(a parable about risk-taking)
Two polar bears — we will call them Bold Bear and Timid Bear — sit on an ice floe that is slowly drifting away toward open, warmer water. As their comfortable, known perch begins to melt they discuss their predicament:
Bold Bear: “This ice floe has been great for the past few months but the ice is melting and eventually it will be gone.”
Timid Bear: “It hasn’t melted much and I’m content here.”
Bold Bear: “We will have to look soon. Why not now when we have time?”
Timid Bear: “I don’t want to waste the day searching for a new home when there’s nothing wrong with this one.”
Bold Bear: “You mean except for the fact that it’s going to disappear?”
Timid Bear: “Some day it will, yes. But we know where all the fish are here. If we move, we’ll have to find the fish all over again. Maybe…what if there aren’t any fish near the other ice floes?”
Bold Bear: “There are fewer and fewer fish here. And soon we we’ll be too far to reach the rest of the pack ice by swimming.”
Timid Bear: “I don’t know. Let’s just enjoy what we have now.”
The next day Bold Bear leapt into the water and swam to a section of pack ice deeper in the interior. In time, he found fish — many more fish than before. As he looked out toward the horizon he saw Timid Bear still on what remained of the old ice floe, standing gamely on one leg as the water rose around him.
…
Businesses face the same choice between the “melting ice” of an established but shrinking market and the opportunity of a new product or service. All markets undergo change; all products have a shelf-life. Technology accelerates this cycle. Indeed, it is increasingly the catalyst for change in most industries, even ones not traditionally thought of as technology-based.
Many businesses are stuck in the cycle of trying to maximize from the status quo and pay little heed to “what’s next.” It usually manifests itself in euphemisms like “expense optimization” or “maximizing share” where margins are maintained or increased as revenue declines. But ultimately it is a terminal event. And there are a constellation of other problems that result from this myopic view, including lack of investment in future products and services. And it isn’t that businesses cannot see the threats. Like the timid polar bear, they know the risks but choose not to change. There are many motivations. Sometimes it’s fear, sometimes complacency, sometimes lack of creativity. But it is almost always a choice.
Take the video content rental market as an example. The business model that powered Blockbuster was ushered in by technical innovation — mass market video cassette players.. Over 25 years, from the early 1980s, that industry grew rapidly with the model moving from one physical media (VHS) to another (DVD). As devices to play that physical video content became cheaper and more accessible, Blockbuster’s retail stores multiplied. The next technology change was what impacted Blockbuster’s model: the advent online streamed or downloadable movies.
Blockbuster could see the shift coming. Like the melting ice floe, the rise of YouTube, the birth of NetFlix and the addition of movies and TV shows to iTunes evolved over multiple years from startups and catalogs limited by selection and time to mainstream adoption. On paper, Blockbuster should have won the race to online content handily — they had all the relevant licensing agreements, they had the purchasing power. They also possessed the strongest brand. Of their principal competition, Apple was best known for music players and computers and NetFlix was a startup company mailing DVDs. Despite those advantages they lost the race and, ultimately, their business.
Blockbuster saw the opportunity but waited — the profit and commitment to retail presence is too attractive. The ice floe may be melting in that first year of commercial-ready streaming video, but they can still hit their numbers. As revenue declines profit is maintained in the time-honored way: by cutting expenses and investment. As the losses accelerate — as the ice shrinks — they search for a quick remedy. First competing with Redbox on kiosks (retail in a different form) and an initial attempt at streaming. Late to the game with both offerings, it was not enough to forestall their slide into bankruptcy in 2011.
Netflix embraced the technology. It’s easy to connect the dots backwards, but in 2005 the consumer landscape for streaming content was uncertain. Broadband penetration was less that 35% of US homes, and the quality of service on many connections yielded a stuttering, low frame rate experience. One could envision how technology would make streaming content viable at some point in the future, but when they launched that day had not yet arrived. Their postal mail exchange of DVDs was a stable business but one with limited prospects for growth — and one that did little to threaten Blockbuster’s core business.
Why did Netflix succeed where Blockbuster with all their vast resources did not? Two reasons: One, Netflix saw their value proposition to their customers as one of maximum convenience — first postal mail, then streaming. They were not wedded to a model to deliver that mission of convenience. Two, they were willing to embrace a technology not fully formed, betting on their own ability to realize its promise. In contrast, Blockbuster viewed their business entirely through the lens of retail presence. They were the “video store” company and not the “video content” company.
The challenge for many businesses is to find the right balance of innovation and maximizing commercial opportunities. No company proposers by taking crazy risks. But no business survives without innovation. In a time of rapid technological change, the ice melts faster. The landscape is littered with the wrecks of companies who held on to an old model too long. It is exacerbated for some public companies for whom strategy extends no more than one quarter ahead. What is remarkable about companies like Netflix (and others like Amazon and Apple) is not that they innovate — it is that they are willing to take risks. That they will do so even if that investment may not pay off for a year or longer; or that it will canibalize an existing business.
And this is not a new story. Three examples from the last thirty years:
- Microsoft was once the largest reseller of BASIC language interpreters in the world. Computer language software represented their was their entire business until they embraced the opportunity to build and sell operating systems to the new IBM personal computer.
- GEICO sold their insurance over the phone and through local offices until a new platform called the World Wide Web offered a new way of attracting and servicing customers.
- Apple ended the 1990s as a niche manufacturer of personal computers with a market capitalization of $9.29B.
Further reading:
http://www.bloomberg.com/news/2010-09-23/blockbuster-video-rental-chain-files-for-bankruptcy-protection.html
