Friday, September 01, 2006

Dell's Collapse No Mystery, Just Simple Marketing Mistakes

Wednesday's front-page column in the Wall Street Journal recounted Dell's recent missteps. Sad to say, much of what is related in the piece describes a simple failure of sensible marketing.

As I've been reflecting on the piece, considering what perspective to apply to understand Dell's debacle, I think it is one of growth into ineptitude. Another story of a business model that successfully grew for quite some time, inadvertently sowing the seeds of its own destruction.

The charts at the left of this post illustrate the end of the company's era of consistently outperforming the S&P 500 index, with its performance worsening in the past 2 years. Over five years, it has been flat, while the S&P eked out a small gain. Over two years, Dell has fallen 40%, while the Index has risen almost 20%. In just the last 12 months, the Index has risen around 5%, while Dell has still declined about 40%.

In Dell's case, there seem to be three classic sources of that destruction of their successful business model.

First is an all-too typical case of what I refer to as "sand in the gears." Like Intel and Amazon, Dell must have begun rapidly assimilating the merely-average as employees. Seat-warmers who liked to boast, "yeah, I work at Dell," when that was a cool thing to say. However, witness what some of those customer management mavens did for Dell. They actually outsourced the retail phone order-taking function to temporary workers. Then refused to promote or "hire" any of them into the Dell workforce. The article states that turnover at these outsourced call centers reached 300%.

Let me see if I have this picture right. You take a group of people and tell them they aren't going to be "real" Dell employees, with Dell status and benefits level. Then you assign them the task of fielding calls from interested potential retail buyers. When they do a good job, you tell them they get nothing but "paid." And then Dell wondered why they lost ground in the retail segment.

That's a classic example of someone in charge being totally inept, and not caring a whit about the results of their ineptitude. Nor, apparently, for at least a few years, did their immediate and two-levels-up superiors.

Next, we have Dell's success in placing PCs into American homes become a factor in its own demise. By raising the bar with market penetration, the next buying decision for many families was approached differently than that of their first PC. Perhaps their needs changed, and grew. Or, perhaps they taught themselves that now, having successfully bought and used one PC, online or by phone, they knew enough to go to a locally sited big box retailer and buy "any" brand which satisfied their now-savvy technical/application needs and price points.

Lesson for marketing executives. When a market is immature, a brand can be worth quite a bit in terms of quelling customer post-sale cognitive dissonance. When the customer gets confident in his knowledge of the product, the rebuy decision won't be the same. And the customer may well value "brand" much less than when he was ignorant of the product.

So that seems to be another factor in Dell's lagging performance. Its marketing executives didn't keep their finger on the pulse of retail consumers, and, as a result, they missed important changes in that segment's buying behaviors. Score one for the bricks and mortar retailers, and the companies that elected to collaborate with them, like HP.

Finally, Dell has, I think, simply run out of road for its once-vaunted business model. This might be mostly a business development issue, rather than a marketing one. However, good marketing intelligence would have seen this coming, with the aforementioned changes in consumer buying behavior, as the changes were occurring, rather than two years later.

Would opening a chain of Dell stores have mattered? Maybe not. I've been looking around their website lately, and the cupboard's pretty bare for consumer products. In this case, I think one could fairly cast the issue as one of poor segment choice. The consumer segment seems to still be buying PCs, but Dell didn't really keep pace with features and price points, as its competitors did. They bet on the business segment, and it didn't provide sufficient growth and profitability to sustain Dell's formerly consistently superior total return performance.

It's not about exploding batteries, so much as just poor marketing in the swollen, mediocre ranks of Dell. And, thus, perhaps an unfixable problem, given the mature nature of the sector, and Dell's important and longstanding mistakes which have hurt it now for several years. It may well be the GM of the computer sector, going from dominant producer to an also-ran with product nobody really wants to buy anymore, and little room for a comeback.

Time will tell. And I don't think it will take all that much time, either.

Thursday, August 31, 2006

Long-Term Market Reactions to Oil

The Wall Street Journal ran a very interesting article on Tuesday regarding how the nature of gasoline refining has changed in the past 20-30 years. Due to lack of expansion of refining capacity, and growing demand, availability is tight, so margins have finally risen from their historic lows.

What I find most fascinating is how the article describes not just that refineries are being built, and large ones at that, but where they are going up.


A man named Mukesh Ambani, chairman of India's largest private company, Reliance Industries, Ltd., "is building the world's largest refinery complex" on India's northwest coast, near Pakistan.

