward strategies that focus on the creation/acquisition of premium content that drives blockbuster sales in the "head." Blockbusters, by Anita Elberse (Henry Holt and Company, 2013); see post titled Heads, Long Tails, and Light Consumers.

A couple stories came out right after this post: (1) Netflix announced it was giving up movies distributed by Epix -- including a few blockbusters -- to produce more original content, with Hulu picking up the Epix catalog; and (2) a rumor has developed that Apple is considering producing its own video/media content, possibly for a future Apple TV service. 

In Blockbusters Elberse talks about how premium content production can turn into a winner-take-all battle. As an example, she notes how major opera production outfits like the Met have started to dominate live-stream opera events, leading to an ever-growing, spiraling dominance. As the Met has expanded its live-stream efforts, its revenues and budget have grown larger, giving it the ability to sign better talent and create better productions than smaller opera houses trying to compete in the live-stream market. Smaller opera houses are being squeezed out of the market. Id. 

Elberse says one of the ironies of the opera house example is that cheap digital reproduction, distribution, and consumption don't actually democratize the opera house market (or any other media market). Instead, digital technology allows large production outfits like the Met to cheaply distribute the best opera product to markets formally served by smaller, less polished local players (the smaller, more regional opera houses). Id. Cheap digital distribution makes blockbuster strategies even more appealing, amplifying winner-take-all effects and increasing the importance of superstars and premium, big budget productions. Id.

In light of this, it seems like Netflix is making a mistake in giving up the Epix relationship, unless Netflix lacks the budget to simultaneously (1) acquire blockbuster content from Epix and (2) produce premium content in-house.

If you accept Elberse's theories, it also seems to make sense for Apple to try producing blockbuster content in-house. Apple has resources far greater than the other over-the-top providers/distributors -- Netflix and Amazon -- currently trying to produce premium content in-house. If content/media production is a winner-take-all (or most) market, then Apple's ample resources/budget could be a big competitive advantage/differentiator relative to alternative offerings from Netflix and Amazon.

Because it has a thriving device business, Apple is also well-positioned to distribute this content cheaply and conveniently to end users. Apple could make any content produced in-house exclusive to iTunes, possibly for a limited term, and then license this content to other distributors like Netflix and Amazon. Apple could leverage in-house content in a flexible way, maximizing the content's value.

The idea of Apple producing in-house content makes me a little nervous -- I've always appreciated Apple's focus on making the best hardware. At the same time, however, Apple's services business -- which includes Apple Music -- has always seemed to operate as a unique, separate entity (as noted by Horace Dediu at asymco.com). I think Apple can produce content through Apple services without interfering with its hardware business. It also doesn't seem like much of a stretch to go from the curated/produced content in Apple Music (like the Beats Radio shows) to movies and miniseries videos produced in-house by Apple. Premium movies and video could enhance the Apple brand and give Apple a more unique, differentiated ecosystem, which is consistent with Michael Porter's definition of effective strategy. See Concepts page and discussion of Michael Porter. 

It's interesting -- digital technology makes distribution cheap and easy, which opens movie and video production up to companies that formerly lacked the theaters or networks or other distribution vehicles needed to make content production financially appealing. Now that distribution is cheap, big budget, blockbuster productions are still strategically appropriate but are no longer the sole province of traditional content studios/networks like Disney or ABC.

Addendum (added 9/2/2015):

I should add that one other aspect I like about Apple producing movies and video is that art, whether it's a beautifully designed product, a movie, a miniseries video, or a piece of music, is always unique and differentiated and doesn't commoditize. And art doesn't have to improve over time the way most other products do -- it's timeless. As a result Christensen's concepts of overserving and "good enough" aren't really relevant. I like the idea of Apple adding ecosystem elements that are unique and don't commoditize. See post titled Art Doesn't Commoditize.

The author owns stock shares of Apple.

Heads, Long Tails, and Light Consumers

I'm currently reading Blockbusters by Anita Elberse and wanted to summarize a few thoughts on the book. Blockbusters, by Anita Elberse (Henry Holt and Company, 2013).

Elberse talks about the general effectiveness of blockbuster strategies, or the idea of a company focusing most of its resources -- including its marketing and talent funds -- on just a few products or services, whether it's movies, music, books, or electronic hardware. She makes a strong case for focusing on the "head," or sales driven by a few blockbuster products that are expensive to develop and market, versus focusing on the "long tail," or sales from targeting multiple niche market segments with a range of specialized products. Big profits are driven by the head and not the tail. Id.

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Citing William McPhee's Formal Theories of Mass Behavior, Elberse also makes the interesting point that "light consumers" who buy less frequently and know less about product alternatives tend to opt for the most popular choice. Companies with blockbuster strategies naturally monopolize light consumers. Id. "Heavy consumers" who buy a product frequently are more aware of their alternatives and are typically the ones who choose niche, long tail products. Id.

