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Ipod & The Dirty Secret Of Grassroots Marketing

No company understands the power of grassroots marketing better than Apple. In fact, the movement that was to become "Apple" was even foreshadowed in Apple's own, famous 1984 advertising campaign. While Apple has been quick to reap the rewards of an almost unparalleled ability to leverage the power of the grassroots marketing over the last two decades, the dirty secret of grassroots marketing "movements" is that they can just as easily be turned against you, as work for you. This is especially true when your "brand believers" are creatively minded folks with an idealistic world-view, an ability to design websites/edit video and a deep skepticism of everything that smacks of "The Man".
One frustrated Apple believer recently learned that Apple wanted to charge him $255 to replace the dead battery in his 18-month old iPod. What would any self-respecting grassroots believer do? Why launch a guerrilla marketing campaign of his own, of course. The disgruntled Apple-kid has been stencilling the words "iPods Unreplaceable Battery Lasts Only 18 Months" all over Ipod ads throughout New York City. In fact, he has even gone global and created an downloadable movie chronicling his efforts via Gizmodo]
It is critical that Apple remains true to its believers---for the believers brought Apple to the party in the first place and have helped Apple remain competitive in the cutthroat world of the pc manufacturers. Apple's believers are the bagdge-bearers who, like the Harley-owner who puts up with the potato decibels, gladly rebuilds his/her desktop every six months and evangelizes the supremacy of Apple 24/7 to anyone who will listen.
In grassroots marketing--once your believers turn against you, the endgame has begun.

Posted by Bradley Peacock | Permalink | Comments (8) | TrackBack

Rumors of NetFlix’s Pending Demise Are Greatly Exaggerated

One company we’ve always been impressed with is the DVD-rental-by-mail NetFlix. Various members of the BuzzSponge team have used NetFlix over the last few years, and each of them has raved about the convenience of the service. Consequently, whenever there’s an article in the business press about the company, we tend to take notice. You can imagine, then, that we read this morning’s Wall Street Journal article about NetFlix—portentously titled “DVD-Rental Firm May Be Victim Of Its Own Success”— with particular interest.

For those of you who aren’t familiar with the NetFlix business model, here’s a brief summary. NetFlix is a movie rental website that pioneered the concept of renting DVDs to customers for a flat monthly fee. Effectively, customers paid $19.95 a month to rent as many movies as they wanted, with the sole catch being that you could “check out” three movies at a time (if you paid a higher rate, you could rent more movies). You’d thus select a list of movies that you wanted to rent and place them in a “queue” of up to 10 movies, and NetFlix would subsequently mail the movies three at a time to you. When you were done with each movie, you’d simply mail it back to Netflix in a pre-paid envelope that came with the rental, and NetFlix would mail you the next movie from your queue. Customers flocked to this model, primarily because Netflix offered several things that brick-and-mortar video stores couldn’t: an astonishing selection of movies (since Netflix operates a few huge warehouses, rather than several dozen small video stores, they could stock a wider array of movies), an easy-to-use interface (searching for movies electronically beats walking through the local Blockbuster) and finally, personal recommendations a la Amazon.com (made possible by well-organized and executed customer data collection and “collaborative filtering”).

The upshot of all of this? NetFlix has been extremely successful, despite the wintry economic climate that we’ve suffered through the last few years, having managed to consistently turn a profit for over a year and a half. Perhaps more impressively, the company continues to steadily grow and gain market share, even in the face of new competition from firms like Wal-Mart and Blockbuster. As was noted in the WSJ, in its most recent 10-Q, Netflix managed to generate $72m of revenue, up to 25% from the prior quarter. Net profitability is still small—roughly $3-$5m a quarter—but steady.

The fact that Netflix is one of a small—but growing—handful of Internet businesses turning a profit has meant that its stock has skyrocketed this year (according to the WSJ, it’s up 322%; more than either Amazon [up 162.2%] or eBay [up 56.4%]), a fact that’s pushed it’s P/E ratio to stratospheric levels (95x’s this year’s estimated earnings). These facts have made Netflix a favorite target of business journalists when it’s time to write a story about the return of bubbalicious Internet stocks, and also a favorite for investment analysts eager for publicity. Today’s WSJ article was no exception to this trend, and proposed that a) Netflix is indeed proof of a bubble in Internet stocks and b) there’s no way that Netflix’s business will withstand competition from the likes of well-run businesses like Wall-Mart or badly-run businesses like Blockbuster and c) there’s no way that Netflix’s industry—DVD rental-by-mail will survive the coming consonance shock of video-on-demand. Nothing we haven’t read before.

