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August 18, 2007

Bucking the Offshore Trend

I hope this article in The New York Times describes a sign of things to come -- a new call center opened by Netflix in Hillsboro, OR, with 200 customer service representatives, in an attempt to stay ahead of Blockbuster:

Netflix set up shop here a year ago, shunning other lower-cost places in the United States and overseas, because it thought that Oregonians would present a friendlier voice to its customers. Then in July, Netflix took an unusual step for a Web-based company: it eliminated e-mail-based customer service inquiries. Now all questions, complaints and suggestions go to the Hillsboro call center, which is open 24 hours a day. The company's toll-free number, previously buried on the Web site, is now prominently displayed.

Netflix is bucking several trends in customer service. Booz Allen Hamilton, a management consulting firm, and Duke University studied 600 companies last year and found a continued increase not just in outsourcing, but also offshoring, in which call centers are moved overseas...

Netflix's decision to greet anxious consumers with a human voice, not an e-mail, is also unusual in corporate customer service. "It's very interesting and counter to everything anybody else is doing," said Tom Adams, the president of Adams Media Research, a market research firm in Carmel, Calif. "Everyone else is making it almost impossible to find a human."

In contrast, Blockbuster outsources a portion of its customer service, and when people do call, they are encouraged to use the Web site instead. Its call center is open only during business hours, said Shane Evangelist, senior vice president and general manager for Blockbuster Online, because the majority of customers prefer e-mail support, which is available 24 hours a day. "Our online customers are comfortable using e-mail to communicate," he said.

Over the past decade or so, Corporate America has been relentlessly improving its efficiency. In general, this is a great thing, because it means we get better goods for less money. But it's easy for firms to take these steps too far. Netflix is making a bet that by spending more in order to treat their customers better, their profits will ultimately rise. I sincerely hope they're right.

July 19, 2006

Tesla, Apple, and Offshore Manufacturing

Autoblog ran a story on the impending public unveiling of the Tesla Roadster -- tomorrow, in fact, is the date. So far, Tesla has said that their Roadster will have two seats, go from 0 to 60 miles per hour in about four seconds, go 250 miles on a charge, and cost about 1 cent per mile to operate. Readers commenting on the story, speculating wildly about Tesla's chances before knowing the details, found Tesla CEO Martin Eberhard joining in (which I regard as a good sign for the company).

One commenter in particular was disappointed by the rumors that Tesla would not build and own its manufacturing capability:

America is totally relying on being a service economy but to this day I still see all great or greatly emerging economies to be doing it through manufacturing but no one cares to preserve this in America. Sure it looks like services have done well for America and they have but it isn't why America is as great (economically) as it is, at one point the U.S. manufactured over 85% of the world's products... Don't get me wrong, it I don't want get rid of the service companies I want America to have both service and manufacturing.

All you Silicon Valley guys seem to understand the concept of not putting all your eggs in one basket but when it comes to jobs putting them all into services seems to be just fine (i.e. in your purchases you don't look for American made is my guess and now with getting into a traditionally manufacturing based thing such as automobiles where it is made doesn't have to be America). Tesla isn't really a manufacturing company it is a service company. Tesla is really selling design (and for now, management). Contracting to buy parts from Asia and everywhere else and to contract to a factory to assemble the vehicle (especially *if* the factory is outside of the states then Tesla probably won't own the factory just contracting out) means the only thing Tesla is doing to add value is the design work (and for now, management).

Tesla isn't a service business any more than, say, Apple is a service business. Why doesn't Apple manufacture its own iPods? Because Apple has learned (like so many other firms have in their respective industries) that it is far more profitable to design, market, and sell iPods than it is to actually assemble them. Why is this? Because it's harder to design, market, and sell consumer electronics devices than it is to assemble them.

Think about it this way: how many firms could realistically compete to manufacture iPods for Apple? I'd guess at least dozens -- some in China, some in Taiwan, the rest in a few other Asian tigers. But how many firms have proven they can compete against Apple and win in the digital media player business? In the US, at least, the number is effectively zero, given that Apple's market share is north of 70 percent.

Or think of it this way: can you name the firms that assemble iPods? I'm betting you can't. But you can name Apple.

