Category Archives: Business

Missing out on a break through company

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There are many stories in business today about how companies decide not to purchase a company that has since gone on to be a market defining company. Yahoo! is one of the worst offenders. Yahoo managed to turn down both Google and Reddit both in very different ways. In the case of Google, Yahoo realized their mistake and tried to buy Google and then Google turned Yahoo down.

A company like Yahoo is in a tough spot when approached by a novel company that’s trying to compete in a market that Yahoo doesn’t really understand. Although, this isn’t really the case with Google, but Yahoo was much more confident in the technology they knew as their search platform and didn’t understand the potential ad growth that Google was eventually able to deliver.

Reddit, according to Alexis Ohanian and his book Without their permission, an executive at Yahoo told him that reddit was a rounding error to Yahoo’s web traffic. Which so greatly insulted Ohanian that he has used this as a motivational statement to this day.

Eventually Google IPO’d while reddit was bought by Condé Nast media. I believe that because of the direction of management that these companies were both able to flourish to this day. Google is obviously, one of the largest companies in the world, while reddit has become a huge community that the members still feel as if they are in a special club no one knows about.

It is likely that if either company had been acquired and managed in a different way, we wouldn’t have the same internet we have today. Condé Nast essentially left reddit alone and has only started to push the company to become profitable – 7 years after they were bought. It was only 3 years ago they introduced reddit gold and within the last few months they included a daily target for profitability using reddit Gold. In that time reddit has exploded in user base and introduced features to increase user base and interest in the site. If you’re interested in reading more about the history of reddit Randal Olson has an amazing analysis here, it’s really interesting.

On the other hand, Google has gone on to create an amazing ecosystem in Android, Chrome, Glass, the web, and so on. They have shut down more heavily used platforms than most companies create. None of this would have happened if Yahoo had bought Google, because Yahoo doesn’t or at least didn’t think that way.

Yahoo has two fairly large social platforms, Tumblr and Flickr, and is looking to acquire imgur. Acquiring Imgur is essentially admitting defeat with Flickr, as imgur was designed to make sharing photos on reddit easier, and Flickr is horrible to share photos with on reddit. So, it’s likely Yahoo will survive and possibly thrive in the future, but why did it miss out on yesterday’s internet of the future?

Missing out

I believe that these decisions aren’t because of bad managers. In fact, it’s likely because of high quality “traditional” management. While the internet was evolving companies like Yahoo developed metrics like views, clicks, and click throughs, to measure success of a website and the growth of a platforms. As Yahoo is a platform, being approached by other potential non-compatible platforms that were smaller was something to be expected. It is likely that Yahoo turned down hundreds of other unsuccessful platforms along with Google and reddit.

Yahoo wasn’t able to understand the potential of these different platforms, because their metrics were different than Yahoo’s. Yahoo was likely looking at both volume and number of clicks within the platform, while both reddit and Google’s engagement model focused more on sending users to other websites while minimally keeping the users on their platform. However, because of the content the users would continually come back.

Using the innovator’s dilemma as a lens here, we see that the quality of these platforms is much lower than Yahoo’s. Google’s home screen is the same as it has always been. Just Google with a search box and two buttons. Reddit on the other hand is a series of blue links with little to no ads and some arrows next to each link. Very plain and simple. Very different than Yahoo.

Furthermore, these platforms were servicing different users. Google users were searching the internet more broadly, while Yahoo was trying to both allow searching and be a one stop shop. Reddit was trying to engage with the politically active techie, which is a VERY small subset of the internet user base. Yahoo was servicing a lot of the people that had fairly recently left AOL and wanted a similar portal. It makes the internet less scary to have a platform for inexperienced users.

Measuring these platforms with the same metrics and vision of Yahoo, these would have made very bad buys and likely would have been killed off, directionally changed from the trajectory they were on and led to their success. Condé Nast essentially provided a “skunk works” area for reddit and enjoyed the clicks to the other sites that they owned that redditors also visit frequently.

It is likely that if Yahoo had bought either or both Google and reddit, the end result would not have lead to internet we have today. These platforms would have been warped into very different products that many young people would have avoided. I believe that Yahoo has learned a great deal and will likely do a better job with Tumblr and Imgur than they have with Flickr.

