The Network Garden - Mark Sigal's Blog

The 3 S's of a Good Partner: Smart, Strategically Aligned, Skin in the Game

Effective partnering strategy is one of the areas that many businesses struggle with, especially startups.

Specifically, companies gravitate between two extremes. One is the wasted cycles of 'press release' partners, where the deliverable is a press release full of platitudes, but nothing tied towards product or push (i.e., growing sales or distribution).

Two is the realm where material resources are committed in the form of product development or marketing spend where the outcome goals are simply nebulous.

For startups, the dilemma of when and how to partner is doubly confusing, as entrepreneurs fight daily the often conflicting challenges of: A) Maintaining the optics of forward progress; and B) Managing the harsh truth that nothing is truly free.

Simply put, every commitment is an offset of an already precious recource, be it time, reputation or dollars.

So how to decide when a prospective partner is worth the investment of real engagement and/or dollars?

My experience has been that when the following three assertions are true, a bonafide partnership has the elements to take root.

1. They're Smart: In the universe of customers, partners and investors, there are smart partners, who make you better by asking the right questions, pushing the right outcomes, and opening your eyes to the big picture; and those that don't. To be clear, this isn't about IQ; it's about Contextual Intelligence.
2. They're Strategically Aligned: Strategy is all about where you want to get to at the end of the day. Is the partner striving to get to a place that you specifically want to go? Are they taking complementary vehicles to get there? 
3. They have Skin in the Game: There is a great axiom about chickens and pigs. In terms of putting food on the table, both the chicken and the pig can get the job done. But there is a fundamental difference in their level of commitment. The chicken (hen) is merely engaged when it lays an egg. But the pig is truly committed, as it has real skin in the game in serving up its bacon. Moral of the story? Look for partners with real skin in the game. They are less likely to go AWOL or randomly change directions on you at the most inopportune times.

Related:

1. Would you rather work with a chicken or a pig?
2. What Makes Us Happy?
3. Start in the Middle

It's All About Them: Understanding Selfish Narratives

I was talking with a friend the other day about their career aspirations. To their credit, they were REALLY clear about their bulls-eye, what they are looking for and why, which is great. I am an advocate of casting one's net narrowly and specifically, something I call a "narrow net" strategy.

But one thing that I noticed as my friend was talking was how little of their peronal narrative was focused on the selfish goals of the company that would hire them.

This underscores a fairly common truth that many struggle with. We love to hear ourselves talk - especially about ourselves. This explains why most of us are great self advocates.

But, here's the rub. Other people are focused on THEIR aspirations and their narratives.

Hence, understanding this essential truth is often the difference between getting the:

• Sale
• Job
• Girl (or Guy)

And not.

My advice then is this. Work backwards from the "selfish narrative" of your audience, be it prospective employer, customer, new hire, publicity target or love interest.

Ask yourself: what are the selfish narratives that speak to them most clearly, compellingly and why?

What kind of story can you tell that credibly expresses that that's you?

After all, empathy and understanding are not just about being good. They are also about getting the outcomes that you want.

Related:

1. Career Path: The Narrow Net Strategy
2. Instagram, Kodak and the Selfish GeneUnder

Tim Cook on the relationship between collaboration and integration to Apple's success

This Businessweek interview with Apple CEO Tim Cook is an excellent read, but I really nodded when Cook talked about Apple's unparalleled level of integration and the role that collaboration plays in their culture and organizational structure, inasmuch as it points a bow around the core thesis behind my recent GigaOM article on the age of indivisibility and integrated systems design. Here's Cook:

"You look at what we are great at. There are many things. But the one thing we do, which I think no one else does, is integrate hardware, software and services in such a way that most consumers begin to not differentiate anymore. They just care that the experience is fantastic. So how do we keep doing that and keep taking it to an even higher level? You have to be an A-plus at collaboration."

Sounds sooo simple, yet just a tiny handful of companies on the planet have found a way to do this across products segments, product lifecycles, and do so at scale -- over a multi-year period. That's the magic of Apple.

Read the full Cook interview HERE.

Read my GigaOM piece HERE.

OMG, WTF is going on with Apple Stock?

Apple stock is down 25% since late September, and the pundits, naysayers and Apple haters are all saying that if there is this much antipathy for Apple stock, maybe the smart money knows something.

The narrative reasoning behind this is straightforward, and it goes like this. One year after Steve Jobs' death, Apple's magic is gone. Siri sucks. Maps suck. iOS 6 is buggy. There is no more iPod, iPhone or iPad like 'breakthrough device' in the offing. Tim Cook isn't Steve Jobs-like in keeping his management team moving in lock-step. The Apple Retail hire was an obvious cultural miss-fit from day one.

Finally, the competitive offerings are getting 'good enough,' meaning: A) Margins are destined to be under pressure; and B) The flow of devices into customers hands, and cash into Apple's coffers, are poised for disruption.

First off, let me say that in early September I predicted this EXACT backlash to play out following the iPhone 5 announcement (see: 'Get ready for the Apple + iPhone backlash').

