January 31, 2011 §
Over the weekend, super-blog Engadget revealed screenshots of an apparently new product offering from Amazon. Based on the screens, which are no longer accessible from Amazon’s site, the ecommerce juggernaut intends to offer unlimited streaming of TV shows and movies, for FREE, to all Prime subscribers. Prime subs currently pay $79 annually for unlimited shipping, and Amazon has reported a strong correlation between the launch of this delivery service and an uptick in sales activity.
In and of itself, Prime may be a winner, but I think Amazon is on the brink of making a large mistake if it intends to include online media benefits for no additional charge. Here’s why:
- It devalues the online media industry. For the sake of argument, let’s attribute the full price of the Prime service to the media feature. At $79, it’s already $16 below Neflix’s comparable, streaming-only service. If it’s successful, as Amazon surely hopes, Netflix will have no choice but to meet or beat the price, and voila! There go Netflix’s profits, and Amazon’s differentiator. Listen for the hissing sound of margin escaping the industry, like air from a balloon, as the two race each other to the bottom.
- It requires heavy subsidization. Shipping is a money loser for Amazon. Even with the Prime subscription fees, Amazon spends more on shipping than it takes in, and the stats are worsening. According to its financial statements, Amazon took in $1.193B in shipping revenue last year, while incurring $2.579 in cost. Relative to the prior year, shipping revenue grew only 29%, while cost grew 45%. Yikes. It may be a perfectly sound strategy for Amazon to increase its appeal by making shipping more affordable, but with shipping being a cost center, the subsidy for the online media business has to be funded by its core ecommerce operation.
- It smells of the “causality trap”. Their research may indicate otherwise, but it’s not intuitive that the way to increase memberships to its premium shipping service is to add online media benefits. And even if their ploy were successful at growing Prime subs, it’s even less likely that the new members will buy more physical goods from Amazon (which is necessary for the subsidy to work). I think Amazon my be falling for the causality trap, in which company planners observe a beneficial correlation (in this case, Prime subs order more frequently than non subs), assume a causal relationship, and then extrapolate that if they could only drive more of the causal behavior, that the correlation will surely hold, and they’ll make a whole lot more money. But this is flawed logic. Existing Prime subs value the service for its shipping benefits and are therefore more likely to be active buyers. If new subs are lured in by media benefits, they will care less about the shipping features, relatively speaking, and can be expected to behave differently from the installed base, i.e., buy less often.
So what might explain Amazon’s strategy? It’s media business is large, contributing over 40% of its overall revenue, but while its Electronics and General Merchandise business is growing at an increasing rate (67% last year vs. 48% the year prior), Media has started to flatten, producing a comparably modest 16% growth over the last two years. So Amazon is under some pressure to try something new. It is also likely anticipating a not-too-distant future as Netflix has, where streaming and downloading online content overtakes the sale of physical media, such as DVDs and Blu-ray disks. Both are good motivations, but I think their strategy is off base. If they’re willing to invest in subsidies, as they seem to be, they could boost media service subscriptions with a more relevant and targeted offering to electronics buyers, particularly those buying units compatible with its online media services (e.g., free 12-month trial). Who wouldn’t give that a try? An offer like that would produce paying subs as they roll off the promotional period, and would help differentiate their electronics business (not to mention, leverage the huge amount of volume generated by that business already). Similar reasoning underscored Best Buy’s purchase of CinemaNow, Walmart’s acquisition of Vudu, and Sears’ recently announced partnership with Sonic Solutions.
Amazon, if you’re planning to give online media away for free to your Prime subs, you may want to take a step back and rethink that. Sorry if I’m disappointing all you Prime customers out there.
January 11, 2011 §
I was invited by the Technology Association of Georgia (TAG) to join a panel tomorrow on issues related to Product Management and Strategy. The event is postponed due to the snow and ice, but the weather won’t deter me from commenting on what I think is a very worthwhile and timely topic. Changes in the business environment, and particularly within the technology field, are imposing new demands on both functions, and together, they can navigate them more successfully. We hope to reschedule the session soon, but in the meantime, here’s a summary of my point of view on the topic …
There is a fundamental gap between business owners’ requirements and the resources actually available to deliver them. Strategic planning processes often fail to pick up or resolve this issue, and produce plans that can be unrealistic in terms of timing and resources – business owners later gripe that their failure to deliver against plan is the fault of Product or Engineering.
