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Tag: Netflix

What Happens After the Tech Bubble Pops

In recent years, it’s been the opposite of controversial to say that the tech industry is in a bubble. The terrible recent stock market performance of once high-flying startups across virtually every industry (see table below) and the turmoil in the stock market stemming from low oil prices and concerns about the economies of countries like China and Brazil have raised fears that the bubble is beginning to pop.

Company Ticker Industry Stock Price Change Since IPO (Feb 5)
GoPro NASDAQ:GPRO Consumer Hardware -72%
FitBit NYSE:FIT Wearable -47%
Hortonworks NASDAQ:HDP Big Data -68%
Teladoc NYSE:TDOC Telemedicine -50%
Evolent Health NYSE:EVH Healthcare -46%
Square NYSE:SQ Payment & POS -34%
Box NYSE:BOX Cloud Storage -42%
Etsy NASDAQ:ETSY eCommerce -77%
Lending Club NYSE:LC Lending Platform -72%

While history will judge when this bubble “officially” bursts, the purpose of this post is to try to make some predictions about what will happen during/after this “correction” and pull together some advice for people in / wanting to get into the tech industry. Starting with the immediate consequences, one can reasonably expect that:

  • Exit pipeline will dry up: When startup valuations are higher than what the company could reasonably get in the stock market, management teams (who need to keep their investors and employees happy) become less willing to go public. And, if public markets are less excited about startups, the price acquirers need to pay to convince a management team to sell goes down. The result is fewer exits and less cash back to investors and employees for the exits that do happen.
  • VCs become less willing to invest: VCs invest in startups on the promise that future IPOs and acquisitions will make them even more money. When the exit pipeline dries up, VCs get cold feet because the ability to get a nice exit seems to fade away. The result is that VCs become a lot more price-sensitive when it comes to investing in later stage companies (where the dried up exit pipeline hurts the most).
  • Later stage companies start cutting costs: Companies in an environment where they can’t sell themselves or easily raise money have no choice but to cut costs. Since the vast majority of later-stage startups run at a loss to increase growth, they will find themselves in the uncomfortable position of slowing down hiring and potentially laying employees off, cutting back on perks, and focusing a lot more on getting their financials in order.

The result of all of this will be interesting for folks used to a tech industry (and a Bay Area) flush with cash and boundlessly optimistic:

  1. Job hopping should slow: “Easy money” to help companies figure out what works or to get an “acquihire” as a soft landing will be harder to get in a challenged financing and exit environment. The result is that the rapid job hopping endemic in the tech industry should slow as potential founders find it harder to raise money for their ideas and as it becomes harder for new startups to get the capital they need to pay top dollar.
  2. Strong companies are here to stay: While there is broad agreement that there are too many startups with higher valuations than reasonable, what’s also become clear is there are a number of mature tech companies that are doing exceptionally well (i.e. Facebook, Amazon, Netflix, and Google) and a number of “hotshots” which have demonstrated enough growth and strong enough unit economics and market position to survive a challenged environment (i.e. Uber, Airbnb). This will let them continue to hire and invest in ways that weaker peers will be unable to match.
  3. Tech “luxury money” will slow but not disappear: Anyone who lives in the Bay Area has a story of the ridiculousness of “tech money” (sky-high rents, gourmet toast, “its like Uber but for X”, etc). This has been fueled by cash from the startup world as well as free flowing VC money subsidizing many of these new services . However, in a world where companies need to cut costs, where exits are harder to come by, and where VCs are less willing to subsidize random on-demand services, a lot of this will diminish. That some of these services are fundamentally better than what came before (i.e. Uber) and that stronger companies will continue to pay top dollar for top talent will prevent all of this from collapsing (and lets not forget San Francisco’s irrational housing supply policies). As a result, people expecting a reversal of gentrification and the excesses of tech wealth will likely be disappointed, but its reasonable to expect a dramatic rationalization of the price and quantity of many “luxuries” that Bay Area inhabitants have become accustomed to soon.

So, what to do if you’re in / trying to get in to / wanting to invest in the tech industry?