You can read the piece to gauge the many reasons why market indigestion was a given, but that doesn't address the larger question of whether Apple has really lost its mojo, or not.

I have three thoughts on this one:

1. Stock Value: Apple is trading at a trailing price-to-earnings (PE) ratio of <12, and a forward PE of 9. By contrast, Google, which missed its latest earnings, is trading at a trailing PE of 20, and a forward PE of 14. Unless you believe that Apple is worth 60% of Google, it doesn't take a rocket scientist to conclude that something is amiss. In fact, the always-excellent Andy Zaky at Bullish Cross has done detailed analysis showing why at no point in recent history has Google been a better investment than Apple (see: 'Buy Google or Apple? The Answer is Simple'). Similarly, I wrote a piece some time back arguing that Apple is a "Gold Standard" investment, reserved for category leaders that consistently out-execute the competition; the point being that Apple's peers are not HP and Microsoft, but rather, Amazon, Google, Disney, Nike, McDonald's, Southwest Airlines, Berkshire Hathaway, Proctor & Gamble and Coca Cola. So what are those guys trading at? Factoring out Amazon, which trades at a wacky PE of 2,679, the averaged PE of those companies is 17.32. Again, Apple is trading at a PE that is 68% of the value of the Gold Standard companies (see: 'What is Apple Worth? The 'Gold Standard' Thesis'). The key point here is that whether you believe, as Andy Zaky argues, that Apple is a $1,000 stock in the next year or not, you should have conviction that Apple's stock values are out of whack.
2. This Time is Different: Uh, no. Actually as Horace Dediu at Asymco shows, Apple has had multiple of these types of valuation contractions over the years, as the market is fairly simplistic, dumb and reactive when it comes to the Apple narrative. Also, know that Q4 is routinely their weakest quarter since it's the wedge between back to school and holiday, and typically the new iPhone launches late in the quarter, meaning that revenue does not pop until Q1, the holiday quarter. Analysts always miss this, and in fact, last year the stock dropped 13% based on the same narrative. Just as last year, the miss was analyst numbers, not Apple's, something that I noted then. In fact, following last year's Q4 disappointment + end of year tax selling through to their Q1 earnings call (end of February), the stock went up 44%. If it did something comparable, the stock would trade at $750.
3. Apple and its Ecosystem: The other big picture is whether there are systemic issues fundamentally breaking Apple. Corporate culture is certainly a risk, and I am NOT betting that the company has another breakout iPad or iPhone type of device in 2013 (color me dubious on a game-changing Apple TV, which I blogged about HERE). Then again, they don't have to, as they are not priced richly, and there are a lot of legs left in iPhone and iPad in my opinion. Margins? Well, the margin story never ends, and yes, iPad mini tightens margins a bit, but then again, Apple's stock price assumes a margin collapse. What happens when margins tighten, but it's minimal? Is Apple losing business? Are they losing profits? Are they failing to generate cash? The answer is obvious - NO - so it really comes down to your intestinal fortitude and cash urgency as an investor. 

Obviously, I know no secrets, but if I were you, I would embrace the Warren Buffett-ism: Be greedy when others are fearful, and fearful when others are greedy.

The market is acting fearful. Be greedy.

UPDATE: I thought that Tim Cook's comments on the relationship between integration and collaboration (in BusinessWeek interview), and how the translates to uniquely Apple execution was instructive. There are a small handful of companies on the plan that have the DNA to do this.

Related Posts:

1. What is Apple Worth: The 'Gold Standard' Thesis
2. Get ready for the Apple + iPhone backlash
3. Why the Rumors About Apple Building a Television are Wrong (O'Reilly)

 

The Jobs Engine: On Indivisibility and Integrated Systems (GigaOM)

There is a looming sense, a dark narrative that America’s best days are behind it. Why? A clash of civilizations. A sense in many pockets of the country that we are living in a time of anomie, inequity and worry.

Everywhere you look, there is disaster. At ground zero are the remnants of a 100-year flood known as the 2008 financial crisis; it’s a flood that never completely receded.

Put another way, whether you are politically right or left, believe in trickle down or trickle up,  the hard truth is that there are few catalysts for significant job growth in America right now.

Take a look at that one great wonder and power of our age, broadband internet. In many ways it has been an engine of growth and created whole new industries. Yet it has also set off a wave of painful disruption, through the triumvirate forces of:

• Digitization: Anything that can be turned into bits, will be.
• Globalization: Where location can be rendered moot, it will be.
• Commoditization: When bits and logistics can commoditize, they will.

In its wake it has permanently broken or even destroyed multiple industries. In fact, Bureau of Labor Statistics data shows quite clearly how such industries that were rocking and rolling prior to broadband are now sucking wind, including electronics stores, book stores, electronic components, employment services and information services, to name a few.

Less obvious, but equally troubling, is the fact that when these industries break it also disrupts the ecosystems that surround them as well, cascading in a domino effect. 