Or think of it this way: how much does an iPod assembler make on each unit? Well, given that they have to compete with dozens of other companies that can do the same thing just as well, I'd be surprised (though this is a guess) if they make more than $20/device, even on the highest-end iPods. How much, on the other hand, does Apple make on each iPod? iSuppli estimates gross margins of 50 percent on iPod nanos -- $101 on a nano, with $8 of the cost going to assembly. You can do the math, but it seems reasonable to say it's 10 times more profitable to be the designer-marketer-seller than it is to be the assembler, at least when you're the best at what you do.

Again, Apple isn't a service company. A more accurate way of thinking about them would be as an intellectual property company: they design proprietary hardware, design the user interface for the hardware, create (portions of) the software that drives the user interface, and create the software for the hardware to connect to computers (iTunes) as well as the software to provide back-end services to the hardware (iTunes Music Store). How relevant is the fact that they don't actually assemble their proprietary hardware? It's only relevant to the extent that to do so would actually lower their overall profit margins (given how much less profitable assembly is than design), therefore making their company less valuable. Who would want that? Not any rational Apple shareholder. In any case, since Apple controls the entire product creation cycle, including directing external suppliers and assemblers, though technically they're an intellectual property company, it's easier for us to think and say that Apple makes iPods.

When it comes to tying this back to Tesla, everything is speculative at this point. But assuming they've adopted a standard Silicon Valley design-market-sell model, subcontracting out assembly -- which seems to be the case given the comments made so far -- then I'd say they're doing exactly the right thing, because this model tends to reduce end-prices to consumers and increase profit margins for vendors. And it won't change the fact that Tesla makes cars.

June 22, 2006

"The 50 People Who Matter Now"

Business 2.0 is out with a list of "The 50 people who matter now":

The names presented here weren't selected on the basis of fame, net worth, or the accomplishments of yesteryear.

Instead, our goal was to identify people whose ideas, products, and business insights are changing the world we live in today -- those who are reshaping our future by inventing important new technologies, exploiting emerging opportunities, or throwing their weight around in ways that are sure to make everyone else take notice.

It's great to see three highly deserving friends make the list:

Rank: 13
Stewart Butterfield and Caterina Fake
Co-founders, Flickr
Why They Matter
: As the creators of Flickr, the phenomenally successful photo/social-networking site, the husband-and-wife team has become the poster couple for the Web 2.0 movement. But that's not why they appear here. Flickr was acquired by Yahoo last year, and now Butterfield and Fake have been deployed to spread some of Flickr's social-media DNA throughout the company. That means finding new ways to emphasize human-powered keyword tagging and filtering, on everything from your own search results to travel itineraries and restaurant reviews. Incorporating the subjective nuances of human judgment into its search results has become an essential part of Yahoo's strategy to compete against Google, its algorithm-obsessed rival. Thanks to the Flickr kids, the search wars are shaping up to be a battle of man vs. machine.
and...
Rank: 22
Reid Hoffman
Angel investor and CEO, LinkedIn
Why He Matters
: Want to launch a Web 2.0 startup? Be prepared to kiss Hoffman's ring. In his day job, Hoffman is the co-founder of LinkedIn, the online haven for business networkers. But on the side, he's also an angel investor with a knack for spotting young companies with big potential. Thus far, he's supplied insight and investment money to a remarkable number of successful startups, including Digg, Facebook, Flickr, Last.fm, Six Apart, Technorati, and Wink. And while the cash is nice, Hoffman's imprimatur has become even more important if you want to be seen as a player in today's Internet game. If he likes your idea, good fortune is likely to follow. If he doesn't, it may be time to rethink your business plan.
Some of the people whom Business 2.0 considers to matter less than Stewart, Caterina, or Reid include:
  • Jimmy Wales, founder of Wikipedia
  • Ed Whitacre, Chairman and CEO of AT&T
  • Oprah Winfrey
  • Jeff Bezos, CEO of Amazon.com
  • Richard Branson, Chairman of Virgin Group
Congratulations to all three of you!

