How to fight a competitor that does not appear on your radar?

Two years ago, Reed Hastings, the founder and CEO of Netflix, was asked who could possibly threaten his company’s domination. He immediately replied: “Our number one enemy is sleep”, and then added “And we’re winning!

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Hastings: “Our number one enemy is sleep” (Nov. 2017)

Even the greatest companies find it next to impossible to predict what might be the next big threat for their businesses. Sometimes the blind spot is so large, that it eventually eliminates the company in some cases. Compaq, Kodak, Nokia, Tower Records, and many others disappeared because they were unable to react quickly enough to the technological changes that completely changed the customers’ preferences and as an outcome their business environment.

Back to Netflix, in 2008, Jim Keyes who back then served as Chairman and CEO of Blockbuster, at those days the world’s biggest video-rental company, was quoted saying that “Netflix is not even on the radar screen in terms of competition”. Two years later, Keyes filed for bankruptcy.

Professor Clayton Christensen of Harvard University’s Business School, has studied corporate behavior for years, with a mission to figure out why excellent companies cannot predict the future and insist on promoting their outdated technologies until eventually extinct. He summarized his ideas in a revolutionary book called “The Innovator’s Dilemma”. The Economist named it as “one of the six most important books about business ever written”.

In the Blockbuster case, going back in time to 2008, the entire concept of watching movies over the internet seemed far-fetched and ridiculous (in those days the average Internet speed in the US stood at 3.5 MB). But that’s not the only reason for the Miracle called Netflix. At that year, the perfect storm took place, as Blockbuster was not the only company who could not foresee the future. Starz also had no clue how it will contribute to rewriting the TV industry history, but not as a front liner.

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Prof. Christensen: “The fear of cannibalizing sales of existing products is often cited as a reason why established firms delay the introduction of new technologies.”

Starz, the American premium TV network which features many of the greatest motion pictures of all time, signed a four-year agreement with Netflix in which the latter will be able to broadcast 1,000 different films each year out of Starz’ catalog. Netflix paid 5M-7.5M USD a year, equivalent to the price of a single indie movie in Hollywood. Netflix has leveraged the agreement to the fullest and became the world’s largest streaming company with 139 million subscribers.

How did that happen? The main cause is the inability of companies to adopt disruptive technologies, which in their early days are unstable and expensive, and as a result, the path to monetization might be not attractive enough for large companies, usually publicly traded, that focus on increasing revenues and profits in the short term (hence, the innovator’s dilemma).

The result is that established companies with handful resources allow ambitious start-ups with limited or no revenues at all, to lead the next revolutions. From the startup point of view, this is quickest way to conquer market share or to invent a new market category.

The emergence of new technologies and the speed that existing technologies are become outdated is greater and faster than ever before. The artificial intelligence (AI) revolution, the VR/AR/MR revolution, the transition to 5G network, autonomous cars — all these inventions are going to change our world completely and each and every company should be concerned by that, regardless of the industry it operates in.

The media industry is also going through challenging times. Linear TV is losing its steam with ratings falling year after year, alongside with the rise of streaming services such as Netflix and Hulu. In the next couple of years, most traditional players such as Disney, Warner Media, NBC and others will launch TV services over the Internet. These huge media conglomerates have a fair chance to survive as the window of opportunity is still open, but most TV channels as we know them today will probably not survive the transition and disappear.

These days, the 5G network is starting its deployment in the US with the tailwind of president Trump. The impact on the way we will consume content is going to change radically as websites’ banners that we hate so much will go away and make place for high quality video advertising making new formats that will look more like the Times Square screens. How big will this change going to be? According to Ovum Research, the mobile media revenues will double and reach $420 Billion in 2028. That means that other advertising formats will decrease dramatically.

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mobile media revenues will double and reach $420 Billion in 2028 (Source: Ovum 2019)

And this is just the beginning, the entire user experience will be different once augmented reality (AR) glasses will become mainstream. Unless you are deeply invested in AR, you probably have a negative opinion about AR glasses as they currently look bulky and cumbersome, and the idea that one day we’ll go around wearing those sounds unreasonable. However, we can say today with high certainty that most of us will soon walk around with glasses as such. How soon? According to different sources, in 2020 apple will release its AR glasses and that’s when the mass adoption will begin.