Data caps can we get rid of them?

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Changes are afoot in the mobile industry. We’ve been seeing a sea change with how T-mobile looks at their customers. They’ve been changing the contracts and potentially even eliminating them. They’ve separated the phone payment plan from the monthly access fees which is an imortant first step in completely separating the purchase of a phone from the carrier that provides the services. This will eventually reduce the amount of junk files installed because  the carriers can’t force the providers to install them. I think that the reason why the Nexus 7 isn’t on Verizon Wireless is that they are refusing to install the bloatware that the Verizon is trying to force upon Google. I think this is a good thing. Google has also filed a suit against VZW to force them to allow the Nexus 7 on their network. This is going to break the carriers power over the user. Carriers don’t want to be dump pipes for the internet. The wired and cable companies are actively fighting against this by puttng data caps on downloading content. At the same time they’ve experimented with this, the wireless providers have been much harsher. However, these caps weren’t a problem in the past. According to BGR a website that focuses on mobile issues has noted that the amount of data that wireless users has begun to regularly break the data caps. T-mobile has also offered all of their plans without datacaps. This will likely push many data users on verizon and AT&T to switch over to these networks. This will likely put more pressure on the carriers than they have experienced in over a decade. I look forward to this increase in competition especially since I refuse to go over my data caps and greatly limit the amount of data that I use over the wireless networks. I believe we’ll see some interesting changes in the future.

I think that these changes will also preclude the merger of T-mobile and sprint as the US market needs additional competition not less. I think that there will be changes in all of the companies marketing and product offerings, but likely T-mobile will be the largest winner with Sprint in second.

Healthcare is not a free market

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From the obvious department, amIright? Yes, but not for the reasons you think. Healthcare cannot and never will be a free market. There are several reasons for this that I will elaborate on here.

Healthcare consists of micro-regulation in the form of the reimbursement structure. This is an artifact of two different systems combining to make things worse. First, because the Federal Government is big and has two different programs one for Federal Employees and one of those in need Medicare/Medicaid (I’m combining them here for simplicity), there’s also the VA, but that has much less influence on healthcare. These two programs set the terms on how the government will reimburse or even pay providers for care provided. These are based on Current Procedure Terminology (CPT Codes) and not based upon your diagnosis. Essentially the government sets a price they are willing to pay for a procedure. As one of the largest market players, this influences all of the other payers (IE insurance companies). Many insurance companies use Medicare payment rates to set their own, which drives down the cost of a procedure to the point, in many cases, where it’s below the cost of the actual care. This drive providers to select more expensive and more procedures in many cases to make up the short fall. This payment model also makes it hard for new procedure methodologies to be adopted as they may not be paid for.

Healthcare is a network economy – nearly all care happens close to home. This is why groups like the ACLU argue that driving more than an hour for an abortion is an unnecessary burden on women. Because of the proximity of the majority of care (10.2 miles) this creates a local network of care based on the original provider a patient sees. When you receive a referral, there are a few different routes this can go, best doctor the the referrer knows, another doctor in the same clinic, or in the same care network (such as UPMC in Pittsburgh or Kaiser Permanente in CA). This drives an incentive to send patients within the network leading to mutual referrals or money staying within that care network even if there are better doctors for that specific patient outside of that care network. In addition to the Doctor’s network there is, of course, your insurer’s network which may be in direct conflict with the professional network that your provider has.

Imbalances of knowledge – in typical free markets there’s an assumption that everyone has the same amount of knowledge. In Healthcare, it is abundantly clear that this isn’t true. Most patients have little to no understanding of their diseases when they are first diagnosed. On the other hand, both their insurer and provider has an extensive knowledge of the disease. This limits how well the patient is able to correctly make decisions about their healthcare. It also pushes reliance to the provider whenever there is a disagreement between insurer and provider. The member can’t effectively participate in those conversations about care. Furthermore, there maybe little penalty to the patient if they fail to follow the prescribed course of care until much later where neither the insurer or provider can enforce a change of behavior to reduce costs for the entire system now through treatment rather than later when there are more complications.