The article contains a few important facts which help us understand how the provision of various elements of the gasoline supply chain are changing, and why.

Years ago, one of my close friends was a now-retired senior oil executive at Exxon International. He was a lifer, having begun to climb the corporate ladder there right out of college as a petroleum engineer. Tony used to tell me how little Exxon had made on the refining of crude over the years. This, he said, had shaped Lee Raymond's views on running the company.

Now, the Journal reports, refining margins are around $20/barrel of oil. That's on barrels which are bobbing up and down in the $70 range, meaning a 28.5% gross margin. Not bad for an industrial commodity, both coming and going. Further, the larger refining margins mean that it is now very feasible for refiners to price shipping the crude to, and the gasoline from, their refineries. Thus, the Indian connection.

Finally, an eye-opening little piece of information. In 2000, America imported less than 8% its gasoline. By last year, that number had risen to 11%. It is now at 13%. A 63% rise in the volume of gasoline imported by the US in six years.

Thus, Mr. Ambani's bet. But, he's not alone. Worried about American oil companies not building a new onshore refinery from scratch in 30 years? Maybe you shouldn't be. Mr. Ambani's partner in the latest refinery venture is- Chevron, the merged entity that was one Chevron and Texaco. The article also mentions, as part of the wave of planned refineries worldwide, that Exxon, ConocoPhillips, and Total, SA, are all in talks with Saudi Aramco to build new refineries as well.

As the article points out, these offshore refineries will solve two vexing problems for US gasoline supply. One is geographical concentration. By taking advantage of relatively inexpensive shipping costs, as a percentage of the new refining margins, these new refineries will spread the risks of weather, specifically hurricanes, knocking out large amounts of US refining capacity, or distribution facilities. Further, they are being designed to refine high-sulfur oil. As the classic "light sweet" crude becomes less of the oil supply globally, on a percentage basis, these new refineries will provide more gasoline from currently harder-to-refine crude sources.

Finally, there is the matter does one put this delicately.....refinery construction and its impacts on the local environment. Americans don't want another smelly, belching industrial refinery located near where they consume all that gasoline. But, being the economic creatures that we are, we are more than happy to pay Indians to allow those belching refineries to be located, built and operated on their less-discriminating shores.

In a way, although most people don't consider process industries quite like they do finished goods industries, it's just like what happened with steel and other basic metals operations. Third- or second-world countries are more than happy to get the jobs that are created when you have to erect and operate the world's largest oil refining complex. And they will gladly offer their less-stringent environmental quality constraints in the bargain.

Mr. Ambani is assembling a workforce of 150,000 people to erect the new refinery by December, 2008. According to the article, "two years ahead of many projects that others are planning." Read that to mean, "able to reap the full measure of gains by being the first guys on the block to refine high-sulfur crude into American-bound gasoline at still-bloated margins."

God bless 'em, the Indians went our way, rather than tilting toward the Russian socialists after all! They know a huge profit when they see it, and they go for the jugular.

And, in a beautifully seamless piece of "best practices" engineering, Ambani's team is simply unrolling the very same blueprints for their first mega-refinery on the site, and building it again right next door! How brilliant is that? Everyone who's ever done home construction or renovation knows all too well that much of the cost and time of those projects come from customer indecision and changes in the plans while building is underway. The Journal pieces cites the expected cost/barrel of the refining capacity being constructed by Mr. Ambani to be $10,300, or "about a third lower than the estimated cost of building the two big refineries planned for Saudi Arabia" with Exxon, Total and ConocoPhillips. So, not only do the Indians offer their environment to the cause of global gasoline supply, but their cheaper, though more productive, labor as well. And think of what all those labor dollars in India will be buying- more finished goods! Talk about a virtuous circle.

To top all of this great news off, Mr. Ambani and his 29% partner, Chevron, already have factored in the effects of the rush to supply American's with more gasoline by the decade's end. Between the various new refinery projects on the drawing board, and the expectations of US gasoline demand growth to slow after the next few years, due to ethanol and hybrid cars, the partnership expects the profit opportunities in the American market to change in a few years.

By building this super-refinery in India, they are well positioned to supply China and.....India!

Thank God, Adam Smith's invisible hand is at work, as is Joseph Schumpeter's view of creative destruction. As the US onshore petroleum refining business becomes too expensive and constrained to effectively compete globally, those US companies engaged in the business move their operations overseas, to where it's economical to build and operate new, better-designed refineries for today's oil supply. It isn't going to be just your shirts, shoes or computers that are built with components and subassemblies shipped around the world anymore. Soon, the gasoline in your car's tank will have been around the world to get to you, too.