Ironically, McPhee found that heavy consumers tend to appreciate popular products more than the obscure products they often buy. Id. This suggests that heavy consumers of obscure niche products are prime candidates to eventually switch to more popular blockbuster products.

Elberse notes that YouTube and Netflix formerly seemed interested in pursuing long tail strategies, trying to provide a niche offering to every market segment. This strategy was enabled by the negligible transaction and search costs associated with digital goods. YouTube and Netflix initially seemed to believe that long tail sales would widen and lengthen because consumers would value niche offerings more than blockbuster offerings, leading to declining sales in the head and growing sales in the tail. This apparently hasn't occurred. Id. YouTube has since shifted its focus to premium "channels" from well-established stars/brands like Jay-Z, while Netflix is spending big on premium content produced in-house, like the House of Cards series with Kevin Spacey. Id.

The implications for companies like Apple seem pretty clear. Focus your resources, including your marketing and talent funds, on just a few blockbuster products, thereby monopolizing light consumers while also attracting heavy consumers. Heavy consumers may start with a niche product but they're likely to appreciate the blockbuster product more, making them prime candidates for product switching.

Addendum (added 8/26/2015):

The effectiveness of blockbuster strategies versus long tail approaches should also be good news for premium content producers like Disney, ESPN (a Disney subsidiary), and HBO. Regardless of whether consumers get this content through cable providers like Comcast or over-the-top services like Apple TV or Roku, premium, blockbuster content should remain a healthy source of profits.

The author owns stock shares of Apple.

The Perils of Growth

In Becoming Steve Jobs there's a great passage about how John Lasseter of Pixar fame became attracted to the Disney/Pixar acquisition because it would eliminate pressure from Pixar shareholders for growth through TV shows and more and more products -- Pixar was a publicly traded company when it was acquired by Disney. Disney could protect Pixar from this phenomenon, allowing Pixar to stay focused on just a few great movies at any given time. Becoming Steve Jobs, by Brent Schlender and Rick Tetzeli (Random House, 2015). To me these comments are interesting because they come from the perspective of an actual product creator rather than a strategist or CEO. It seems likely that people who create really great products -- the ones who ultimately drive a company's long term success (individuals like John Lasseter and Jony Ive) -- prefer focusing on just a few things at a time. They know they can't create something lasting and great if their efforts are diluted across too many projects.

A company focused on long term, sustainable growth/success needs to do everything it can to facilitate the happiness and success of great product creators like John Lasseter or, in Apple's case, Jony Ive and Apple's other great designers and engineers -- these are the people driving sustainable long term growth.

CEO's and corporate boards must learn to tune out noise from shareholders who demand short term growth at the expense of sustainable long term growth driven by truly great products. Company leaders must create an environment where their best product creators can focus and thrive.

When a company focuses on the long term it gives itself more time to develop lots of great leaders and creators. Careful, patient organizational development allows a company to drive sustainable long term growth without diluting product quality and brand value.

The author owns stock shares of Apple.

"Quality is the Best Business Plan, Period" and the Low End Dilemma

The quote above comes from John Lasseter, the chief creative officer at Pixar. A similar quote comes from a Jony Ive interview on Apple's product design process: "If it's not very good we should just stop ...." I think these quotes capture why certain companies -- BMW, Mercedes, Porsche, Ferrari, Disney/Pixar, Apple, and so on -- survive and prosper over such a long time period. They consistently focus on delivering a well-designed, high quality product, which leads to a great user experience, a strong brand, and high customer loyalty. These companies all put superior product quality ahead of affordability, allowing them to survive and grow even with limited market share.

Low cost, low end products often lack the quality needed to deliver a great user experience, which leads to disloyal customers who will trade up for a high quality alternative as soon as they can afford it. A college student driving a Ford compact looks forward to the day when he can maybe afford a BMW sedan.

This may explain why Android OEM's are losing business to Apple. It may also explain why low end companies with low margins often seem to disappear, while a few luxury brands survive for decades. In the short run the low end may be appealing, especially from a market share perspective, but in the long run low end customers defect and support the survival of high quality vendors.

The Low End Dilemma

Companies with a low end, modular business model -- that are trying to disrupt incumbents making high quality products that are arguably more than good enough -- face another big challenge: making the meaningful product improvements needed to move upmarket. When a company with a low end disruptive model can't move upmarket, it ends up wallowing in the low end, engaged in unprofitable, price-based competition. See Concepts page and discussion of Clayton Christensen.