To compensate, business owners argue for dedicated Product and Engineering teams, which are often prohibitively expensive, or submit aggressive ROI models to ensure they are allocated the resources they need from central planning. But even if resource allocations are “optimal” for a certain point in time, product innovation and development are not static processes given fluctuating market needs, unforeseen competitive threats, and unpredictable supply chains. The average PLC is shortening and is more susceptible to disruption than ever before. Companies and industries stuck in long planning and development cycles must either defy the odds and predict the future, or develop product that may be on the path to obsolescence even before it’s released. Recall how Microsoft’s Kin was killed 2 months after launch in favor of Windows Phone 7 devices, following a 2-year development cycle initiated with the 2008 acquisition of Sidekick maker Danger. Given this backdrop, I see several developments:
- Shortened planning cycles (e.g., quarterly, from annual), or more likely, continuation of the annual planning process, augmented with lighter monthly or quarterly refreshes.
- More iterative strategic planning processes that better align business plans with centralized resources (which means the process needs to start in Q3, rather than the all-too-common mad dash in Q4).
- Continued adoption of the Agile SDLC method – competitors whose business models depend on massive code pushes will need to challenge the status quo (note how Microsoft, taken to school by Google Docs, is preparing to launch Office 365, the cloud version of its popular software franchise).
- Extension of Agile development approaches to strategy and decision-making, highlighted by deconstruction of complex problems into smaller, testable implementation stages to packetize risk (what academics call “option value”).
- Increased levels of cross-training within centralized engineering/development teams to increase flexibility and maintain alignment between supply and demand across the enterprise.
- A challenging of the notion that core competencies cannot be outsourced – I’ve now worked for two companies, large and small, that outsourced major development projects because the resources didn’t exist internally, the vendor quality was high, and the cost was unbeatable. Obviously, outsourcing won’t be viable in all cases, but it’s time to challenge the old assumptions.
- Adaptation of key functions, such as Product Management, to support the new reality. PMs will need to manage global vendors, continuously align shifting resources with development projects, navigate fluctuating priorities, and work with business owners to determine how to create and deliver a roadmap broken into bite-sized pieces.
January 7, 2011 §
During Christmas week, the FCC passed what some would call a mild Net Neutrality policy, that essentially prevents ISPs from blocking lawful content, but that generally protects their right to implement usage-based tiers. Web publishers continue to get access to the market, and broadband providers get to charge for it, so mission accomplished, right? If so, why does the debate rage on, and why, in its first few days of existence, is the 112th Congress already presenting a bill that would reverse the FCC’s effects? There are three reasons, in my view:
- The nature of multi-sided, partisan issues: common ground is hard to come by because both sides believe that if they give an inch, the other side will attempt to take a mile.
- Avoids the real issue: the recently passed policy doesn’t speak to what’s really at stake here, which is that much of our country’s innovation (and new jobs) comes from the digital sector, whose business models have become dependent on cheap distribution to consumers. Charge publishers for their share of traffic, and their profits vaporize, making investment harder to come by. The FCC policy maintains that ISPs can charge customers use-based tiers, but these days, customers have broadband choices, and who wants to drive customers away with new fees?
- Isn’t necessary: a key tenant of the new policy is that ISPs shall not block lawful content. Surely, the righteous defenders of content liberalization have noticed that while the negotiations have continued for years, no content has been blocked or “managed” in any material way. The existence of a vibrant competitive ISP market (including options for cable, DSL, satellite, and now wireless, in most MSAs) is an already effective deterrent, and there is no place for regulation when the free market functions effectively and efficiently.
So, Net Neutrality is far from resolved. And until it is, we all suffer because as consumers, we don’t know how our household budgets may or may not be effected; as Web publishers, we don’t have confidence in our economic models; and as ISPs, we don’t know that we’ll get a predictable return on our capital investments (especially given the explosive growth of online video). And don’t forget the lobbyists – actually, their profits are assured for quite some time.