Oh, and one last point. No US senators, congressmen, or cabinet secretaries were involved in the provision of this new gasoline supply. Leave it to the market, and you'll get a better solution every time.

Wednesday, August 30, 2006

Some Further Thoughts On Video Programming Delivery In The Coming Years

As I noted in my prior post, here, there continues to be more splintering of the delivery and viewing of video content these days.

For instance, yesterday's Wall Street Journal ran an article about MTV's trouble with its online sites. Furthermore, the article published a table, sourced by comscore Media Metrix, purporting to show unique visitors to websites last month. Yahoo video was first, notionally, with 21.1 million. Right behind, with 20.1 million, was NewsCorp's MySpace Videos, followed by YouTube with 16.1 million unique visitors. Given my prior comments about Yahoo, I wonder if the July numbers don't represent, as a snapshot of one viewing period, the growth of YouTube to nearly rival Yahoo, as opposed to Yahoo maintaining a continuing lead in this area.

I now wonder whether half of cable's revenues will go away as more consumers find and buy/view content directly on urls via their hi speed data facilities. With destination sites like Youtube, who will need a pre-packaged suite of programming content like Comcast currently has for TV, or is attempting for the internet? And then, we'll probably see cable and telephone company DSL-based content offerings compete each other's prices downward to retain some measure of revenue from these antiquated, pre-packaged content services.

Instead, we'llprobably buy a wireless box which takes the hi speed online signal, directs it with a handheld wireless controller, and displays url-based video on your in-home TV display.

Voila. Goodbye broadcast, and even cable 'TV.' Hello video ubiquity a la carte. Which, by the way, is something the cable industry already admits it doesn't like, won't offer, and on which it will lose money.

Of course, this online a la carte video world does have to be paid for somehow. And it's easy to see what that "somehow" will be. YouTube is allowing advertising on its dedicated channels. Hmm.....a familiar concept. Of course! That's broadcast network TV from the 1950s, updated for today's viewers and technologies. And then, of course, there will probably be direct access to very hot production company sites who will charge via credit card or PayPal to have access to popular 'television-style' serial programming.

I don't know what the arrangements are for the provision of, say, ABC's Lost or Desperate Housewives. But it would seem reasonable that production contracts for serial programming is going to change. Before, it was just about syndication rights and royalties. Now, a good production company with a hot property can air it initially via a network, then go solo after the brand has been built. Or, perhaps they'll just go directly to a YouTube or other online video content concentrator site.

Then again, perhaps a really good production shop will simply secure its own financing via the capital markets. Maybe they'll sign a long-term distribution agreement with YouTube to provide basic cashflow while they develop properties for the online market. The possibilities seem truly too many to contemplate just yet.

I wouldn't want to be the Dolans, or any other cable company/mogul right now.

Tuesday, August 29, 2006

YouTube's New Direction: Retail Distribution of Mainstream Media

YouTube's announcement last week that it will create dedicated pages for advertisers and their mainstream video content marks an important new development in the way video will ultimately be delivered to homes.

My partner and I were discussing this amazing development, whereby a Paris Hilton channel is being created on YouTube in order to publicize her music videos, in hopes of selling her music.

What one has to realize about this is the incongruity of YouTube beating out the entire music publishing industry establishment, not to mention existing online entities such as Amazon, Yahoo and MSN, to become the online "location" of choice for new video content.

In marketing, there is a concept known as the "evoked set." It basically describes how consumers tend to choose a small number of providers of a good or service, perhaps 3-4, among all the potential vendors, that they will actually consider when they make a purchase.

Among all the potential internet URLs one might visit for video content, it appears that YouTube has become part of a very, very large number of consumer evoked sets. Thus, even other media concerns, armed with their "talent," still feel the need to approach YouTube for the online equivalent of shelf space. One assumes that YouTube's equivalent of the supermarket "slotting fee" is a cut of the ad revenues flowing to the channel managers.

One has to simply marvel at how this young company has seemingly joined the ranks, at least in terms of usage and preference, of Craig's List, eBay, and Google as a firm which began as little more than a way for someone to solve a simple online-related problem, without a profit motive per se.