Here’s how it works: When an industry like print media goes sideways, not only do publishers and the employees housed within them go away, but so too do printers, production houses, delivery trucks, book stores, newsstands, book reviewers, sales reps and publicists. Worse, this hits regional hubs especially hard. And we now know those jobs are not coming back. Ever.

The immutability of this dynamic hearkens to a signature line in Oliver Stone’s ever timely, ‘Wall Street,‘ when broken trader Bud Fox (Charlie Sheen) asks corporate raider Gordon Gekko (Michael Douglas), “Why do you need to wreck this company?” Gekko retorts, “Because it’s wreckable, all right?”

Read the full post HERE.

UPDATE 1: Kevin Kelly, author of 'What Technology Wants' (one of the more thought-provoking books of recent years), and long time Wired writer, has written an excellent article on what he calls 'The Post-Productive Economy.' Most fundamentally, he argues that sustaining growth waves take decades to reach full bloom, yet our measures are tailored to both the wrong kinds of metrics and the wrong sense of periodicity. I think that it further underscores the truth that the strongest counters to Commoditization, Digitization and De-Localization is Integration.

Related:

1. Retail Needs a Reboot to Survive (GigaOM)
2. HP, Dell and the Paradox of the Disrupted (GigaOM)
3. Assessing the Internet: Great Creator or Better Destroyer (GigaOM)
4. The Great Reset: Why Tomorrow May Not be Better than Today

HP, Dell and the Paradox of the Disrupted (Guest Post @GigaOM)

If a picture is worth a thousand words, what story does the above picture tell? It tells the story of one of the most dominant coalitions of our time — Wintel — coming apart at the seams.

In quantitative and qualitative terms, it suggests that if this is the best that the four horsemen of the PC industry have to offer going forward, this tale won’t be ending too well. And things are looking particularly grim for Hewlett Packard and Dell, the two best-known faces of the personal computing industry (see also, “HP: The Garage is Closed”).

As much as anything, it’s a stark reminder that disruption doesn’t give a crap about legacies. This is something that I have seen again and again in my twenty years as an entrepreneur in network infrastructure, Web-based services and mobile applications.

Read the full post HERE.

Related:

1. Pattern Recogntion: Differentiate or Die
2. HP: The Garage is Closed
3. Pattern Recognition: OEM Roadkill Ahead

Pattern Recognition: Apple Vindicated; Retail Schadenfreude; Disruptive Paradox

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Apple Vindicated: What protection does the industry's innovator merit against shameless knock-off artists? Does anyone really want to argue that what Apple has created is NOT uniquely proprietrary? That it merits less consideration than a Gucci bag or a new erection pill? Yes, I get it. Our patent laws suck, and there are ridiculous numbers of frivolous lawsuits, but Apple v. Samsung is not one of them. Feel free to pick apart this aspect or that of the IP that Apple is claiming, but know this. Apple has built proprietary differentiation, and by simple sniff test logic, they've earned the right to protection. It's not a god-given right that I can enter your house, eat from your refrigerator and not pay for it. To me, there is justice in this ruling; and vindication for The Legacy of Steve Jobs. No less, it's one year to the day from when he resigned as CEO of Apple. Talk about tributes!
2. Retail Schadenfreude: I love retail. My first career was in retail real estate. My brother is a shopping center developer. I can wax poetic about the magistry of Cheesecake Factory. But, I also love Amazon, and feel that they are a great retailer, and consistent innovator. Obviously, bricks and mortar has a place, wherever it can create differentiation. Otherwise, it will get Amazon'd on price. That's why I have little pity for Staples, just as I had little pity for Circuit City or CompUSA before that. These are businesses that either never had heart (CompUSA and Circuit City), or simply lost it (Staples); who killed the Mom and Pop just because they could. Now, Amazon is killing the Big Box. Karma's a bitch, isn't it? 
3. The Disruptive Paradox: In the movie 'Joe Strummer: The Future Is Unwritten,' a documentary about the life of the founder of The Clash, there is a great line uttered by Bono talking about the vibe in England and Dublin in the 70s. Bono says, "I was frightened...I was excited." That sentiment is applicable to our present time. Many, many industries in a deeply screwed mode. A completely unhealthy, ineffectual political system. Oh, and institutionalized conflicts of interests between Big Business and the government apparatus (I am intentionally distiguishing between Policy Creation and Policy Adminstration). Yet, something HAS to give. The patient will not simply get better with time. You can look at this pessimistically, and with cynicism. Or, you can be a little scared, but also be excited. Because we are at the end of a cycle, and approaching the beginning of a new one. It's post-global, post-digital, and post-commoditization. The new cycle is about making the inefficient more efficient, and creating differentiation where commodization exists. This is the 'stop the film and discuss' portion of the program. It stands to reason that some companies will figure this one out, providing the essential case studies for many others to get to the higher ground of re-invention. Be scared. But also be excited.

