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Archive for the ‘Innovation’ Category

This quote, from statistician George Box, is one of my favorites, because of its far reaching implications.  It serves as a reminder to me that whether it’s a predictive model written in Python saved in a Jupyter notebook or a mental model based on personal experience and encoded in the wet-ware of my brain, it’s still wrong – in some way and to some degree that I may not be aware of or even able to discern.

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This coming Tuesday, September 12th, I’ll be speaking at Product School in Santa Monica on data’s role in product development.  To help me prepare, I wanted to start exploring the topic first here with a post.  (Writing always helps me to structure my thinking.)

Consider this your preview of what I hope will prove to be an engaging discussion, and if you’re in the LA area, come out to join us in person.  All the details are available through Eventbrite.

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The tendency to deconstruct business functions into ever finer units of specialization – what I call business reductionism – threatens the kind of coordinated action required to execute on a good business strategy and must be resisted.  The marketing in particular seems to have become susceptible to this sort of reductionism, brought on by the introduction of new marketing technologies , and hope for reconstitution rests on getting back to first principles.

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Things seem to be getting frothy in tech these days.  Facebook paying nearly 1/10th it’s market cap for the WhatsApp user base sounds a lot like paying for “eyeballs” in the Dot-com era of the 1990’s.  That acquisition was then quickly followed by the $2 billion Oculus announcement, which seems to be an even more awkward fit for the social network.  Facebook is definitely playing the long game here.

The other news maker recently has been Disney’s acquisition of Maker Studios for nearly $1 billion.  The fit between those two makes more obvious sense but the valuation still seems rich and has many around Silicon Beach scratching their heads.  (UPDATE 4/14/2014: The plot only thickened when Relativity Media made a counter bid for Maker for an estimated $1.1 billion under a slightly different structure.  This twist suggests a land grab for “new media” properties driven in part by fear of being shut out from all the good deals.)

The “follow the photos” theory for the WhatsApp purchase offered on PandoDaily (above link) sounds not only consistent with prior acquisitions (e.g. Instagram, a failed bid for Snapchat) but strategically sound as well.  (UPDATE 4/28/14: Others have since echoed this theory as well.)  An elegant explanation: co-opt the competition. Facebook can circumvent a disruptive threat by buying control now but letting the company continue to evolve separately.  A simple solution to the classic innovator’s dilemma.  A similarly consistent strategy and market view point probably lies behind Disney’s decision too.

Just last year, AwesomenessTV had around 14.5 million subscribers when it was acquired by DreamWorks Animation for $33 million (plus potentially $84 million more based on financial targets).  Compare that to the 380 million subscribers and 5.5 billion monthly views Maker has today, and the Maker deal starts to look more reasonable.  On a per subscriber basis, Disney paid (very) roughly $2.50 per Maker subscriber while DreamWorks Animation paid $8.00 per AwesomenessTV subscriber.

Of course there are a great many other metrics to consider -measures of engagement like average view duration, likes, shares, and comments as well as demographics and devices, all of which can drive differences in the value derived from one subscriber or viewer to the next.  One cannot simply impute a linear relationship between enterprise value and total subscribers.  It would be analogous to looking at just the spot price today to estimate an options value, but there is no Black-Scholes model for new media start-ups.

I’ve written before about M&A as an open innovation strategy, and I submit for your consideration that these MCN acquisitions are part of one such strategy – investments in future innovation.  Just as Box could rightly allocate to marketing some of the costs associated with supporting its non-paying customers (the customer acquisition costs of a freemium model), some of the premium being paid for Maker or AwesomenessTV could be considered investments in R&D.

Of course, some of the acquisition price still includes projected revenues.  Trends such as market consolidation (a.k.a. all the recent acquisition activity), the growing popularity of brand integrations, a shift in ad dollars away from traditional television, and pressure building on YouTube to share more of ad revenues all add up to rosier financial projections, but for a start-up, those are just vanity metrics.  (UPDATE 4/11/2014: As it turns out, Internet ad revenues have now overtaken broadcast.)  They don’t account for the derivative value of what a company might learn from all the experimentation and audience engagement taking place on the YouTube platform.