We’ll leave the debate as to whether or not Netflix is over-valued for a later time—we’ll wait ‘til we have a few more finance classes under our belt for that baby—but we would like to take issue with the other two anti-NetFlix arguments on the table, namely those tired, old and square arguments that the firm will end at the hands of either new competition or video-on-demand.

Now that we’ve thrown down the gauntlet, let’s examine why new competitors—especially new competitors like Wal-Mart or Blockbuster— don’t pose much of a threat to Netflix. We’ve got three answers here. Most obviously, Netflix’s niche—film buffs who rent several movies a month—is vastly different than the more mainstream segment that either Wal-Mart or Blockbuster serves. Simply put, Netflix stocks a much larger array of the more obscure art house, foreign and critically-acclaimed films that its niche—film buffs—prefer than either Blockbuster or Wal-Mart, which carry more new releases and blockbusters than NetFlix does. This means that Netflix is shielded somewhat from price competition since its product isn’t really a close substitute to the product produced/rented out by a Wal-Mart. (Consequently, the fact that Wal-Mart’s decision to price its DVD rental service at a price $4.41 less than NetFlix’s probably hasn’t slowed NetFlix’s growth too much.) If Wal-Mart or Blockbuster were to try to go after the same film buff customer, they’d face the economic challenge of having a much smaller base of film buff customers to spread the cost of acquiring art house/foreign film over, since their own audience is pretty much middle American, with very few film buffs. Moreover, Wal-Mart and Blockbuster would face a huge credibility gap trying to win over the Netflix customer—after all, it’s not too likely that budding cineastes and film aesthetes would want to rent from a low-brow service like Wal-Mart, right?

Furthermore, it’s important to consider that the economics of the NetFlix model are vastly different than the Wal-Mart model. Since its customers rent several movies a month (meaning more postage costs, content, etc), NetFlix’s customers are lower-margin customers than the likely customers of Wal-Mart, who rent just a few movies a month. The fact that Netflix has figured out a way to serve these lower-margin, high-rental volume customers profitably—optimizing its service to its niche, and figuring out how to stock movies at its warehouses in a manner that enables it to meet demand most efficiently—gives it a huge competitive advantage over a Wal-Mart or a Blockbuster, who’d have to learn how to serve these customers from scratch. Finally, because the key drivers of Netflix’s costs-a national warehouse and distribution network—are already sunk, Netflix has a powerful weapon vs. Wal-Mart or Blockbuster to use should it be challenged directly in one market. Effectively, it can lower prices at a time when its total costs are low, while the challenger’s total costs are still fairly high, since the challenger is still building out and paying for its service. This means that Netflix can quickly turn Wal-Mart’s or Blockbuster’s challenge into an investment with negative returns.

We also believe that Netflix is fairly well protected against the challenge from video-on-demand. First, the content on video-on-demand—mainstream blockbusters—is probably less appealing to the Netflix customer than to the Blockbuster or Wal-Mart customer. Secondly, video-on-demand doesn’t offer quality and high-end features that the NetFlix DVD customer likely values—there are no anamorphic scan, no 6.1 channel sound, no “making of” featurettes or deleted scenes on a VOD product. Third, it’s also probable that the threat of VOD to Netflix is less imminent than the business press would like you to believe. Keep in mind that the supplier for both VOD and DVD content—film studios—has a vested interest in promoting DVD over VOD, since DVDs form the most profitable part of a studio’s revenues at present. As such, why would a studio rush to VOD when they still have the opportunity to harvest plenty of revenue from DVD?

Finally, even assuming that VOD ever matches the quality of DVD, and arrives in the market more quickly than we expect it does, there’s no reason to believe that this should be a threat to Netflix’s business model. Provided that Netflix’s management is adroit enough to anticipate when the change to VOD will occur, and assuming that they’re strong-willed enough to accept that the costs of their investment into DVD rental-by-mail at that time are sunk, and shouldn’t figure into their decisions, they’ll be well-positioned to take advantage of VOD. This is because of the fact that Netflix’s model gives it reams of data on customer preferences, tastes, and desires, and because of the fact that like Amazon, the company has done an exceptional job of mining and refining that data to understand who its customers are, and what they want. Accordingly, when VOD comes, Netflix will be in the enviable position of being able to cross-sell the VOD content its customer wants—high-end and more obscure films—far better than any of its current competitors, who are attuned to the needs of the straight-up, mainstream market (yo).