Pattern Recognition: User Interface Design; OEM Roadkill; Cheesecake Logic; Quotable

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. The Principles of User Interface Design: Many, if not most, products deliver a poor user experience (see the excellent book 'The Inmates Are Running the Asylum' for more fodder on this topic). While it's easy to throw out terms like 'keep it simple' or 'minimalism,' that still doesn't answer the larger question about what the guiding principles are for sound user interface and interaction design. Having built a ton of products across: A) Type (hardware, software, service, tools); B) Segment (consumer, enterprise, developers, carriers); and C) User Environment (PC, mobile, Web, network device), I thought that this article provides an excellent compass for newbies and leathered veterans alike. EXCERPT: "To design is much more than simply to assemble, to order, or even to edit; it is to add value and meaning, to illuminate, to simplify, to clarify, to modify, to dignify, to dramatize, to persuade, and perhaps even to amuse."
   
2. OEM Roadkill Ahead: In 'The end of the road for OEMs,' Sebastian Anthony puts forth a compelling argument that the days of the hardware OEM are numbered. But, in doing so, he misses a key reason why. The simple fact is that in the post-pc era, software is a greater differentiation point than hardware. Software, as Marc Andreessen correctly notes, is eating the world, and today's hardware OEM doesn't understand software as anything other than a layer to be abstracted away. As such, this isn't the end of OEM's per se; just the end of OEM's that lack true software competency (see Acer's feckless attack on Microsoft for their hardware end-run). Bubbling under the surface, however, are hardware OEMs that natively grok software. Look to Kickstarter and other Maker-friendly spots to see the seeds of such innovation germinating.
3. Cheesecake, Chains and the Health Care Industry: In this excellent New Yorker piece, Atul Gawande looks at the processes  and management culture by which a restaurant chain like Cheesecake Factory can serve its 80M customers a year a diverse menu of fresh, high quality food at a reasonable price, and do so consistently, year-after year, and location after location. It makes Gawande wonder what the health care industry can learn from Cheesecake Factory, a great entry point to some illuminating writing. EXCERPT: "In medicine, too, we are trying to deliver a range of services to millions of people at a reasonable cost and with a consistent level of quality. Unlike the Cheesecake Factory, we haven’t figured out how. Our costs are soaring, the service is typically mediocre, and the quality is unreliable. Every clinician has his or her own way of doing things, and the rates of failure and complication (not to mention the costs) for a given service routinely vary by a factor of two or three, even within the same hospital."
4. Can I get a Quote? If you have ten minutes or an hour, Fred Wilson's Fun Friday post is a group thread on favorite quotes. There are many gems, but this dandy by Teddy Roosevelt stood out for me: "It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."

Pattern Recognition: Caveat Platform; Atomic Units; 'Too Big To Fail' Nation

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Caveat Platform: Ok, I am mucking with Latin in places that I shouldn't, but the moral of the story this week is that trusting platform makers that you don't give any money to is a recipe for getting lathered up, and given the "special" treatment. There is no free lunch, as Dalton Caldwell lamented this week with respect to Facebook. There is no honor (or even recognition) for your contributions, as Howard Lindzon lamented this week about Twitter. Folks, when will we learn? Free is just too expensive when you are counting on building your business on top of it. Free can disappear tomorrow, change course, or in the case of Twitter, turn from idealist to carnivore in a snap. And why not? It's free. You got what you paid for, right? It's ironic that when I wrote my article, ''The Scorpion and the Frog,' about the then-nascent iOS, I actually wondered if Apple would fall back into its old ways of screwing over its developers. Yet, they have been practically saintly in contrast to everyone else. Then again, I could just as easily add "open' to this rant, but I've already done that in another piece, which you can read here, if you'd like.
2. The Atomic Unit of Your Product/Service: Man, I hate Fred Wilson. Rich, successful, reasoned, humble, inclusive...and a great writer and thinker. Fred, leave some morsels for the rest of us, will ya! Every week, it seems that there are two pieces he writes that cut through the cobwebs in my brain, giving me a wee bit more clarity. This week, it was Fred's piece on understanding the atomic unit of your product or service; namely the fundamental object at the root of your offering. Why is this important? Because it cuts away all of the bullshit that gets us to focus on the wrong stuff. In Twiter, it's the act of tweeting, or the tweet. In Instagram, it's the photo. Now, while all businesses need to understand their atomic unit of value, early stage REALLY needs to focus on this, as otherwise, your minimal viable product (MVP) will be a slathering bunch of ingredients, a discordant messs. What's interesting about Apple in this context is that their universe seems to built around the very concept of reducing complex systems to atomicity. They are the builders of russian nested dolls, executed across multiple dimensions. In any event, read Fred Wilson. Do it. Now.
3. When Even Sandy Weill knows TBTF is Unstainable: When a guy like Sandy Weill recognizes that Too Big Too Fail is unsustainable, isn't that akin to rats leaving a sinking ship? I mean, who else really needs convincing? After all, Weill's legacy is predicated on the ongoing viability of Citigroup, itself a by-product of his ability to stick a shiv in the back of the Glass-Steagall Act, the 'hit' that started it all. A big vainglorious ego doesn't abandon its life creation unless a great power dictates otherwise. As Matt Taibbi suggests, that greater power is money; namely the fact that Citigroup is worth a tiny fraction of what it was when Weill left the company, which, given the precipitous and dramatic nature of its collapse in 2008, he is probably still holding a lot of beaten down stock shares from. Break it up; value is unleashed, and Sandy gets to enjoy the mega-rich life again (ok, he is plenty rich), something his 2004 bio underscored his love of quite well. The bottom line is that when the folks at ground zero say, "enough," that should be good enough for the rest of us. Or, as Weill's former co-CEO John Reed says best, "I would compartmentalize the industry for the same reason you compartmentalize ships. "If you have a leak, the leak doesn’t spread and sink the whole vessel." Amen. Don't we know this already?