April 07, 2006

Starbucks, Consistency, and Competition

Earlier this week, I wrote about the minor controversy in Missoula, MT over the opening of the downtown's first Starbucks. Now, again via Starbucks Gossip, comes word of an anti-Starbucks column written by a local resident:

While I agree that many small, independently owned espresso shops in America may owe their origin to Starbucks; I would argue that Starbucks, like many corporations, sold its soul on the route to ubiquity. Starbucks coffee has become a symbol of consistent mediocrity. No longer educating the public about coffee, they actually brew mass misconceptions about coffee and espresso (i.e. the caramel 'macchiato').

The downtown Missoula coffee market is more than saturated. There is a place to buy an espresso drink on EVERY single block of the downtown business district. The impending arrival of City Brew (with its Orange Street, interstate-friendly drive-thru) and downtown Starbucks are further pressuring an already pressurized market, hence the predatory practices which bring up the strong revulsion of Starbucks. There is not an open market for espresso downtown. Starbucks is not providing something which is uniquely Missoulian or uniquely Montanan, like the rest of the downtown businesses. It will not draw tourists from other areas to downtown. While each coffee retailer has its own loyal customers who would never darken the door of a Starbucks, that's not the customer base they are worried about. Downtown Missoula greatly relies on the summer tourist dollar. Coffee is of great comfort to the traveler. Before, a downtown tourist would have been obligated to take a chance on a local coffeehouse. Now the siren song of the "consistent yet mediocre" mermaid will be beckoning on North Higgins.

These are not customers who have the time or inclination to experiment with some local flavor. These customers have one shot to buy coffee downtown before they leave. A national name and familiarity is NOT something the local retailer can compete with.

Starbucks is "mediocre", yet its popularity means it can't be competed with? I'm reminded of the famous Yogi Berra line:

Nobody goes there anymore; it's too crowded.
You can't have it both ways, saying, "Starbucks is mediocre; I can't compete with it." If Starbucks is truly mediocre, then surely it can be competed with. And somehow it's "predatory practices" of Starbucks to open up one more espresso outlet when there's one on every single block of the downtown business district? You mean it wasn't predatory when all those other espresso outlets opened up on top of one another?

The author is right in one sense: Starbucks is all about consistency -- that's the nature of the quick-service food business. I don't pretend they make the best coffee around. For example, if I'm in Seattle, I'll choose Uptown Espresso whenever I'm near one. But if I'm on the road, and especially if I'm in a hurry, yes, I'll choose Starbucks -- I like it, and more importantly I know what I'm going to get.

It's said that the greatest weakness of a person or an organization is its greatest strength taken to an extreme, and I generally believe that. If Starbucks' greatest strength is consistency, then its greatest weakness is an inability to adapt quickly or locally. Instead of trying to prevent competition, figure out how to beat Starbucks at its own game. Make drinks they don't make. (Why hasn't someone made an Americanized, Starbucks-style version of Thai iced coffee and popularized it?) Offer customers a different experience than they can have at Starbucks. (Why no fireplaces, especially in cold-weather locations like Missoula?) Give them things that Starbucks doesn't: Pastries baked on-premises. Free Wi-Fi. Donuts. A free newspaper with a minimum purchase -- say, a drink and a pastry (and make it a national newspaper -- travelers don't care about local news). Fresh made-to-order sandwiches. Soft drinks.

Starbucks is neither evil nor predatory. They're powerful, and they have tremendous brand name recognition, and they didn't get that way by making drinks that people didn't want. But they can be competed with. To attempt to deny them access to a local market is anti-competitive, and therefore fundamentally anti-consumer. Moreover, if you don't like Starbucks, don't think you can defeat them by locking them out: you can't. You can only defeat them -- or, more likely, slow their advance -- by being innovative and clever in how you compete with them. And putting up barriers to them isn't going to teach you how to compete: just ask the US auto manufacturers about that.

April 03, 2006

Before Starbucks

Via Starbucks Gossip, an editorial from missoulian.com on concerns over a new Starbucks set to open in downtown Missoula, MT:

It's an encouraging reflection of how well things are going in Missoula these days that little else is causing as much teeth-gnashing among the local intelligentsia than the impending opening of a downtown Starbucks coffee shop...