These are but three cases that highlight the lack of free market mechanisms in healthcare. Even in cases where a patient wants to seek the best care it’s typically the patient’s responsibility to pay for it if it’s not with in the insurer’s network. In many cases these clinics can reduce systemic costs through lower point of care and lower likelihood of readmission after care.

Over the course of the next few weeks I will discuss Exchanges and their potential, how healthcare can be made more affordable using process improvement tools and other mechanisms. I plan on writing weekly on healthcare. If you have any topics that interest you please comment and let me know!

Disrupting Mobile Phones – Google’s taking the lead and Apple is going to lose

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http://news.phonebloks.com/

Photoblok’s high level picture of their design

For some people, Motorola’s Project Aria, in partnership with Phonebloks, is going to be a game changer, while others are kind of like, meh. I think that the end result of this phone will actually be a game changer, but not everyone will switch to this format of phone. Many people will continue to buy phones that have been designed for the full experience. However, I do think that theses phone will significantly impact in how many people think of phones.

These phones represent a disruptive shift for the phone industry. Why are these disruptive when I said that Kayak isn’t disruptive? Well, in the book Innovator’s Dilemma Dr. Christensen argues that when new industries are formed the leaders are companies that are able to combine all the pieces that are needed for producing that good under one roof. In the case of airline travel all the booking used to take place through the airlines, eventually this was outsourced to Travel Agents which were something of an extension of the airlines. The first disruption came when other groups were able to use the internet to book reservations. The act of reserving a seat on a plane became decoupled with the actual flight and service.

So, in the case of mobile phones, specifically smart phones of course, the most successful firms were the ones that were able to combine everything you needed for the phone to be useful. Blackberry did this, but Apple was clearly the best at it. The original iPhone was basically an iPod with a cell antenna in it. This was an amazing thing though. Apple had disrupted the music distribution industry with iTunes and was able to leverage that innovation into smart phones. This of course was a disruption in that industry because everyone was focusing on productivity first, Apple approached it from a content perspective. Content always beats out productivity. In a very real sense, the market changed over night. Apple owns everything in their cell phone, the OS, the design of the chip, the distribution network for apps, music, movies, etc. This is a very classic example of fully integrating as much of the supply chain as possible.

This is exactly how computers started. Large companies like DEC and IBM built everything for a computer. The boards, the operating system, the software, and the interfaces. These companies were large and structured in a way to make money from extremely expensive mainframes which had a very small market. Between Xerox and IBM the personal computer as we know it today was invented.

Our PCs today are modular, which means that every portion of the computer can be built and designed by different firms. This allows a lot more innovation across the platform because it doesn’t rely on one firm to create everything. It allows specialization and diversification for an assembly company. It was because of this modular nature that Intel, Dell, and Microsoft became successful. They were able to leverage the platform that IBM delivered with the PC and grow and develop new capabilities.

This modularity also allowed just about anyone that wanted to the capability to built their own custom made computer. This has become less so with laptops – you can’t buy an empty laptop but you can customize it from a company. This just isn’t the case with smart phones – which are essentially mini computers. The new tablets coming out are as powerful as computers from the early 2000s.  The modularity of PCs offer an additional benefit, you have the ability to easily fix them. If your processor dies or your graphics card does you can buy another and simply pop it in. Even if the motherboard goes, you can still replace that and plug all your existing components into the board. The case is the only thing you don’t have to change if you don’t want to.

With phones the screen is like the case. You don’t really need to upgrade your screen every time. Especially with how hard the screens are unless you drop the phone and crack the screen you don’t need to replace it. Furthermore, we’re getting to the point we are with TVs that the resolution of the screen isn’t going to make much of a difference. Yes, we’re in a DPI battle between Amazon, Google, and Apple but we’re getting close to the point where we can’t tell the difference. Which means that the screen is a perfect thing to act as the phone’s “Case” for modularity purposes. The modularity will help immensely with repariability, which current scores pretty low, if you’re interested in those scores check out iFixit.