Pattern Recognition: Microsoft's Lost Decade; Differentiate or Die; Building the Whole Enchilada

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Microsoft's Lost Decade: Once upon a time, Microsoft dominated the computing industry like no other. They were absolutely terrifying if they viewed you as the competition, as Borland, WordPerfect, Netscape, Lotus, Apple and many others can attest. Yet, Microsoft under Steve Ballmer has become a decidedly different company; one that has repeatedly gotten outflanked by Apple and Google. In fact, just ONE Apple product, the iPhone, now generates more revenue than the entirety of Microsoft's offerings. How did this happen, and why did I suggest back in 2007 that a decay was coming. Read this engaging Vanity Fair article to find out.
2. Differentiate or Die: We see it in the PC space, a market so commoditized that the only hardware OEM that is making any money is Apple. And of course, we are seeing how totally Apple is killing it in the post-PC market with a completely integrated and differentiated set of offerings that the competition can't touch. As John Gruber of Daring Fireball notes, "It’s a testimony to just how remarkable Apple’s last few years have been that 23 percent year-over-year growth (this past quarter) looks so bad on a chart." Meanwhile, this week we saw it in the grocery space, where Whole Foods (aka 'Whole Paycheck'), who StockTwits founder Howard Lindzon calls a 'platform business for new unique food brands,' is crushing it. Meanwhile, it's undifferentiated competitor, Safeway, is majorly struggling. I have a general thesis on this one. The conventional wisdom the past 20 years has been dominated by the loosely-coupled, 'horizontal' model that made Microsoft a lethal killer (upon the release of Windows 3.1 in 1992). That model was so effective that it made Bill Gates the richest man in the world, and industry after industry embraced horizontal as the 'one right way.' With the advent of the Internet, however, the downside of horizontal - a vicious cycle of commoditization - played out. Now, we are at the end-game, a point where few companies can make money under this model, unless they are the core supplier of the secret sauce. Thus, I believe that the next 20 years will look less like Microsoft and more like Apple; namely, tightly integrated, and vertically focused businesses where bricks to clicks are logistically worked out in a more than the sum of the parts fashion. Bet on the companies that figure this one out.
3. Building the Whole Enchilada: Speaking of the vertically integrated trend, BuzzFeed is a social news organization founded by Jonah Peretti, co-founder of Huffington Post, and they are killing it. This letter from Peretti to his BuzzFeed cohorts provides a great window into how a startup (in publishing, no less) is embracing a vertically integrated product strategy to breakout success. Here is an excerpt: "Most publishers build their site by stapling together products made by other companies. They get their CMS from one company, their analytics package from another, their ad tech from another, their related content widgets are powered by another, sometimes even their writers are contractors who don’t work for the company. This is why so many publisher sites look the same and also why they can be so amazingly complex and hard to navigate.  They are Frankenstein products bolted together by a tech team that integrates other people’s products instead of building their own. At BuzzFeed we take the exact opposite approach." Read the whole piece HERE.

Pattern Recognition: Dream Team dissage; Amazon the Assassin; Late Bloomers

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Kobe vs. Dream Team: Kobe Bryant decided to rally his 2012 Olympics teammates by suggesting that their team could beat the 1992 'Dream Team,' which is widely considered the most skilled, dominant Olympics team of all time. The response was predictable. Michael Jordan shredded Kobe. Magic Johnson retorted via twitter, "The 1992 Dream Team had 11 HOFs, 23 champ rings & the greatest player of all time in Jordan. No chance this years team would take us." But the best retort of all? Larry Legend (aka Larry Bird), who disarmed the whole thing, sagely noting, "They probably could (beat us). I haven't played in 20 years and we're all old now." Amen to that!
2. Amazon's Same-Day Delivery: I have written previously about how retail needs a reboot, and how those retailers that can't differentiate in the age of Amazon-powered 'showrooming' will die. Well, the next game changer is coming, and it's same-day delivery, something this excellent Slate article argues will destroy local retail. Meanwhile, two nice bookend reads to this story were: A) Herb Greenberg ruminating on the question, 'Is Costco Broken?' It looks at how changing demographics coupled with Amazon slowly (but surely) moving into its turf are breaking the big box retailer; and B) How Amazon's platform strategy is the ultimate in co-opetition.
3. Late Bloomer, not a Loser: Loud, brash, pompous and impassioned, Dave McClure is not an easy guy to figure out. Seemingly using little more than duct-tape, perpetual movement and a wee-smidgen of pedigree, he has willed himself into becoming a venture captitalist. If this sounds like I am dissing the guy, it's quite the opposite. Not everyone is born with a silver spoon in their mouth, joins the right fraternity or has the 'native' gift of the midas touch. Some (of us) have to climb steep mountains and get cut over and over again to get to a higher plateau.  Dave's heartfelt piece this week was a reminder of this truth, and put a big smile on my face. It was earnest, exposed and very real. Kudos.