Both Maker and AwesomenessTV have access to coveted customers segments – users that acquiring companies like Disney actually need to understand better to ensure their futures.  They are paying for help figuring out where the market is going next so they can, “skate to the puck.”  Next generation, digital-native media companies such as MCNs, unburdened by legacy operations, are uniquely positioned to provide that help.

Return on R&D is notoriously hard to estimate, and in an environment like this one, beware the winner’s curse.  All that said, I get it.  You can pay to play or risk being shut out – without the subscribers, the revenues or the future product/service pipeline.

After today’s Big Frame announcement, which seems like a sensible roll-up at just $15 million, I wonder who will be acquired next.  (UPDATE 4/15/2014: Already DreamWorks Animation is rumored to be in talks with Vevo, in which YouTube also has a stake.  Now that Relativity has lost out on Maker, surely that company will be looking for other deals.  With Big Frame already out of play, one possibility would be going after a vertical like DanceOn or even looking outside of LA at something like Rooster Teeth in Austin or Diagonal View in the UK. I could see both of those latter two getting a reciprocal benefit from the connection back to the Media & Entertainment capital in California.  The only thing that seems certain is Relativity will have to move fast because no one else seems to be slowing down.)

UPDATE 5/2/2014:  Rumor has it that Relativity Media has decided to go after the most obvious next choice, one I considered but omitted above because I presumed to be too expensive.  I ruled out Machinima almost immediately because Warner put money in that company just the prior month, but I should have at least mentioned Fullscreen.  No deal has been reach, and if there’s truth in all the dramatic speculation in reports of a Relativity bid for Fullscreen, a deal may still be very unlikely.  Nonetheless I wanted to update this post yet again because this latest development clearly demonstrates something at play in addition to financial considerations and even open innovation.  My take is that Relativity sees the cost of acquiring Fullscreen for a loss (e.g. for an anticipated negative ROI) is less than the expected cost to its business of being shut out of any good MCN deals and slowly watching new media erode its business.  The situation seems analogous to an airline that continues to operate unprofitably because of its fixed costs; old media companies like Relativity are better off staying in the game and making a bid than forfeiting altogether.

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In the aftermath of the financial crisis of late 2008 and the resulting global recession, defenders of the US financial system maintained that it was a source of US competitive advantage.  Our capital markets facilitate the exchange of money and risk and thereby not only help maximize productivity but also attract businesses to our economy.

With the exception of some of the more exotic financial structures, I tend to agree.  Just as the shift from barter to physical currency enabled new economic prosperity, more sophisticated financial instruments and capital markets (properly regulated) benefit individuals, businesses and entire economies.

The same could be true of social capital.  Today people already exchange favors, debts of gratitude and obligations of reciprocity on a daily basis.  Indeed, reciprocity seems to be deeply ingrained in the social nature of humanity.  Dunbar’s number could be explained as the result of the cognitive limits on mental accounts in social groups.

What if companies could make all these invisible exchanges more visible?  How might collaboration and innovation benefit?  What would a system of social currency look like?  How would it effect rewards and incentives?

Such a system is both possible and relatively easy to implement using a combination of gamification concepts and social technologies.  Here is a hack that I have been mulling over recently.

Every year allocate to employees a set number of social currency point – say 200 per employee.  They can choose to hold onto the points or they can award points to colleagues as a thanks for helping out – say, 1 point for a discrete favor or for providing some much needed insight as a subject matter expert, 5 points for consistently being a team player who goes above and beyond, 10 points for saving the day and making the difference on an important project.  (Publishing very basic guidelines will help.)

Require some information on why the points are being awarded, and make that information public.  This will enforce some discipline and avoid frivolous exchanges.  Making the information public also reinforces the inherent value of the social currency.