So, how does Phonebloks come into all of this? They are essentially pulling an IBM by creating a system that can be modular. Google’s Android will be the operating system of choice, but it’s likely that even this could be flexible in the manner that PCs are today. It’s unlikely that iOS will be on these phones legally, although I’m certain someone will figure out a way to install the operating system on these phones. This will hurt Apple in the long run as people will not be using their operating system will leave their ecosystem and prevent them from making as large of revenues in the future. People will still buy their products, but there will be much less sales. Apple could be repeating history if they don’t offer to sell their operating system for phones like this.

Why do I think that these phones are going to be winners? Well, it will increase the longevity of the phone. With phones costing upwards of $600 for the top of the line phone anything that can increase the length of time that a person is using one is a good thing. Secondly, as Android and other OSes evolve they require more capabilities from the phone which means older phones aren’t able to use the latest operating system. Buying a much cheaper CPU to install would be a lot better for end customers. This will also disrupt the supply chain as companies like Qualcomm aren’t used to selling directly to customers. Finally, as long as the design is good, then it won’t seem as much of a burden to have the same phone year in and year out. It will require people to think differently, but that’s something that I believe Motorola and PhoneBloks can over come.

These phones are going to change the industry and possibly enable other companies to develops phones in the same way. Hopefully they pick one standard interface like the Motherboard that all companies conform to. This will allow companies like Google and Microsoft to go back to innovating on operating systems and to get out of the phone building business.

Continual disruption – still happening in TV and content

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One of my favorite things to read about is innovation. For those of you that know me, that’s not really a surprise. However, I think that there’s a lot of misunderstanding out there about what “disruptive” innovation is. Most people think that apps that modify the way you do something is disruptive. For example, people have said that companies like Kayak and Hipmunk are both disruptors of booking travel. However, the true disruption came from travelocity or orbitz, whichever came first. These sites really did change the way the game was played for booking travel because they essentially cut out both the middleman (travel agents) and the airlines involvement in book flights. Anything beyond that has simply been sustaining innovations. These are innovations that are quickly co-opted by the existing incumbents as it’s possible for them to do that. A more disruptive technology for travel would view the process holistically from the moment you booked the trip to the time to returned home from your completed vacation. The site would need to account for getting you to your destination without any sort of delays. In James Womack’s book Lean Thinking, they point out the “value add” activity of a flight was only 3 hours, while the total waiting time was over 12 and they didn’t include the effort it took to book the trip back in 1995. All inclusive it’s likely to be much worse now. Especially the way that airlines measure “on time departure” (leaving the gate on time) which is different than our “on time departure” (taking off on time).

In a true disruptive situation you’ll typically see the incumbents resorting to changing laws to keep their supremacy of the markets, we don’t see this in travel at all. Where we do see this is in telecom and cable. The image below from Mashable pretty well explains why this is happening.

There’s likely overlap between users of Netflix, Prime, and Hulu, but if I was cable TV I’d be running scared. I also would love to see this graphic if you add Twitch.tv and specifically ESPN. I think eventually twitch will be disrupting ESPN and the traditional sports networks out there.

How are the cable companies using legal and technical mechanism to limit access to content on Netflix, Amazon, Hulu, and Twitch? First, the movie industries have absurd agreements with cable companies (providers) giving their services, like Xfinity from Comcast first access to content. In many cases this will translate into something earlier on the subsidiaries of those in terms of networks. Second, cable providers use their control over the network to throttle the internet speeds of these internet services. This is leading them to try to change the laws around net neutrality so that the cable providers don’t just become “dumb pipes” that content is passed through but the users don’t interact with.

I believe this also indicates that both cable networks and internet providers are being disrupted in a way that they don’t understand. They are using every tool they have at their disposal to fight against the adoption of these services, but they don’t understand what’s happening. Consumers have hired comcast, verizon, and others to provide them a solid consistent connection to whatever content the user wants. Internet providers are trying to force themselves into a middleman role that the users don’t want. When opportunities arise that will allow the user to experience content on their own terms. It’s clear that cable TV is losing the fight and this will only accelerate as people purchase more tablets and devices like that. Chromecast (which allows people to display things from a laptop/tablet on their TV) is another disruption that Google is providing, Amazon has something similar for their Tablets (which will increase Prime usage by the way). The TV companies are losing and need to figure out new business models to stay afloat. This is where disruption is happening. Not in other spaces.