Pattern Recognition: Mad as Hell; Playing by the Rules; Cyclical Markets

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Mad as Hell: Henry Blodgett of Business Insider has written a fire and brimstone piece intoning that Americans should be 'mad as hell' at big business and the greed mongering 1% for squashing our sense of egalitarianism. But in digesting the piece, I was left with three thoughts. One, it's reminsicent of the story that I read about in junior high school of how totalitarian societies actually encourage symbolic protests by their citizenry. Why? That way, their beleaguered populaces let off some steam, making them less likely to actually rebel. In other words, Blodgett's "get angry" piece feels very similar, encouraging us all to go hit a pillow. Two, is that the most powerful incentive systems are ones that offer variable rewards, and so long as the stock market goes up more often than it goes down, the prevailing narrative will remain, "Keep trying. You still have a chance." (If that goes, look out.) Three, reading the comment thread of the piece frames our collective inability to have anything other than a one-track, linear discussion about what ails our society. It's as if our economy, industry, governance and way of life is just a big black box of inputs and outputs. The truth, however, is: 1) There are NO catalysts for net job creation; 2) Both parties are completely conflicted based upon the revolving door between government and private industry, and the role of big money lobbying and PACs in instituting policy behind closed doors; 3) Even if there was a spirit of adult compromise in Congress, 270 members of Congress and Mitt Romney have signed Grover Norquist's Pledge, stating that under NO circumstances will they approve any legislation that creates new taxes. A policy that costs $2, but cuts $8? Can't do it under The Pledge. Think about that one if you have ever been responsible for negotiating an operating budget with others; 4) Whether you appreciate the power of Creative Destruction or not, the reality is that it moves on its own timeline. It could be 5, 10 or even 20 years before a new job-creating catalyst arrives. Hence, simpletons that suggest that government should "do nothing but cut taxes and get out of the way," blissfully would have us play the societal version of Russian Roulette by ignoring this inconvenient truth that's playing out in countless pockets across the country; and 5) "Greed is good," as the only rationale that you need for any decision in business (or life) can't end well since it incents businesses and citizens to make decisions that provide short term rewards blind to long-term costs. Moral of the story: A wise person once said that the real challenge in life is learning to manage the paradoxes, for true quality and true sustenance comes from embracing the AND, not the OR. To be clear, though, being an AND means that there are a lot of things that you CAN'T do. Case in point, it's the reason that Apple can be hardware, software, service, tools, marketplace, ecosystem AND retailer, but fundamentally, has only one platform, and only one SKU per device type. In other words, rather than us being 'distracted' by being mad, we should focus instead on codifying a coherent mission statement for America in the 21st century, and the requisite plan of record, collective sacrifice, proper incentives, and checks & balances required to bring it about.
2. Playing By the Rules: There is an axiom that it is better to ask for forgiveness than to ask for permission. Sadly, playing by the stated rules is NOT a winning recipe. It's for chumps, and there's certainly no glory in being a martyr. Remember, Google didn't ask to link, YouTube didn't ask to encode, Facebook didn't ask to create the social graph. And, Wall Street? If there's an industry that more fully lives by the ethos "loophole," I don't know of one. By the same token, when you live by the sword, you should be prepared to die by it. A little moral hazard goes a long way. 
3. Cyclical Markets: Before I got into tech, my first career was in real estate as a retail shopping center asset manager. Having cut my teeth professionally in Los Angeles during the Savings and Loan Crisis of the late 1980s, I understood the dynamics of managing through markets where over-development and desperation created a death spiral of high vacancies, high rates of business failures and plummeting rental prices. As luck should have it, when my business partner and I expanded the operations to the San Francisco Bay Area, we found a market that was a picture of the 'calm before the storm.' In other words, all of the environment variables were similar to what had played out in LA; it was just that the Bay Area was ~12 months earlier in the cycle. Hence, while prospective client after client proudly told us how the Bay Area was 'different,' we knew better, and cautioned them accordingly. When the tide turned, we looked like visionaries, and cleaned up, building a business that would become one of the Top 20 Real Estate firms in the Bay Area. The moral of the story is that markets evolve cyclically, and if you can read the tea leaves of markets that are further in the cycle, and apply them to markets that are earlier in the cycle, you can make serious coin. Consider, that for the past 20+ years, the democratization of the PC, led by horizontally focused Microsoft and Intel, taught companies not only in the computer industy, but in orthogonal industries as well, that you couldn't win by building the whole enchilada. Being horizontal, so the conventional wisdom went, created bigger markets, more diverse ecosystems and more opportunities to create wealth. Flash forward, and now horizontal has played its course, resulting in too many hollowed out industries where the product has become a commodity and the customer won't pay a penny more than its worth. We've seen this trend play out in big box retail, personal computing, media and many other segments. Meanwhile, Apple has taught us that through vertical integration (based on a coherent differentiation plan), comes margins, profits, customer loyalty and thus, defensibility. In other words, if the last 20+ year cycle was all about riding the coattails of commodization through horizontal orientation, the next 20+ year growth cycle is all about building new differentiated growth vehicles that are powered by vertical integration. Thus, if you want to look and feel like a visionary, and make a mint in the process, focus on identifying segments where this type of disruption is available. Best of all, most of these segments will already be in a world of hurt. Buy low, and some day you will be able to sell high.