  • Understand the business before you get in: Its a shame that market sentiment drives fundraising and exits, because good financial performance is generally a pretty good indicator of the long-term prospects of a business. In an environment where its harder to exit and raise cash, its absolutely critical to make sure there is a solid business footing so the company can keep going or raise money / exit on good terms.
  • Be concerned about companies which have a lot of startup exposure: Even if a company has solid financial performance, if much of that comes from selling to startups (especially services around accounting, recruiting, or sales), then they’re dependent on VCs opening up their own wallets to make money.
  • Have a much higher bar for large, later-stage companies: The companies that will feel the most “pain” the earliest will be those with with high valuations and high costs. Raising money at unicorn valuations can make a sexy press release but it doesn’t amount to anything if you can’t exit or raise money at an even higher valuation.
  • Rationalize exposure to “luxury”: Don’t expect that “Uber but for X” service that you love to stick around (at least not at current prices)…
  • Early stage companies can still be attractive: Companies that are several years from an exit & raising large amounts of cash will be insulated in the near-term from the pain in the later stage, especially if they are committed to staying frugal and building a disruptive business. Since they are already relatively low in valuation and since investors know they are discounting off a valuation in the future (potentially after any current market softness), the downward pressures on valuation are potentially lighter as well.
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Staying in Sync

While I don’t expect everyone to be as device-crazy as I am, one of the obvious consequences of convergence (the idea that more gadgets will become more computer-like — think smartphones, tablets, etc.) is that more people will have more devices. This creates new problems for users who, especially if they are from the US, were previously used to accessing their services/information mainly from a single device. After all, a well-built service or source of information should optimize experience around the user, not which device.

This proliferation is one reason I think internet services like Evernote and Gmail took off: for someone working with multiple devices, its much easier to make sure every device has access to the same data and functionality when the data and functionality aren’t on the devices themselves but hosted somewhere “in the cloud.” (Thank you, Dilbert)

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The same logic applies to syncing services like Dropbox and applications like Netflix and smart syncing software like Chrome: they make it easy to ignore which device you’re using and just focus on the functionality and data that you want access to (in the case of Dropbox, its files; in the case of Netflix, its your viewing history and your place in a given video; and in the case of Chrome, its browser history and preferences).

Its gotten to the point where there are enough app developers and technologists working on this type of syncing that I get disappointed when a service or application fails to intelligently think about syncing as a way to delight the user. For instance, I get regularly irritated by the Twitter app for not tracking which interactions (@replies, favorites, re-tweets) I have previously seen. As I routinely move from one device (a smartphone) to another (a PC) to yet another (a tablet), with each device, I need to recheck which tweets and interactions I have seen and which I haven’t. While this is hardly the end of the world, it is only obvious because apps like Google’s new Hangouts app and Amazon’s Kindle app pass information on what you’ve seen and to where between devices, making it a coherent service completely unchained to the specific device you’re using – you can start a chat/book on one device and transition to another device without a hitch. I especially am a fan of Hangouts’ extra step: if you see an incoming message on one device, it will remove the notification from all the other connected devices (and will even minimize the open windows in other Chrome browsers).

This sort of abstraction is a common theme in the technology industry – where new companies and technologies emerge to simplify new sources of complexity. Its something I believe is becoming key functionality as the underlying problem (people with lots of devices and lots of services) grows. My advice to developers and entrepreneurs out there: don’t assume your users are married to any particular device and help them stay in sync. They will reward you for doing so.

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The Cable Show

A few weeks ago, I attended the 2012 Cable Show – the cable television industry’s big trade show – in Boston to get a “on the ground floor” view of how the leading content owners and cable television/cable technology providers saw the future of video delivery, and thought I’d share some pictures and impressions