Back to Reed Hastings and Sleep Problem. At the beginning of this year, Netflix published worse-than-expected reports and dropped 14% a day, the reason given: “We are competing (and losing) against Fortnite.”

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Netflix, January 2019: “We are competing (and losing) against Fortnite.”

Why Hastings is losing to Fortnite? Fortnite is not a streaming service, it’s a “battle-royale” shooting game. At the end of the day, both Netflix and Fortnite are in a battle for our screen time. And Fortnite, became one of the favorite forms of spending time by Netflix’ subscribers, as for some the temptation to play a game is bigger than binging a TV series.

Netflix will not disappear because of Fortnite, but on the other hand, it does pose a real threat. As the preferences of Netflix’s subscribers is constantly evolving, so should Netflix. In this particular case, it would make a lot of sense to offer a gaming streaming service like Google, Microsoft, and others. It requires Netflix to look at itself as a streaming platform and not as a video platform. It became the most popular video service as it defined itself as a video service and not as a rental service like its rival Blockbuster did, and because of that, it made sense for Netflix to expand its service to streaming movies and not just sending DVDs in envelops.

So how do you prepare for a competition that does not always exceed radar?

1. Look at the Overall Picture

It is not always direct competition that will cause the company to collapse. Kodak considered Canon and Nikon as ideal partners for its success. On the day that the photograph became digital, and there was no need for film, those partners actually buried Kodak. The Kodak story is even more tragic as Kodak actually invented the digital camera in 1975, but was afraid of cannibalize its film business and buried the project.

History tends to repeat itself, and these days, the future for Canon and Nikon is still shrouded in fog. Chinese smartphone manufacturers that did not exist a decade ago (Xiaomi, Oppo and Huawei just to name a few) are making cameras to become redundant as they win the battle over our pocket. And it really makes me wonder, since the most important feature for a smartphone buyer is the quality of its camera. Why don’t we see smartphones from Canon & Nikon?

Another great example is Tesla that envisioned the concept of electric cars, and is now worth 50% more than ford, which invented the car production line. In this case again, it was General Motors that was first to produce the electric cars and buried the project just as Kodak did.

2. Avoid Complacency

Intel’s legendary CEO Andy Grove coined the phrase “Only the paranoid survive”. Groove helped Intel to grow from garage-based business to the world’s largest chip manufacturer. After Groove left, the company totally missed the mobile revolution and is still unable to gain a foothold in this market. When Renée James, who was the president of Intel at that time was asked how did Intel missed one of the biggest revolutions of our times, her honest answer was “We didn’t appreciate that the iPhone was the advent of mobile and ultra-mobile computing”.

3. Separate Innovation from the core business

The third suggestion is taken from Clayton’s book, and that is to encourage innovation within the organization but as a separate business unit. This model that has been warmly embraced by technology companies such as Google (with its Google X) and Facebook (with Building 8). These must be separate organizations that look at challenges differently and do not fear to cannibalize the current business of their sponsors. For example, a team at HP, the developer of a laser printer, would not be concerned about the implications of the product for the revenues of the company’s inkjet printers, although this technology could damage a very profitable product line. The working assumption is that if HP does not open laser printers, another company will do so and take market share.

Walter Isaacson, who wrote Steve Jobs’ biography, said: “One of Job’s business rules was to never be afraid of cannibalizing yourself. “ If you don’t cannibalize yourself, someone else will,” he said. So even though an iPhone might cannibalize sales of an iPod, or an iPad might cannibalize sales of a laptop, that did not deter him”.

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Steve Jobs: “ If you don’t cannibalize yourself, someone else will”

To summarize, rapid changes in our business environment force us to move quickly and make decisions, some are wrong. But only those who will be brave enough to challenge the essence of their current business and the value that it provides over time will also become part of our future.

Once an Entrepreneur, now a VC Guy. #vegan from #telaviv

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