Pattern Recognition: Connectors; Winning; Facebook's Growth Team

My goal is to write one 'Pattern Recognition' a week. Just the top 3-4 stories that stayed under my skin. Here's what stuck this week:

1. Brands Should Target Connectors Aggressively: This week, I was in NYC on business. As it was raining, I asked the doorman at my hotel if he could hail a cab for me. While we were waiting, he pulled his new Samsung Galaxy Note out of his pocket, and starting checking the news. Having never actually seen someone using a Galaxy Note, I asked him if he liked the device. Almost apologetically, he told me how he's a long-time Apple gadget lover but had needed something a little bigger than an iPhone, as a lot of the time, guests of the hotel ask a question, need directions and what not. In fact, he was quite happy with the device. This got me thinking. A hotel doorman must find himself in dozens of (potential) like encounters every day, all the while in a mode that puts a device like the Galaxy Note in a favorable light. Given the natural position of such connectors to spread the good word about a product relevant to doing their job, this sure seems like an argument for brands aggressively targeting key connectors in relevant segments. They are the ultimate influencers when the context is right. To be clear, I am sure some brands are doing this; I just don't believe it's a standard part of many companies' market penetration strategies.
2. Staying in the Game: Being in the tech business, I constantly marvel at the number of companies who despite mediocre products and dubious customer adoption in the early stages of their life, somehow manage to 'hang around' until they achieve victory. By victory, I mean: A) outlasting the competition; B) finding a market; C) achieving product maturation; or D) realizing a successful M&A event. To me, this suggests that winning is as much a product of finding a way to 'stay in the game' as it is about pursuing greatness or building a dominant market position. Sometimes what separates the winners from the losers is the conviction that you simply won't be defeated, and the unyielding drive to keep moving towards the goal line in the face of doubters, defectors and hard data. Mark Suster delves into this topic in an effective post called 'What to do about that chip on your shoulder,' and I love how Facebook challenges its rank and file to ask themselves, "What would you do if you weren't afraid?" Sometimes, when we're feeling against the wall, we let fear and a sense of doom drive us into the crash position. Winners ignore such facts, as the KNOW their destiny is otherwise. Paradoxical, to be sure, but such is life.
3. Facebook's Growth Team: Probably the most impressive thing that I read this week was the response on Quora to the question, 'What are some decisions taken by the "Growth team" at Facebook that helped Facebook reach 500 million users?' Read the whole piece as it spotlights how a company goes about institutionalizing growth in the same way that Apple, under Steve Jobs, insitutionalized the process of creating insanely great products. It's indicative of how fundamentally different business CAN be in the age of the Internet Economy, and one gets the sense that Facebook is absolutely dogmatic in their approach. This truth is best framed by the following snippet from Andy Johns, who worked on the Growth Team at Facebook, "Growth was a horizontal layer across product like engineering/ops is a horizontal framework behind product. Not only would someone ask 'What's the performance impact on site speed or stability if we build and ship 'X'?' it became common for people to ask 'What's the impact on growth if we build and ship 'X'?'. The decision to make growth a canonical part of the product, engineering and operational discussion was a really important decision that the executives made." In the end, it all comes back to understanding your product and the value + outcomes that it delivers. This requires having both the rigor and framework to suss that truth out, then test it, and iterate tirelessly to the bullseye. This truth is underscored by the comment by Chamath Palihapitiya, who led the Growth Team, and stated, "At Facebook, one thing we were able to determine early on was a key link between the number of friends you had in a given time and likelihood to churn. Knowing this allowed us to do a lot to get new users to their 'a-ha' moment quickly.  Obviously, however, this required us to know what the 'a-ha' moment was with a fair amount of certainty in the first place." Needless to say, way too few companies know this answer with such certainty in their business, and even fewer build the systems required to optimize it, which explains Facebook's unique position in the market.

 

Apple vs. Google: Lessons from Bill Gates’ playbook (GigaOM)

“There are three sides to every story: Your side, my side, and the truth.” —Robert Evans, 'The Kid Stays in the Picture'

I’ve been ruminating on how Apple and Google could have come up with such divergent takeaways from studying the incredible, terrifyingly dominant run of Microsoft under Bill Gates.