  • While there is a significant piece of the show that is like a typical technology conference (mainly cable infrastructure/set top box technology vendors like Motorola, Elemental, Azuki, etc showing off their latest and greatest), by far the biggest booths are SXSW-style attempt (flashy booths, gimmicks) by the content owners (NBC, Disney, etc) to get people to notice them. Almost every major content provider booth had a full bar inside, there were lots of gimmicks (see some of the pictures below — Fox and NBC trotted out some of their celebrities, many booths had photo booth games to show off their latest shows – like A&E with its show Duck Dynasty, Turner even invited a lollipop maker to create lollipops in the shape of some of their cartoon characters, etc).
  • The relationship between content owners and cable companies that has built the profits in the industry is being tested by the rise of internet video. Until recently, I had always been confused as to why Hulu and Netflix seemed so restrictive in terms of content availability. It was only upon understanding just how profitable the existing arrangement between the cable/satellite providers (who are the only ones who can sell access to ESPN, HBO, CNN, etc) and the content owners (who can charge the cable/satellite providers for each subscriber, even those who don’t watch their particular networks) that I began to understand why you can’t get ESPN or HBO online (unless you have a cable/satellite subscription) — much to the detriment of the consumer. Thankfully, I saw some promising signs:
    • At the Cable Show, every content provider and cable provider was talking about “TV Everywhere”. Nearly every single booth touted some sort of new, more flexible way to deliver content over the internet and to new devices like tablets and phones. Granted, they were still operating within the existing sandbox (you can’t watch it without a cable subscription), but the increasing competitive overlap between the cable TV-over-internet services (like Xfinity TV online) and the content providers’-over-internet services (like HBO GO), I feel, will come to a breaking point as
      • Networks like HBO realize they could get a ton of standalone users and make a ton of standalone money by going direct to consumers
      • Smaller networks  increasingly feel squeezed as cable companies give a bigger and bigger cut of total content dollars to networks like HBO and Disney/ESPN/ABC, and resort to going direct to consumers.
    • New “TV networks” are getting real traction. One of the most real threats, from my perspective, to the cable-content owner dynamic is the rise of new content networks like Revision3, Blip.TV, College Humor, and YouTube’s new $200M initiative to build original high-quality “shows”. Why? Because it shows that you don’t need to use cable/satellite or to be a major content owner to get massive distribution. Its why Discovery Networks (owners of the Discovery Channel and TLC) bought Revision3. Its why Hulu, Netflix, and Amazon are funding their own content. After all, Hulu has quite a few made-for-Hulu programs. Netflix has not only created some interesting new shows, they’ve even decided to resurrect the canceled TV series Arrested Development. And its why Amazon just announced its first four original studio projects. Are these going to give HBO’s Game of Thrones a run for its money? Probably not anytime soon — but traction is traction, and the better off these alternatives do, the more likely the existing content/distributors are forced to adapt to the times.

I think this industry is ripe for change — and while it’ll probably come slower than it should, there’s no doubt that we’re going to see massive changes to how the traditional TV industry works.

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How to properly define a company’s culture

Company culture is a concept which, while incredibly difficult to explain or measure, is very important to a company’s well-being and employee morale. Too often, it comes in the form of vaguely written out “corporate mission statements” or never-ending lists of feel-good, mean-nothing “company values”. Oh joy, you value “teamwork” and “making money” – that was so insightful…

It was thus very refreshing for me to read the Netflix company culture document (sadly no longer embed-able, but you can find it at this Slideshare link).

Slidumentation aside, I think the NetFlix presentation does three things extremely well:

  1. It’s not a list of feel-good words, but  actual values and statements which can actually guide the company in its day-to-day hiring, evaluation. Most company culture statements are nothing but long lists of virtues and things non-sociopaths respect. “Teamwork” and “honesty”, for example, are usually among them. But, as the Netflix presentation points out, even Enron had a list of “values” and that wound up not amounting to much of anything. Instead, Netflix has a clear state of  things they look for in their employees, each with clear explanations for what they actually mean. For “Curiosity”, Netflix has listed four supporting statements:
    • You learn rapidly and eagerly
    • You seek to understand our strategy, markets, subscribers, and suppliers.
    • You are broadly knowledgeable about business, technology, and entertainment.
    • You contribute effectively outside of your specialty

    Admittedly, there is nothing particularly remarkable about these four statements. But what is remarkable is that it is immediately clear to the reader what “curiosity” means, in the context of Netflix’s culture, and how Netflix employees should be judged and evaluated. It’s oftentimes astounding to me how few companies get to this bare minimum in terms of culture documents.

  2. Netflix actually gives clear value judgments.  I’ve already lamented the extent to which company culture statements are nothing more than laundry lists of “feel good” words. Netflix admirably cuts through that by not only explaining what the values mean, but also by what should happen when different “good words” conflict. And, best of all, they do it with brutal honesty. For instance, Netflix on how they won’t play the “benefits race” that other companies play:

    A great work place is stunning colleagues. Great workplace is not day-care, espresso, health benefits, sushi lunches, nice offices, or big compensation, and we only do those that are efficient at attracting stunning colleagues.

    Netflix on teamwork versus individual performance:

    Brilliant jerks: some companies tolerate them, [but] for us, the cost to teamwork is too high.