For 1 point, the information required can just be an option in a drop down; for 5 points require an additional one or two sentences – for 10 or more, maybe a short blurb. Include the date.  As you collect information and track awards, you build a data set on social interactions that can be analyzed later.

At the end of the year, everyone is entered into a raffle for prizes with the number of entries per person being somehow proportional to the points that the entrants have accrued by the year’s end.  There can be multiple winners, and smaller prizes are probably better than really large ones.  The goal is to make the whole process fun and slightly augment the value of the currency without distorting the normal social incentives so much that employees start gaming the system just to win.

At the end of each year you can see who are the experts and who are the team players.  You can map out interactions and social networks and begin managing people with a new set of metrics.

We are only just beginning to understand the potential gains from harnessing social data.  The Enron corpus has proven to be an invaluable trove of data for analysis.  Imagine adding datasets from the exchange of social currency, one day maybe even gadgets like those that are already gaining popularity in the quantified self movement.  All sorts of new, more rewarding and more productive organizational structures and management practices could be possible.

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Someone recently asked me the question, “What is [business] strategy?”  Given that I call myself a “business strategy consultant,” I was disappointed to find myself fumbling around for an answer. I only managed to cobble together some vague metaphors involving “horizons” and “guiding lights.”

So what is strategy?

I should have a much clearer and more concise answer to this question, if for no other reason than to keep a better response at the ready for dinner parties when inevitably someone wants to know, “What do you do?”

When Porter came up with the Five Forces, strategy described at a high level how your company contended with these forces and beat the competition in the war for profits.  The martial language is both intentional and appropriate since the concept of strategy originated in military theory.

But Porter’s Monitor Group is now defunct, acquired by Deloitte under duress.  In an age when the pace of change from technological advancement is ever increasing, no competitive advantage is truly sustainable, and customers are better informed than ever about their available options. Simply aspiring to beat the competition will not suffice.

Firms need a more meaningful reason for being.  Call it a mission, vision or something else, they need something with which both their customers and their employees can identify.  That’s where strategy for the new era needs to begin – with the impact your company is trying to have on the world, above and beyond beating your competition.

Nonetheless, the Miltonian mandate to make money must also be heeded.  Strategy doesn’t stop with impact alone (outside of the social sector).   Rather, good strategy also identifies valuable problems to be solved and customers to be served who are willing to pay for that value.

Of course, competitors cannot be disregarded entirely in all this, but it makes no more sense to let your competitors drive your strategy than it does to drive your car looking in your rear view mirrors.  You might glance in the rear view from time-to-time, but your gaze generally remains out front on the road ahead of you.

Shifting the focus away from competitors and over to impact and customers and their problems actually leads to a more robust and responsive strategy.  Firms can better anticipate threats from disruptive new entrants and are more likely to recognize attractive opportunities in market adjacencies.

As I’ve considered my answer to the question, “what is strategy,” my conclusions have become more consequential than merely offering a new definition.  The time has come to replace the notion of business strategy entirely.  Music seems a more fitting analogy now than does war.

Imagine if we changed the conversation to be instead about winning business harmonies; rather than tactics, we discussed melodies; and in place of command and control hierarchies and processes, we empowered employees to improvise like jazz musicians.

What is business harmony then?  The broad targeting of people (consumers) and problems in the market that in turn guides organizational decision making, coordinates disparate activities, and ensures a consonant impact from a collective effort.

Just call me a business harmony consultant.

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Sometimes a picture is just better . . .

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A powerful analogy for innovation.

Catalysts are problems in need of a solution.

Adding heat means tapping into the passion of the individuals working on the problem.

Increasing the surface area amounts to opening up your organization and exposing it to more ideas.

Motion comes from changing the context – just mentally re-framing things in a new way or even physically moving your location, as you might do with an offsite.

When they all come together, there’s a transformative reaction.

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