For those too young to remember, Microsoft had a run like no other. Through a combination of strategic brilliance, relentless focus and sheer determination, Microsoft leveraged its initial DOS beachhead into a PC industry-crushing market share and massive profits vis-a-vis Windows, Office, Internet Explorer and BackOffice, a position cemented by a unified foundation of developer tools and legions of dedicated Microsoft developers.

When Microsoft set its sights on a market, it would squeeze the life out of the market leader like an anconda wrapping itself around its prey. Before it was done, the company struck numerous segments, including personal computing (Apple and IBM), word processing (WordPerfect), spreadsheets (Lotus), databases (Borland and Sybase), networking (Novell) and Internet browsers (Netscape).

It’s not hyperbole to say that Apple’s phoenix-like rise and Google’s ascent are directly and positively correlated with Gates’ decision to step away from running his company as CEO in 2000

Read the full piece HERE.

Related:

1. Retail needs a 'reboot' (to survive)

Instagram, Kodak and the Selfish Gene

"I know that I am not going to make the transition, but I am sure as hell not going to do anything that accelerates my demise." - Anonymous, a Big Media Exec

It was a serendipitous occurence, to be sure.

I was attending the trade show of an industry in the throes of painful disruption, and in meeting after meeting, I heard the same story. It was both troubling and confusing.

"We rely on the retail channel as our primary marketing vehicle," each senior exec that I met with recounted with certitude.

Confused, I asked, "But you do know that the Number Two player in the space is in the process of going out of business, and based upon my retail contacts, the Number One player can NOT continue with their big box strategy for the long haul."

Expecting an AHA moment, I followed with, "If that's your primary marketing strategy, what happens when the other shoe drops?" 

Instead, you could hear the crickets sound. In each and every meeting.

Mind you, these were not unsophisticated people or underlings, and this was not a case of one intellectually blind company, but rather, these were the senior decision-makers at the biggest names in this particular industry.

How could these folks be so blithe -- and passive -- about the impending loss of their primary marketing channel?

It did not compute.

Breakfast at Serendipities

The next day I was at breakfast with a good friend of mine, sharing my story of this seeming disconnect, when he recounted his conversation with a Senior VP he knows at one of the largest media companies on the planet. 

"I know that I am not going to make the transition," his friend was lamenting, a tacit acknowledgement that he was a bit of a dinosaur, simultaneously beholden to legacy technologies, rapidly sunsetting organizational structures, and an economic model that paid him richly, but which was withering away.

But then, with a sly grin, the VP added, "But, I am sure as hell not going to do anything that accelerates my demise."

This was the AHA moment that I was struggling to find.

Never underestimate the ability of people to convince themselves of anything, even inaction, when their self-preservation depends upon it.

Understanding the Selfish Gene

In Richard Dawkins seminal book, 'The Selfish Gene,' Dawins introduced the concept of the selfish gene as a way of describing how certain genetic instances might self-propagate even if their survival came at the expense of the viability of the individal organism, and the larger group.

As applied to industry disruptions, this provides a potent impetus for understanding how individuals might behave in ways that threaten the long term viability of their companies or even their industry, since in this context, the immediate driver for the individual is their own self preservation.

Mapping this Dynamic to the Instagram and Kodak Outcomes

So what does all of this have to do with Instagram, which just got acquired for $1 Billion by Facebook, and Kodak, which is in the process of liquiditation?

In yesterday's New York Times, Nick Bilton wrote an excellent article that underscores why culturally-speaking, Kodak would never have been the environment for an innovative re-think of photography, like Instagram, to occur.

A big part of this is the pragmatic truth behind disruptive technologies, as espoused in Clayton Christensen's 'The Innovator's Dilemma'; namely, that industry incumbents look at new market opportunities based upon three, intellectually-reasoned criteria.

One, does the new solution have compelling economic fundamentals? Two, does it leverage the core competencies of the company, and three, do the company's best customers want such a solution?

Christensen's analysis shows how disruptive innovations (e.g., how the PC disrupted the mainframe) foil the smartest companies, since these new segments generally:

1. Have uncompelling economics at the begining; 
2. Are at odds with the company's core competencies; and 
3. Address the needs of an untapped market base, not the company's existing customers.

Hence, smart analysis can lead well-intentioned companies to their certain demise.

To these three drivers, I would add a fourth: the disproportionate self-interest of the individual not to forge a path that will lead to their demise.

Put another away, few of us have the courage to push for innovations within their company that will accelerate their path to unemployment.

This truth is even more so in difficult economic environments like the present, where the hard reality is that in the post-disruption world, there will be no lateral move for such individuals to make.

When you multiply that self-preservation interest across employees and departments, you can see how disruption becomes doom -- even once the hard truths are realized.

Related Post:

1. Innovation, Inevitability and Why R&D is So Hard
2. Retail Needs a 'Reboot' to Survive (GigaOM)