Those small independent coffee shops and kiosks all over town that Starbucks now threatens? They owe their existence to Starbucks. It was Starbucks that got people to plunk down $2 for a cup of coffee and be glad about it. It the process it launched an entire industry -- made up, by the way, largely of little, independently owned espresso shops that took a whole lot of business away from the cafes and restaurants that once did a brisk business with 25-cent cups of drip coffee.

I hadn't thought about it this way. Before Starbucks, coffee was cheap and bad. So my San Francisco friends who get upset over Starbucks displacing local coffee houses are getting upset over Starbucks displacing its own imitators.

Today there are thousands and thousands of young people earning money in coffee-making jobs -- some with Starbucks, most elsewhere. These are jobs that didn't exist before Starbucks introduced Americans to the term "barista." These aren't high-paying jobs, but they're plentiful with flexible hours, and they help pay rent or tuition. Pre-Starbucks, making coffee was something a waitress or bus boy did in between their many other chores.
My son Duncan, who is a senior in high school, just got a job at the Starbucks located in the Super Target here in our town. He'll be a Target employee, not a Starbucks employee, so it won't be quite the same, but still, I was pleased to hear about his new gig. In the universe of jobs available to high school students, Starbucks is good duty -- decent pay, reasonable hours, interesting customers, and no slaving over a fry cooker or burger grill. It will be a solid part-time job for him over the summer and as he starts college this fall.

April 02, 2006

Features Aren't Products

Yesterday, I wrote:

I had dinner last week with a friend of mine who's a Sand Hill VC, who told me about seeing a business plan from one entrepreneur who had implemented a single feature -- the kind of thing a talented AJAX programmer could get up and running in a day or two by hooking into an existing Web service's API -- and was looking for full first-round funding. The feature wasn't a demo of a small slice of what he wanted to build with his funding -- he just wanted to build services around it. Around a feature.
What I didn't write was that late last year, within the span of a week, I had two friends e-mail me asking me what they thought about both the company mentioned above and another company building what appeared to be an identical product. I replied then just as I wrote earlier today, that it sounded like a feature to me, something that could be built on top of an existing Web service within days.

What triggered today's blog entry was reading a commentary by a well-known entrepreneur-turned-venture capitalist saying that Web 2.0 companies are massively overhyped (often true) and that the term is basically used to get funding for ideas that don't deserve it (often true). This person then went on to list his investments -- one of which was the company described above, about which he says he's excited. So Web 2.0 is just hype, unless you're invested in it, in which case it's cool?

Everyone repeat after me: features aren't products.

How can you tell when something's a feature?

  • If it can be built to prototype stage by one programmer within 24 hours, it's a feature.
  • If it's completely reliant on an existing Web 2.0 service, and is valueless without that service, it's a feature.
  • If you can imagine it as a single menu item on an existing desktop software application, it's a feature.
  • If, when you show it to people, their typical reaction is, "How cute!" it's a feature, unless you're showing them a picture of puppies, which isn't a feature -- it's just a picture of puppies.
By the way, if someone reading this decides to write a business plan asking for $3 million to build a Web 2.0 service that uses AJAX to serve up pictures of puppies for users, please don't mention that you got the idea from me.

April 01, 2006

It's a [ Bad | Good ] Time to Start a Business

My friend Caterina Fake of Yahoo (née Ludicorp) has a list of six reasons why "it's a bad time to start a company":

  1. Everybody else is starting a company.
  2. Your competition just got funded too.
  3. Talent is scarce again.
  4. You can't operate in obscurity anymore.
  5. Web 2.0 isn't all that.
  6. There's too much going on.
David Heinemeier Hansson of 37signals responds with a list of five reasons why "it's a great time to start a business":
  1. You don't need VC diesel to get your motor running.
  2. You can actually charge money for valuable services.
  3. You don't need mainstream tech to make a dent.
  4. You don't need to live in San Francisco to make it big.
  5. You don't need a swarm of worker bees to take off.
In fact, the two lists aren't incompatible at all. As David writes:
Yes, it's a bad time to start a company on VC diesel, using me-too technology, flaunting your non-existing goods, doing tagging because it's cool, and spending all your time partying. Guess what? That was never a good idea.
I had dinner last week with a friend of mine who's a Sand Hill VC, who told me about seeing a business plan from one entrepreneur who had implemented a single feature -- the kind of thing a talented AJAX programmer could get up and running in a day or two by hooking into an existing Web service's API -- and was looking for full first-round funding. The feature wasn't a demo of a small slice of what he wanted to build with his funding -- he just wanted to build services around it. Around a feature. Another entrepreneur came to him with a business plan competitive with an existing service that profitably serves up an interesting fraction of all Internet traffic. My friend asked the entrepreneur how he compared with his large, entrenched competitor. Hadn't heard of them.