Right now, Amazon, for years a veritable online general store, is essentially out of the picture when it comes to video content destinations. One wonders if Jeff Bezos should have been spending less time on his space exploration project lately, and more on figuring out how to keep his company at the forefront of online content purchasing. While it may not have been thinking of free video content viewing as part of its business model, at least Amazon had an internet address that was second to none. Until YouTube showed up.

Now, even though Google and MSN have video content sections, the relative newcomer is sweeping all before it as media content moguls beat a path to its door. This alone will likely cement its early usage preference among users for the next year or so.

Once again, we see how several companies full of mediocre, uncreative managers can miss an incredible opportunity that practically invents itself. For all the hoopla surrounding media giants such as Time-Warner, GE-NBC, Disney/ABC, and the cable companies, none of them were even remotely close to taking on YouTube.

As my partner and I discussed this recent phenomenon, we mused about how it is changing viewing habits of video content such as television programming. When companies such as Disney began licensing their more popular television programming on a non-exclusive basis all over the place (iTunes, Comcast, their own online site), it clearly gave notice that the days of simple broadcast network delivery are over already.

So now, one wonders what shapes the delivery and viewing of content that used to be associated with broadcast and cable television may take. Some thoughts about that in an upcoming post.

Monday, August 28, 2006

Yahoo's Investment in Academia: The "Used Car" of The Internet Tries to Get Back in The Race

Friday's Wall Street Journal featured an article about how Yahoo is trying desperately to catch up to its more focused rivals by hiring a slew of outside academics, most notably economists. Terry Semel, Yahoo's CEO, apparently hopes loading up the company with economists will let it overcome years of stagnation and lack of focus.

As an example of this, look at the five-year price chart on the left (click on the chart to enlarge it). It displays the prices of Google, Yahoo and the S&P500 for the period.

Well, God knows the company needs something. To me, Yahoo, has always been a sort of "used car" entrant among online information/data site companies. My partner continually asks me why I use that term. I suppose because, somehow, Yahoo always seems to be that "other" online provider that is seen as stumbling forward, without purpose. A type of bland, basic online information "transportation" vehicle.

AOL was a first generation vehicle. Yahoo blasted onto the scene with a dizzying variety of services, but no clear focus. It seems to offer a bit of everything, and the best of nothing.

Then came eBay, Google, and even MSN.

eBay rules auctions, for better or worse. Certainly better than Yahoo.

Google rules search and online advertising. After minting money with these, they have begun to "cover" all of Yahoo's more noteworthy features, such as free email and chat, at the same "free" price point. Game to Google.

MSN has now charged into video ads and ads for MySpace. At least it seems to have an awareness of how badly it stumbled and missed online advertising after it destroyed Netscape and foolishly felt safe in the online world.

While the rest of the online world focused on racing to dominate some identifiable, profitable online product/market, Yahoo seemed to be the used stock car of the internet, tuned-up a little on Saturday to run at the track.

The Friday piece actually cited Yahoo CEO Terry Semel, for whom I actually have a great deal of respect, as,

"confiding a concern to his top lieutenants that the company risked missing long-term developments. Who in the company is considering what might happen in three to five years, he asked, according to one executive at the meeting."

The incredulous, laughable result, was to name Usama Fayyad, Yahoo's "head of data," to head up what passes for the answer to Semel's question.

By the way, Terry, those of us adults who have worked in corporate America for a while refer to that function as "strategic planning," "strategy," "planning and development," or even "corporate strategic planning and development."

It's a little concept GE developed somewhere back in the mid-1950s. Yes, that's right- 50 years ago.

Art Laffer's Perspective on Inflation and The Dollar

Art Laffer is one very smart economic cookie. Witness his erudite editorial in last Thursday's Wall Street Journal.

In a polite slap at other economists, he wrote,

"But to confuse an increase in commodity prices with general inflation is a serious mistake, one which often seduces otherwise clear-thinking economists."

Laffer's point is that a combination of worldwide commodity price increases, and US dollar weakness, have resulted in a temporary rise in some prices in the US. This does not, he emphasizes, equate to general inflation in the US economy. That is a function of money supply versus economic growth. By comparing inflation-adjusted Treasury yields with nominal Treasury yields, Laffer demonstrates that inflation expectations have remained surprisingly stable and low since 1999.

In effect, Laffer cautions us to avoid confusing the temporary rise in dollar-denominated commodity prices with general US inflation involving the too-rapid expansion of the monetary base.

What a clear, simple and elegant reminder of what measures on which to focus, and how to understand them. What a very intelligent economist Art Laffer is.