In summary, while it’s certainly true that Netflix might be overvalued at present, the arguments proposed by popular business press as to why Netflix’s success can’t continue are poor at best, and show very little grasp of either competitive strategy or economics. So don’t believe all the hype you read about Netflix. We think it owns a pretty tight little niche, and barring any stupid decisions on the part of its management, it should be able to maintain this position for quite some time to come.

Posted by Matt Percy | Permalink | Comments (5) | TrackBack

Marketing Via Rumor And Innuendo: A Thought Experiment

A few weeks ago, rumors started popping up on the Internet that Microsoft—a small company in Redmond, Washington—was poised to make “a significant announcement” regarding its video game console, the XBox, on Nov. 15, which just happens to be the two year two-year anniversary of the XBox’s launch, and the one-year anniversary of XBox Live, the online gaming service that complements the XBox. (We realize that some of our less savvy readers might have a hard time accepting that the Internet can play a significant role in fostering rumors, but a quick search reveals that this isn’t the first time that urban legends, rumor and innuendo have flown ‘round the Internet.)

A few days ago, rumors as to the precise nature of the content of this announcement began to circulate amongst several videogame-related websites. Specifically, it was claimed that Microsoft would be releasing Halo 2—the much anticipated sequel to its bestselling science-fiction military combat simulation, Halo, which has grossed upwards of $250m worldwide, and sold countless XBox consoles—roughly 8 months earlier than anticipated. Almost immediately, discussion boards, chat rooms and video-game related websites and blogs spun into overdrive, as XBox owners salivated at the prospect of playing what will arguably be the biggest console game of 2004 this year. However, as quickly as the rumor materialized, a member of Bungie—the Microsoft-owned software company that’s developing Halo—stepped up and quashed the rumor altogether:

Despite all the juicy rumors floating around the net lately, I can confirm with absolute certainty that Halo 2 is NOT coming out in 2003. As we have said for quite some time now, the game will be released when it is done and that will be in 2004. It is not coming out next week. It will not be on store shelves this holiday. Why would anyone want to do a "secret release" with a property as big as Halo 2 anyways? What possible benefit is there in sneaking it onto shelves without making the consumer aware? Please remember that unless you hear it direct from Bungie, you shouldn't pay attention to any release dates or speculation you see or hear. I'm sorry to crush hopes of playing the game early but it's better than getting your hopes up prematurely. I'm as eager as you are to get my hands on the finished game but we're not there yet. When the time is right, I imagine we will have more to say about a firm release date. For now, we stand by what we've always said - Halo 2 will be released when it's finished.

Rather than stopping the spread of November 15 rumor-mongering, though, Bungie’s announcement merely encouraged XBox owners and video game fanatics to revise the rumor, and argue that while Halo 2 wasn’t coming up, an “upgraded” version of the first Halo was. This re-release of Halo—called Halo Deluxe, or Halo 1.5—would be something like a director’s cut, featuring slightly upgraded graphics, possibly new levels, and online play over XBox Live, something that Halo fans have clamored for since the game’s release. This revision of the rumor made slightly more sense. As was noted on several video game sites and some respected industry publications, Microsoft could use this announcement to drive subscriptions to XBox Live, since many subscriptions would be up for renewal on Nov 15 (the one-year anniversary of the service), and moreover, the cost and technical complexity of re-releasing a slightly improved Halo would be SIGNIFICANTLY lower than rushing Halo 2 to market. Alas, for eager Halo geeks, this rumor was subsequently debunked by another Bungie employee this morning, in a slightly more terse fashion than the previous day’s statement.

So anyways, this whole videogame rumor-mongering thing got the marketing parts of our brains racing. (Cue image of hamsters running frantically on a wheel, lightbulbs turning on, smoke coming out of ears, etc.) Specifically, we began to think of the possibilities of utilizing the natural tendency of consumers—particularly hardcore, fanatical consumers of a certain product—to speculate and fantasize about the products they are most enthusiastic about. For example, let’s hypothetically speculate that Microsoft will indeed make a “major announcement” on November 15, the likes of which will send XBox owners and video game fanatics into paroxysms of delight. Let’s say, too, that Microsoft announces that it will make this statement to a few well-connected industry journalists, key influencers, and video game fanatics a few weeks prior to November 15, so as to seed anticipation. Furthermore, let’s also pretend that Microsoft makes a few cryptic references to “November 15” in its advertising copy (something which has supposedly already happened—Microsoft’s new ad campaign, featuring P. Diddy, supposedly features one ad where P. Diddy says “On November 15, you will believe.”—we haven’t found any hard evidence that this ad actually exists, but if anybody has actually seen it—and can verify it—let us know, and we’ll post a link) so as to encourage and foster speculation and rumor-mongering.