Caterina is right. There are too many Web 2.0 companies in the Valley, competing for too few employees, building imitative services, with names out of Star Wars and no clear revenue plan.

Daniel is right, too. There's no excuse for building a me-too company when there are so many great services waiting to be implemented, services for which people will pay, and there's no overriding reason for building your company in the Valley when collaboration tools have come into their own and VCs are willing to invest out of their zip code.

June 24, 2003

Do I Put "Starbucks" on My Cards?

The Economist on the evolution of coffee houses as temporary office space:

America is becoming a café culture. But the reason is less Starbucks marketing than the economic downturn. The white-collar army of the unemployed are making cafés their offices and job-search centres. Going there every day provides the same sort of structure and routine as a formal office -- but with much better coffee.

Of course, cafés have long served as the locus of business activity for independent consultants, creative types and teleworkers (as well as brewing-places for novels, coups and revolutions). But the new clientèle is different. In contrast to previous recessions, more professionals are out of work. Technology has changed, too, allowing people to job-hunt or devise new business plans untethered from their clunky desk computers and tangled-cord home phones. Moreover, with the number of cafés growing from under 2,000 in 1991 to over 14,000 today, these people now have plenty of places to go....

For coffee houses themselves, their new status as job centres has helped the industry buck the slumping economy. In 2002, the gourmet-coffee sector earned a record $8.40 billion in revenue, with cafs accounting for more than half the sales. Many coffee houses, belonging both to publicly-traded companies and independent retailers, are reporting sales growth of roughly 7%. And though $4 for a cappuccino may seem steep, it's pretty good for a New York per diem office rent.

It's interesting that the article only alluded to (rather than specifically mention) Wi-Fi as a part of this trend. It's not absolutely necessary to get work done, but it certainly helps.

And the unemployed aren't the only people taking advantage of this sort of thing. Of course, there are the business travelers -- I sent up a colleague of mine with Wi-Fi, and now he automatically seeks out Starbucks whereever he goes, partly for the coffee and partly for the connection. And then there are people who just want to get a little work done away from the office for a change. A wonderful new Irish pub opened up next door to my offices recently. Wisely, not only did the owner put in an access point, he made it free of charge. I've taken my laptop over to sit outside and work a bit while enjoying a late-afternoon pint. I recommend it.

April 23, 2003

Good News and Bad News from Ford

There was good news and bad news from Ford on the environmental front last week. First the good news: a formal announcement of their Escape Hybrid SUV, and a pre-announcement of their Futura mid-size sedan, which will be available with a hybrid engine:

Ford Motor Company is highlighting its commitment to hybrid vehicles at this weeks New York International Auto Show. The company is showing the Escape Hybrid SUV -- which will begin low-volume fleet production at years end and retail production in the second half of 2004 -- as well as announcing that the all-new 2006 Ford Futura mid-size car will be the companys next hybrid vehicle.
Ah, but now the bad news: backing down from a prior environmental pledge:
Executives of the Ford Motor Company yesterday backed away from a pledge to increase the fuel economy of its sport utility vehicles by 25 percent by 2005...

Ford is not abandoning the pledge entirely, said one Ford executive, who spoke on the condition of anonymity, but rather is indicating that it does not know whether it can meet the original timetable.

"Are we still trying to get there? Absolutely," this executive said. "Will we get there by that deadline? It's unclear."

More on hybrid cars soon..

