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11 September 2009 • 7:00 am  A Redbox kiosk outside a Walgreens. Peter Wynn Thompson for the New York Times According to an article earlier this week in the New York Times, there will be 22,000 Redbox automated vending kiosks renting DVDs for a dollar a day by December. In the already crowded market for video rentals, Redbox and similar firms are occupying a niche between Blockbuster’s retails stores and Netflix’s rent-by-mail and nascent online streaming services.
With self-service machines, overhead is quite low. Not only do such retail stores as Walgreens, Wal-Mart, and McDonald’s welcome the foot traffic that the kiosks bring, but some are even subsidizing rentals – the article reports that Walgreens has discounts that essentially make the rentals free. So the business model combines the low overhead of Netflix (with no retail stores) with the convenience and spontaneity of any-time impulse rentals (sort of like Blockbuster). And Redbox supports the kiosks with a simple web site that enables its customers to locate machines, view the surprisingly extensive (yet limited) inventory of titles in each machine, and reserve movies online. Very low cost rentals, web-enabled browsing, same day rentals, convenient locations (movies can be returned at any kiosk, not just the one at which it was rented), in short, yet another new value proposition for video rentals.
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8 September 2009 • 7:00 am
 - the ubiquitous (and soon obsolete) red envelopes
The Tortoise’s interest (obsession?) with DVD rental company Netflix was renewed recently with a brief but revealing interview with Netflix CEO Reed Hastings on National Public Radio’s Morning Edition program.
In addition to his candid admission that he likes watching movies – especially comedies – in theatres, Hastings talks a bit about Netflix’s drive to improve its recommendation algorithms, and of course its strategy to reinvent itself (validating our earlier observation) by making obsolete it’s ubiquitous red mailing envelopes. Its future is very much tied to negotiating more deals with movie studies to stream content directly to TVs and computers. But another part of this strategy depends on increasing availability of Wi-Fi equipped televisions. Says Hastings, “I think that we’re on a trajectory over probably 10 years to have nearly everything on streaming. Not just Netflix, but other firms also — and also, to have Wi-Fi built into every television over 10 years.”
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19 August 2009 • 7:00 am With the voices in the debate over U.S. health care reform becoming even more shrill, and opponents decrying the prospective loss of free-market competition in the health care industry, I’ve been thinking a bit on the topic of monopolies.
In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it, according to the late economist Milton Friedman. We generally think of monopolies as a bad thing; monopolists gain pricing power that enables exploitation of consumers. But the provision of goods and services in a capitalist economy is actually accomplished by a blend of free-market players and monopolies, as it must be. Some monopolies are necessary, and even good.
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29 July 2009 • 7:00 am  Netflix prize web page The Tortoise’s fascination with Netflix was enhanced with the news yesterday that Netflix’s public competition to improve the effectiveness of its recommendation system has drawn to a close with two teams essentially tied for the prize. But each of the two teams are actually consortia; teams comprised of other teams. Netflix has harnessed the power of competition and collaboration to solve a challenging business problem.
Subscribers to Netflix are asked to rate (on a scale from one to five stars) each movie they’ve rented, and are even able to rate movies seen in theatres or elsewhere. The data base of millions of individual ratings are used to predict and recommend movies to individual subscribers. The system works pretty well; around two thirds of all rental decisions made by Netflix subscribers are the result of a computer-generated recommendation.
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11 June 2009 • 6:22 pm The New York Times reported this week that a recent New Yorker article on health care spending has become required reading in the White House, and that President Obama referred to the article in a briefing on health care reform with Democratic senators. The article, which is a lengthy but very worthwhile read, was written by Atul Gawande, who is both a staff writer for the New Yorker and general and endocrine surgeon at Brigham and Women’s Hospital in Boston. Along with President Obama, I recommend this article to anyone interested in the likely changes to U.S. health care policy that is on the political horizon.
Gawande’s article follows his curiosity and research into regional disparities in health care spending; why some places spend far more (per Medicare enrollee, an approximation of overall spending) than others, without significant differences in overall public health or patient outcomes. His research focused on the town of McAllen, Texas, “the most expensive town in the most expensive country for health care in the world,” where annual Medicare spending per enrollee (in 2006) was around $15,000, almost twice the national average.
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5 June 2009 • 8:03 pm I want to share with you the opening lines of the lead story in tomorrow’s Economist. With no punches pulled, the issue’s cover story disects the decline and bankruptcy of GM, once the most powerful corporation in the world. The tale of GM is a sad but effective illustration of the deadly combination of long-term avoidance of change and institutionalized support of the status quo, in this case by the U.S. goverment. The article is a very worthwhile read for those engaged in strategic planning. Your comments are welcome below.
The decline and fall of General Motors
Detroitosaurus wrecks
The lessons for America and the car industry from the biggest industrial collapse ever
The demise of GM had been expected for so long that when it finally died there was barely a whimper. Wall Street was unmoved. Congress did not draw breath. America shrugged. Yet the indifference with which the news was received should not obscure its importance. A company which once sold half the cars in America, employed in its various guises as many people as the combined populations of Nevada and Delaware and was regarded as a model for managers all over the world has just gone under; and its collapse holds important lessons about management, about government and about the future of the car industry.
GM’s architect, Alfred Sloan, never had Henry Ford’s entrepreneurial or technical genius, but he had organisation. He designed his company around the needs of his customers (“a car for every purse and purpose”). The divisional structure he created in the 1920s, with professional managers reporting to a head office through strict financial monitoring, was adopted by other titans of American business, such as GE, Dupont and IBM before the model spread across the rich world.
Although this model was brilliantly designed for domination, when the environment changed it proved disastrously inflexible…
21 May 2009 • 1:32 pm For a few years now, I’ve been doing a riff on Blockbuster and Netflix in some of my speaking engagements. It’s been a useful case for sharing many of my insights about strategic management and the role of technology in strategy (disclaimer: neither of these firms has been a client of mine, and my impressions have been formed only from publicly-available information).
The essence of the riff is this: Blockbuster built a very successful business model and then had its lunch eaten by Netflix. The key lessons we can learn from this case are:
- Don’t underestimate the power of technology to change your competitive environment.
- Constantly be looking for ways to challenge and reinvent your value proposition, or your competitors will do it for you.
- Recognize and overcome the forces that will resist change in your own organization.
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