At this point of our hypothetical rumor-based buzz campaign, there would likely be plenty of user-driven gossip and excitement. In short, lots of great, free word-of-mouth. If Microsoft did follow through, and deliver a truly amazing product or service on Nov 15, the amount of customer gratitude, loyalty and support they’d have amongst their most die-hard customers would probably be phenomenal. Not only would they Microsoft have managed to market a product in a way that would truly differentiate it from the marketing clutter, sales of the product would probably be pretty phenomenal, too.

We’re speculating that the above scenario working well for media or entertainment products that have a strong legion of hardcore, devoted fans: Star Wars, the Matrix: Reloaded, Quentin Tarantino, books by Thomas Pynchon, J.D. Salinger, albums from certain bands, to name a few. Let’s go back in time to May of this year, and imagine that the Wachowski brothers announced at the beginning of a few weeks prior to the actual release of the Matrix that they were going to release their latest movie in a few weeks. Let’s also say that they’d also been able to keep the entire filming process of the Matrix 2: Electric Boogaloo totally and utterly secret. (This would have been harder to accomplish, but not necessarily impossible.) We’re confident that at this point, the hype machine would go into overdrive, and when the movie was released—assuming that it met the expectations of fans, which the Matrix movie didn’t—it would have had a pretty tremendous opening, one that would have been comparable to the numbers that it achieved with an expensive marketing campaign that was used to launch the movie.

We won’t beat the issue for much longer, but it is fun to conduct this thought experiment, and we’d love to see somebody actually attempt it in the real world, if only to see what happens. While we’re aware that this strategy sort of flies in the face of the traditional attitude that marketers should seed the market for an entertainment product with buzz or advertising months well in advance of a product launch—to get people salivating, and spreading the word!—it would be great to see marketers actually attempt to use the natural tendency of human beings to gossip and speculate in an interesting and entirely non-traditional fashion. So, uh, if there are any marketers of media or entertainment products with passionate and loyal fanbases (e.g. an army of geeks eager to do your bidding), we dare you to give this strategy a shot.

Posted by Matt Percy | Permalink | Comments (3) | TrackBack

The Manifold Failures Of The N-Gage, Part the Third

As every avid BuzzSponge reader knows, we're no stranger to taking pot-shots at the strategic and design shortcomings of Nokia's hapless GameBoy/cell phone, the N-Gage. This will probably are last N-Gage-related potshot. Not only is making fun of the N-Gage's shortcomings like shooting fish in a barrel, we're sure after failing to understand its target market (see our article on the subject here), launching the N-Gage to, uh, less than impressive sales (selling 5000 units worldwide, despite Nokia's insistent claims that it would sell in the "millions and millions"), and then having their N-Gage hacked (yesterday, hackers devised a way to not only copy the N-Gage's games, but to play them on other--much cheaper, and better--phones), the team behind the N-Gage is well-aware at this point that they're probably about to become a case study in how not to launch a product. But before we invoke the mercy rule, we couldn't resist but post a link to the following site devoted to making fun of the N-Gage's ridiculously stupid (and not stoopid fresh) design, SideTalkin. (With only 5000 users worldwide, most people won't have seen an N-Gage in use, so we'll take a second to explain the joke behind the site: in order to make the N-Gage more cool, avant-garde, or possibly just more obtuse, Nokia's product designers decided to make users hold the phone like a pizza slice to their head in order to make calls. To explain this, take your cell phone, and hold it sideways to your head, rather than simply so that the speaker/mike face in front or behind you. Looks cool, doesn't it? The N-Gage's designers also thought so!). Anyways, you know you've got a problem when hundreds of people in your target demographic start up a website devoted to making fun of your product's ridiculous design, as is the case here. Enjoy.