April 22, 2003

Big, Evil Sugar

Via boing boing comes a story in the Guardian on the US sugar industry's opposition to new nutritional guidelines from the World Health Organization:

The sugar industry in the US is threatening to bring the World Health Organisation to its knees by demanding that Congress end its funding unless the WHO scraps guidelines on healthy eating, due to be published on Wednesday.

The threat is being described by WHO insiders as tantamount to blackmail and worse than any pressure exerted by the tobacco lobby.

In a letter to Gro Harlem Brundtland, the WHO's director general, the Sugar Association says it will "exercise every avenue available to expose the dubious nature" of the WHO's report on diet and nutrition, including challenging its $406m (£260m) funding from the US.

The industry is furious at the guidelines, which say that sugar should account for no more than 10% of a healthy diet. It claims that the review by international experts which decided on the 10% limit is scientifically flawed, insisting that other evidence indicates that a quarter of our food and drink intake can safely consist of sugar.

"Taxpayers' dollars should not be used to support misguided, non-science-based reports which do not add to the health and well-being of Americans, much less the rest of the world," says the letter. "If necessary we will promote and encourage new laws which require future WHO funding to be provided only if the organisation accepts that all reports must be supported by the preponderance of science." ...

The Sugar Association objects to the new report having been published in draft on the WHO's website for consultation purposes, without what it considers "a broad external peer-review process". It wants a full economic analysis of the impact of the recommendations on all 192 member countries. In the letter to Dr Brundtland, it demands that Wednesday's joint launch with the Food and Agriculture Organisation be cancelled...

The industry does not accept the WHO report's conclusion that sweetened soft drinks contribute to the obesity pandemic. The Washington-based National Soft Drink Association said the report's "recommendation on added sugars is too restrictive". The association backs a 25% limit.

The Sugar Association is proposing to withhold all US funding from the WHO -- yes, the people fighting to contain SARS and numerous other worldwide health threats -- if they don't agree that people should feel free to consume one-quarter of all their calories from added sugars. This goes beyond audacious self-interest. This is -- and I don't use the term lightly -- evil.

This is just the latest example of the destructive self-interest practices of the US sugar lobby. They have long sought and received unfair trade protections that cost US consumers billions of dollars, as described in this 2002 article from the Cato Institute:

Through its sugar program, the U.S. government guarantees a minimum price to domestic sugar growers by restricting imports and by buying and storing excess production. The result of this intervention is a domestic sugar price that is typically two or three times the world market price. The losers are millions of American families that consume sugar, along with sugar-using industries such as candy-makers, and sugar growers in mostly poor countries.

As with other protectionist policies, the biggest losers are consumers. American families pay for this program every time they buy Christmas candy and cookies, a bag of sugar, soft drinks or candy bars. A report by the U.S. General Accounting Office estimated that, in 1998, American sweetener users paid an extra $1.9 billion a year because of the U.S. sugar program...

Also paying the price for the sugar program are taxpayers and the environment. To mop up overproduction caused by price supports and protection, the federal government bought nearly 1 million tons of sugar last year only to store it in government warehouses. The buying and storing of excess sugar will cost taxpayers an estimated $2 billion over the next 10 years. Taxpayers are also paying billions of dollars to help clean up the Florida Everglades, where excess sugar production in the region has disrupted water flows and dumped pollutants such as phosphorus in waterways.

The sugar program has caused damage beyond our borders. The depressed global sugar prices caused by U.S. protectionism cost sugar producers in poor nations an estimated $1.5 billion a year in lost export earnings. Our stubborn refusal to open our sugar market has complicated the efforts of U.S. trade negotiators to open foreign markets to American exports, including services, manufactured goods, and farm products such as soy beans and corn in which we enjoy a natural competitive advantage...

The U.S. sugar program is a classic case of concentrated benefits and diffused costs. A small number of sugar growers receive enormous benefits, while the costs of providing those benefits are spread across the U.S. economy, specifically to consumers and confectioners. Consequently, U.S. sugar producers have a strong incentive to lobby and fund campaigns of U.S. policy-makers. Dominated largely by two companies in Florida (Flo-Sun and U.S. Sugar), the sugar lobby has been a major financial contributor to incumbent politicians.

Enough is enough. Big Sugar must be stopped.