    Netflix on its annual compensation review policy:

    Lots of people have the title “Major League Pitcher” but they are not all equally effective. Similarly, all people with the title “Senior Marketing Manager” and “Director of Engineering” are not equally effective … So, essentially, [we are] rehiring each employee each year (and re-evaluating them based on their performance) for the purposes of compensation.

    Within each of the three examples, Netflix has done two amazing things: they’ve made a bold value judgment, which most companies fail to do, explaining just how the values should be lived, especially when they conflict (“we don’t care how smart you are, if you don’t work well with the team, you have to go”), and they’ve even given a reason(“teamwork is more important to delivering impact for our customers than one smart guy”).

  3. They explain what makes their culture different from other companies and why. Most people who like their jobs will give “culture” as a reason they think their company is unique. yet, if you read the countless mission statements and “our values” documents out there, you’d never be able to see that difference. Granted, the main issue may just be that management has chosen not to live up to the lofty ideals espoused in their list of virtues, but what might help with that and make it clearer to employees about what makes a particular workplace special is explaining how and why the company’s culture is different from another’s. Contrast that with the Netflix presentation, which spends many slides explaining the tradeoffs between too many rules and too few, and why they ultimately sided with having very few rules, whereas a manufacturing company or a medical company would have very many of them. They never go so far as to say that one is better than the other, only that they are different because they are in different industries with different needs and dynamics. And, as a result of that, they have implemented changes, like a simpler expense policy (“Act in Netflix’s best interests”) and a revolutionary vacation policy (“There is no policy or tracking”) [with an awesome explanation: “There is also no clothing policy at Netflix, but no one has come to work naked lately”].

Pay attention, other companies. You would do well to learn from Netflix’s example.

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No Money for Blockbuster

imageAs frequent readers of this blog know, my Benchpress-partner-in-crime Anthony and I like making $100 offers for failing companies/divisions. One may inquire, then, given Blockbuster’s plight, why we haven’t made our usual $100 offer.

The reason is simple, despite a couple of long discussions about Blockbuster: Anthony and I are simply not confident that we could turn around Blockbuster.

There really are only three ways for their management to proceed:

  1. Out-Netflix Netflix. The major benefit of this strategy is that this is the business model that its management would be most familiar with – selling/renting video content. However, that’s about the only benefit that this strategy has. They are now strategic followers in a game which Netflix created and perfected, rather than leaders. But unlike Microsoft, they lack the resources to outlast or outinvest their compimageetition (in 2008, Blockbuster lost $374 million compared to having only $626 million of equity [all their assets minus all their debts], while Netflix made a profit of $122 million on $347 million of equity) nor do they have a premium offering to combine with their new strategy (e.g. Microsoft can roll innovations in things like Virtualization or Cloud Computing back into Windows or Office). Blockbuster’s one asset over Netflix, their physical presence around the country, is now relatively unimportant given the prevalence of broadband internet (and new internet-enabled set top boxes) and the cheapness and speed of mail delivery and their traction thus far in gaining major electronics and set-top box wins has been disappointing. Their most promising press release (a partnership with Microsoft to use Live Mesh) may be the only thing going for them – and this happens to be with the player who’s not the leader in portable media players and who’s Live Mesh product won’t really get full force until late-2009/early-2010. This strategy is not promising.
  2. Fundamentally change their business model. This is an idea I pushed at first – suggesting that Blockbuster switch business models to selling home entertainment gear, something which could help tie with their current product offering and give them much needed partners to counter their current slump and lack of customer mindshare. However, Blockbuster’s lack of resources (as of Oct 2008, only $95 million in liquid cash) and profitability and the high risk and long-term horizon of this strategy make this un-feasible as a game changing play. Simply put, there’s not enough farm to bet on this strategy.
  3. Sell themselves. This is probably the most promising strategy in that Blockbuster will only need to turn itself around just enough to convince another buyer to acquire the assets. But, given that Blockbuster is the largest brick & mortar renter of videos and its dim prospects, its unlikely there are any buyers interested in owning a video rental store. Success would require finding a party interested in:
    • Buying an industry stalwart who’s likely to shed off much more in losses and brand value before being able to turn itself around
    • An unwieldy network of physical stores
    • Investing large amounts in either outcompeting Netflix, fundamentally changing their business, or some combination of the two

Sorry, Blockbuster – maybe Dogbert will cough up some dough for you?

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(Image Credit) (Image Credit) (Dilbert)

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