This seems like the problem currently faced by many low end Android OEM's. These OEM's are assembling modular components while trying to move upmarket to compete with companies like Apple. The problem is that it's hard to move upmarket -- with meaningful, well-designed product improvements -- with a low end business model premised on cheap, modular components. An integrated competitor focused on high quality rather than price -- like Apple -- is better positioned to make meaningful product improvements (e.g., Apple Pay and Apple's Touch ID) that distance itself from low end, modular assemblers that must rely on superficial improvements to product appearance, components, or features.

This may be why so many Android OEM "improvements" amount to unnecessary changes or features. These changes often add complexity rather than fundamentally improving a product's convenience or ease of use.

The business prospects of a modular low end player that falls too far behind an integrated company making fundamental improvements are not good.

The author owns stock shares of Apple.

Pursue Excellence, Not Perfection

I've been writing recently about Ed Catmull's book Creativity, Inc. It's hard to overstate just how insightful the book is, often in a very nuanced way. Catmull talks about how companies that achieve a string of major product successes often lose the lean, small company qualities that made them successful in the first place. With every successful new product the company grows, new employees are hired, and costs go up. Employees feel pressure to cover costs and create yet another blockbuster product, pursuing a paralyzing type of perfection. They end up spending more and more time on excessive detail -- striving for a perfect product -- and too little time on really meaningful but risky product innovations.

As a company grows, it often loses the risk-taking spirit of a smaller business trying to survive. Pressure to create another "perfect" blockbuster product, increasing costs and employee headcount, and an imposing history of past successes: (1) lead to incrementally safer product choices; and (2) stifle the candid, free-flowing collaboration/feedback needed to generate outside the box ideas and innovations.

Pixar has addressed the problem of past successes by holding a "Notes Day" at which employees give unfettered, candid "notes" on how the company can operate in a more effective, cost efficient way. It's easier to justify risky new products, and to survive future competitive challenges, when operations are lean. This process teaches employees the importance of candid feedback and collaboration.

There's a cautionary tale here for Apple, which is a blockbuster company like Pixar. Apple has had a string of past successes, and there's certainly pressure to continue that trend. Apple has also been increasing its costs and headcount. The challenge for Apple is to maintain the vibrant, candid collaboration/feedback, and risk-taking spirit, of a smaller, leaner company.

The author owns stock shares of Apple.

Rosetta Stones and Strategic Balance

Everyone is looking for the Rosetta Stone that solves a problem quickly, easily, and consistently. They want heuristic solutions, which often work and are less brain-taxing, so they don't ask "why" and they don't think through a more balanced, nuanced solution to a difficult problem.

Steve Jobs made this point in an interview:

"Throughout the years in business I found something, which was, I'd always ask why you do things. And the answers you invariably get are, 'oh, that's just the way it's done.' Nobody thinks about things very deeply in business -- that's what I've found."

In the excellent book Creativity, Inc., by Ed Catmull (the CEO of Pixar), there's a chapter titled "The Hungry Beast and the Ugly Baby." It's a great example of deep thinking about corporate imperatives. 

Catmull talks about how growth and success can create the compulsive need to "feed the beast." As a company's sales grow, so also do its costs and employee numbers, creating the need for new products to: cover costs, keep employees busy, and continue growing. Corporations usually expand the product portfolio by making safe choices based on what's succeeded in the past (a movie sequel, for example, is a safer choice than an original new movie). As the pressure to quickly create increases, and the product portfolio expands, product quality tends to decline. 

A strategy that feeds the beast is often favored by sales and marketing people trying to safely drive increased sales. These folks tend to resist original new products or needed product changes that threaten existing sales, often leading to the company's demise at the hands of entrants following a new market or low end disruptive strategy. See Concepts page and discussion of Clayton Christensen

Safe products often feed the beast at the expense of original but fragile "ugly baby" projects. New projects look risky and ugly, especially relative to safe, high-returning product extensions, so they get rejected. Catmull says companies must learn to protect these new, fragile projects, at least for a time, giving them the chance to become great original products that help propel future growth. Although Catmull doesn't explicitly say so, it seems likely ugly baby projects are favored by people who design and engineer original new products.

Catmull says companies should respect the beast, because it creates a sense of urgency and promotes forward progress, but they should also respect and protect -- at least for a time -- the ugly babies that can become great products that propel future growth. Too much focus on the beast leads to an overemphasis on efficiency and short term returns. It also leads to derivative products and declining product quality. Too much focus on the ugly baby, and too much protection for new projects that aren't panning out, leads to poor focus and a declining sense of urgency. The beast can be destructive, but it’s still needed to push forward progress.

The key is to strike a balance between feeding the beast while still giving new, original projects reasonable time to grow into great products. Organic growth through a balanced approach is more sustainable than growth through a derivative, expanding product portfolio that's too focused on feeding the beast.

When it comes to corporate strategy, there is no Rosetta Stone, there is no simple heuristic. Managers must think, and must try and balance competing corporate needs.