Mark Sigal's Blog - The Network Garden

Disruption Eruption! On Netflix and Blockbuster

There is a thought-provoking interview at The Motley Fool with Blockbuster’s new CEO. 

It provides a framework for making sense of the asymmetries between what Blockbuster must do to succeed and the space that Netflix has carved out and stands above the crowd within today.

It also provides some updated grammar for evaluating the video rental market.

Instead of “online” versus “bricks and mortar,” Blockbuster's CEO speaks of “by mail” and “bricks and mortar” as the segments in play right now, and "online" as being about online downloads of movies, something that is still coming down the road. 

It simplifies the ultimate objective for Blockbuster as ‘building a merchant culture and lots of little fundamentals. ... that take time.’ 

True words for both Blockbuster and Netflix, to be sure.

Here is an excerpt that anticipate road ahead for the two companies:

‘The dynamic duo will compete in the mailing space for a few years and then shift to downloads... But until then, they serve different demographics and can coexist and grow side by side -- with the occasional bump and bruise along the way.’

Disruption and co-existence of sorts.

Wii: Being fun as a product virtue

The other day I was playing tennis with a friend on Nintendo's Wii system, and was struck by a thought. There is a lot to be learned about the way Nintendo made “being fun” a product virtue. 

(If interested in burrowing deeper into the WHAT and WHY of Wii, check out this excellent article in Fortune).

Whereas everyone else in the gaming space focused on achieving greater realism, which in turn manifested in steeper learning curves and more complexity for the user to grok with, Nintendo focused on being fun and enabling the user to engage instantly. 

Beyond my own direct experience, how fully they succeeded in their goal was brought home the other day when I was standing in a mall where demo stations were set up for consumers to SEE-TOUCH-FEEL the Wii system in action. 

In front of us was an elderly gentleman with his granddaughter.  A safe bet is that prior to this moment the gentleman had: A) probably never played real tennis before; and B) definitely never touched a videogame in his life. 

Yet, here he was playing tennis jubilantly with his granddaughter.  When the game ended, he turned to me asking if it was okay if he played one more game of tennis (we were next in line to play), and then I fully got it.  Nintendo had made the infomercial and the product at the same time, each one serving the other.

Product nuts, take note.  When product marketing and product management fit so fully hand in glove, you are destined for breakout market success.  This is a topic I have previously blogged about (see 'The Pitchman: Must read for Product Nuts').

Financial Tsunamis

I recently read a great article in CondeNast Portfolio that does a wonderful job of connecting the dots in the subprime lending meltdown. 

The market storm has already taken out the CEOs at Citigroup and Merrill Lynch, which mostly just serves to frame the fact that the turbulence isn’t limited to some lending backwater, but rather that it has upset the apple cart on Wall Street. 

As the argument goes, the real pain is destined to be felt on Main Street at the consumer level.

While I am not a pessimist, and am actually pretty positive about the level of productivity gains and innovation domains that are upon us, I do recognize a couple of storm clouds that are forming.

One is that it is easy to foresee a scenario where higher interest rates result when increased loan default rates drive the need for greater risk premiums (for lenders to lend).  There are a lot of variable rate loans out there, and especially those with artificially low teaser rates, are going to endure some pain.

Two is that you start to see how a liquidity squeeze (where lenders just don’t lend to large categories of would-be borrowers) could be pretty crippling to our economy by breaking a lot of models that assume ready access to expansion capital.

Three is how much of consumers’ exercise of wealth has been driven by equity expansion as the price of (their) homes boomed.  It will be interesting to watch how the inverse of this behavior plays out as their equity contracts. 

Having lived and worked through the build up to the tech bubble and its subsequent burst, I can tell you that some kind of hangover is inevitable. 

As a storyline with a narrative, though, it is pretty fascinating.  You take for granted the types of loans that were made to people with poor credit histories, those with no verified sources of income and those making ridiculously small down-payments.  Few appreciate the importance of the secondary marketplace in creating liquidity.  In some markets, it is just astounding the role that speculators played in absorbing inventory (the same dynamics played out in the tech bubble). 

And when you understand the role that the rating agencies played in metaphorically dipping in holy water the derivatives created from portfolios in high risk loan categories and anointing them as "investment grade," it is an AHA moment.

Here are a few nuggets from the article:

• Think of the current situation as a deep-sea earthquake. The plates shifted late last year when home prices in the U.S. stopped rising.

• The housing boom didn’t merely inflate home prices. Home equity extraction has accounted for as much as one-third of consumer spending growth at points during the boom.

• John McCain has been reciting a quote attributed to Chairman Mao: “It’s always darkest before it’s completely black.” That may be where we sit now. In August, we had a credit panic akin to a run on the bank, but on a global scale. Even companies that had made mostly safe loans—like Countrywide, the nation’s largest mortgage lender—found that the short-term-borrowing markets were closed to them.

• Companies unrelated to the mortgage market will find credit tighter as banks divert cash to cover their bets. Trades and investment strategies that relied on the cheap-money boom will unwind.

• The skittishness, however, was a symptom of larger imbalances—in the dollar, in global trade, and in American consumer debt.

But read the full article.  It is great.

RELATED LINK:

1. NY Times article, 'What Created This Monster' adds some further analysis.

The Network Garden in Top 100 List

My blog, The Network Garden, was recognized as one of the Top 100 Social Media and Social Networking blogs.  Kind of cool.  Check it out by clicking HERE.

Happy turkey day, everyone!

Assertion-based reasoning

A friend of mine had a great exercise.  He would say:

“Write up the set of core assertions about your business.  Then imagine a challenge to those assertions by your constituency base. 

Imagine them asking you to articulate the ‘WHY’ side of your value proposition.  Then imagine them responding to your answer with a collective 'SO WHAT,' either formally or informally through inaction. 

Ask yourself, what then, what would your next move be?"

In Buddhism, you have the concept of things being “workable.” Paths can be discovered, situations can be stitched together and routines can be iterated and then forged over time. 

I would assert that if you can commit to answering the ‘WHO’ in this type of model and doing so with clear specificity, then you can develop a well-grounded, workable path to becoming the ‘WHAT’ that you want to be.

V and The Quiet Coup

In the movie, “V for Vendetta” there is a memorable line where the lead character, V, calls out the people to wake up from their slumber, beginning with an acknowledgment. “I know why you did it. I know you were afraid. Who wouldn't be?”

Emanating like a Koan, in the New York Times Op-Ed Piece, “The Coup at Home,” Frank Rich asserts that a quiet coup has taken place in America. 

“What was once shocking and unacceptable in America has now been internalized as the new normal,” Rich states.  We’re not idiots, he adds, stating, “Americans know that the ideals that once set our nation apart from the world have been vandalized...”

As the canvas for drawing out his perspective, he makes ugly comparisons to the putsch that Musharraf just brought about in Pakistan:

"In the six years of compromising our principles since 9/11, our democracy has so steadily been defined down that it now can resemble the supposedly aspiring democracies we’ve propped up in places like Islamabad. Time has taken its toll. We’ve become inured to democracy-lite.

Even if Mr. Bush had the guts to condemn General Musharraf, there is no longer any moral high ground left for him to stand on. Quite the contrary. Rather than set a democratic example, our president has instead served as a model of unconstitutional behavior, eagerly emulated by his Pakistani acolyte."

I am a big believer in personal responsibility, intellectual honesty and intellectual curiosity, too.  On some level, we get the government we deserve, a point worth considering in reading Rich’s powerful close:

"To believe that this corruption will simply evaporate when the Bush presidency is done is to underestimate the permanent erosion inflicted over the past six years."

Or, put less eloquently, "shit sticks."