Posted by Matt Percy | Permalink | Comments (3) | TrackBack

Everything Speaks McVolumes

Brands are not "positioned' in stone. Brands are organic not static---growing, shrinking, evolving all of the time. Contrary to common belief, the term "brand management" does not adequately describe how successful companies build brands. "Brand management" today is more synonymous with "cat herding" than with brand-building. Why? Because companies don't control the ultimate fate of their brand...key customers do.

What is a "key customer"? It is that individual who can directly influence the sustainable success of a business. By definition, "key customer" describes a group much larger than simply "those who consume/purchase a product or service"---the focus of most brand managers. "Key customers" consist of a company's employees, strategic partners, customers/consumers, influencers, analysts, and even investors.

A wonderful example of the organic nature of brands and the value of "key customers" is provided by this week's battle between two venerated and trusted brands, McDonald's and Merriam-Webster. In the world of brand-building, everything speaks. McDonald's may have spent millions launching its new tagline, but in the end of the day Webster's addition of "mcjob" (meaning "low paying, dead end work") into the official english lexicon could have long-term ramifications for the strength of McDonald's brand as it gradually erodes meaning for arguably McDonald's most valuable key customer franchise, its employees and franchisees.

"McJob" was first coined by the Washington Post in 1986 (OED), popularized by Douglas Coupland in his seminal work, Generation X, and has become part of the American lexicon. Webster didn't invent the word, "mcjob", it simply legitimized the term by adding it to the latest version of its dictionary. In doing so, Webster fulfills its brand promise of being a trusted authority on the evolution the English language. Unfortunately for McDonald's, one company's brand-building efforts can erode the brand of another. What is remarkable is that in the case of "mcjob" that brand erosion will occur to a brand that exists in an entirely different industry.

Rightfully so the new CEO of McDonald's is not taking the inclusion of "mcjob" in the dictionary lightly. Certainly recognizing that Merriam-Webster cannot delete the term "mcjob", he is making the best of a bad situation and publicly standing up for his valuable internal constituents--a stand that employees and franchisees will both respect and appreciate:

"It is a slap in the face to the twelve million people in the restaurant industry" --McDonald's Corporation CEO Jim Cantalupo (The Register)

In addition, a handful of McDonald's loyalists have attempted to rectify the situation on their own by posting new definitions for "mcjob" on on-line dictionaries:

A job that allows elderly people to reenter the workforce, trains more young people than the armed forces, provides steady income to families, and offers work to mentally and physically challenged people. A place where leadership and pride are encouraged and advancement opportunities are limitless. -Catherine 11/09/03

However, in the end of the day McDonald's is reaping what it has sewn from an organizational perspective. "Mcjob" is more than a simple definition in a dictionary, it is a commonly held perception among the public, McDonald's key customers and others. Trust, integrity, honesty, prestige--these are all attributes that corporations like McDonald's invest hundreds of millions of advertising dollars to add to the tapastry of meaning that is their brand. Merriam-Webster's most recent entry, may have pulled a thread from McDonald's tapastry, but McDonald's employment practices molded the perception in the first place. Words can mold meaning, and meaning can be an infinitely valuable asset for a corporation (just look at what Barista has done for Starbucks). However, brand-building is less about advertising and coining terms and more about an organization-wide understanding that "everything speaks" and in many cases actions speak louder than words. (First published by Peacock Nine...here.)

Posted by Bradley Peacock | Permalink | Comments (9) | TrackBack

The Young Elite Shun Chicago

One of the most fascinating products of the most recent census is the the special report published this month by US Census Bureau. In Migration Of The Young, Single & College Educated (pdf) we learn that Chicago is the eighth most popular major metro for young, well-educated singles to move to. The Bay Area, L.A. and Atanta are the top three metros, followed closely by D.C. and New York respectively. Although New Yorkers are up in arms about the fact that they are not the "first city" for the "hipster" set, they do have the dubious distinction of being the city with the greatest number of singles in the United States.
So what does all of this mean exactly? Why should we care? Well considering that the recent data not only is in sync with Richard Florida's perceptions of Chicago in The Rise Of The Creative Class but also tracks with the Forbes' Best Places List ranking of job growth in American cities, one has to wonder what the future holds for what is arguably the economic "jewel" of the midwest. Neither Silicon Prarie nor Boeing were the magic solution for Chicago. With the educated elite shunning Chicago for sunnier pastures, what is in store for the Second City's economy in the decades ahead?

Posted by Bradley Peacock | Permalink | Comments (0) | TrackBack