Can the Chevy Volt be Saved?

I’ve been following the Chevy Volt with interest since it was first announced in January 2007. What caught my attention (other than exploding batteries – which we’ll set aside for now) is that it's the first practical electric car.

One of issues we often help clients address is how to turn new technologies into products that people want to buy. It’s an issue that has plagued electric cars from the outset. Even today, the best an all-electric car can do is go about 100 miles between charges. This makes them impractical as a primary vehicle and relegates them to the category of “expensive toy.”
 
In contrast, the Volt, a Plug In Hybrid, can be driven up to 40 miles on battery power alone and then indefinitely on gasoline. There is no range limit, making it a practical alternative as a primary car. And, if you drive a Volt and the majority of your trips are less than 40 miles, you’ll get an eye-popping 70 to 80 miles per gallon.

In theory, Chevy has made just the right tradeoff to leapfrog past the current generation of hybrids while sidestepping the limitations of pure electrics.
 
Unfortunately, sales of the Volt have not lived up to its promise. Through November, only 6,142 Volts had been sold in 2011 (below its modest 2011 target of 10,000 units and way, way below the 119,000 Priuses sold in the same period). 

To understand why the Volt has underperformed, we’ll start by revisiting a Topline Strategy report from 2007, Why People Really Buy Hybrids.” That study sought to identify what made the Prius a break out success while other similar hybrids languished.

The reason can be summed up in a single word – Brand. On strict economics, hybrids are essentially break-even. If you buy a Honda Civic Hybrid instead of a plain old Honda Civic, your gas cost savings over the life of the car more or less offset the extra cost of buying the hybrid.

But, because the Prius only comes as a hybrid, people who buy a Prius aren’t choosing between a Prius standard and a Prius hybrid. They are choosing between a Prius and some other car. In the majority of cases, that other car is much more expensive than a Prius – ranging from an Accord or Camry (a few thousand more) to a BMW or Mercedes ($10K to $20K more).

These “trading down” Prius buyers – who don’t include Civics and other economy cars in their purchase set –  save a lot of money by choosing a Prius. They save thousands on their upfront purchase, save thousands more on gas over the life of the car, and get to drive a car that expresses, by its appearance, their environmental values.

Now, armed with this understanding of why people by hybrids, let’s go back to the original question, “Can the Chevy Volt be Saved?” The answer: Yes – if Chevy does the following three things:

1. Distinguish the Car: How many Volts have you seen on the road? Odds are you’ve passed quite a few, but you wouldn’t know it. While Chevy took a page from the Prius playbook and gave the car its own name, it didn’t distinguish the car visually. It’s hard to tell it apart from other Chevy’s. For the Volt to succeed, it needs to redesign the car so that when you see a Volt, you know you’ve seen a Volt.
2. Make it More Practical: If you’ve ever been in a Prius, you’ve probably felt that the car was actually bigger inside than out. The Prius can comfortably seat 5 adults, and with the hatchback, has enough room to easily cart home everything from a Costco trip. In contrast, with 2 bucket seats in the back, the Volt seats 4…period. And if the two in the back are adults, it’ll be a tight squeeze. While it does have a hatchback, because the back seats don’t fold down, the storage room is pretty limited. Part of what makes the Prius an attractive alternative to a Camry, Accord, or other mid-sized car, is that you don’t have to sacrifice space. Again, Chevy needs to pay a little closer attention to the Prius playbook and make the Volt more practical.
3. Lower the List Price: Finally, Chevy needs to get the price down so that you can into one for under $30,000. Until the starting MSRP falls below $30,000, it’s going to be difficult to capture the “trade down” market that has been all important to the Prius. Part of the problem is that the $7,500 in government incentives offers on Plug In Hybrids, for which the Volt qualifies, are redeemed as tax credits. If you buy the car in January of 2012, you’ll get $7,500 back 15 months later, in April of 2013, when you pay your 2012 taxes. There is an enormous psychological element to pricing and as a result, there is a big difference between a $39,995 car on which you receive a $7,500 rebate and a car that costs $32,495. There’s an even bigger difference between a $37,495 car with a $7,500 rebate and a $29,995 car. What Chevy needs to do is lobby the government to issue the tax credit at the time of purchase (like they did for the very popular 2009 “Cash for Clunkers” program) and to engineer $2,500 out of the car so that the starting price falls to $29,995.

As the list implies, fixing the Volt will not be easy and will require a redesign. It’s an investment they might not be willing to make, but if they do, and do it right, it would be worth it.

Happy Holidays 2011

Wishing You All Good Things Now and Throughout the Coming Year

In 2011, we're starting a new tradition at Topline Strategy by replacing our paper holiday cards with a donation to worthy causes. This year, we have made contributions to the World Wildlife Fund and The Greater Boston Food Bank.

The Death of Cable TV - Coming in 2016!

The fact that new technologies can decimate established industries is well known. Among the first casualties of the internet era were travel agencies. Since 1997, the number of travel agents in the US has declined by 44%, eliminating 80,000 jobs and $3.9 billion in wages. More recent victims have been providers of land line telephone services. Since 2001, nearly a quarter of US households have dropped their service, costing the phone companies over $15 billion a year in revenue.

The next industry in the technology crosshairs is cable TV (we’ll use ‘cable’ to include for cable, satellite, and FIOS). If the stakes already seemed high for travel and home phone services, consider that cable, with its $110 billion in revenue, is larger than both of them combined.

To some extent, trumpeting the death of cable is a bit like crying wolf. A quick Google search reveals plenty of articles over the last few years predicting cable’s decline. Meanwhile, the cable TV industry continues to not only survive, but thrive. In 2010, the share of US households with cable reached a record 91.2% up from just 85% in 2005.

However, this time, the death of cable is for real.

Recently, I was visiting my friend Rob in California. When we turned on his TV, I was surprised to find that he didn’t have cable (or satellite or any other pay TV service). Rob is not a Luddite, nor does he belong to the small group of people who just don’t watch TV. Instead, he watches an hour or two of TV a day over the Internet via a Mac he has connected to his TV set.

Today, Rob is at the front edge of what will soon become a major trend. He’s the TV equivalent of the person who in 2001 disconnected their land line to go with just a mobile phone. In 2001, going all mobile was pretty radical. But by 2005, the combination of increasing coverage and falling prices led to a tipping point.

In the cable TV world, bandwidth and content are the equivalent of coverage and price in the mobile world. The tipping point will come when home internet speeds become fast enough to reliably carry a TV signal and when enough [legal] content is available online that viewers can get the shows they want without having a cable subscription. That day is fast approaching.

The magic bandwidth number, where internet TV becomes feasible for large number of households, is a little north of 8 mega bits per second (mbps). At 8 mbps, a home internet connection can support the basic needs of the 30 million single-person households – delivering a standard definition program to a TV while allowing the viewer to simultaneously surf the web.  As bandwidth speeds continue to increase, the number of households for whom internet TV becomes viable option will continue to grow. At 16 mbps, the 40 million two person households come into play and at 21 mbps, online HDTV becomes a reality.

Number of Households in Play by Home Bandwidth Speed

Today, home internet speeds in the US average 5.8 mbps and are increasing at about 18% per year. This puts the bandwidth tipping point around 3 years away.

Average Home Internet Speeds will Exceed 8 mbps in ~3 Years

Unlike bandwidth, there is no easy objective measure like mbps to judge when content will hit the tipping point, but we may already be close.

• Of the Top 25 rated TV shows from the week of October 9, 2011, 19 were available online for free (either on Hulu or the networks’ own sites) and the same holds true for many of the most popular basic cable shows.
• A subscription to Netflix streaming service or Hulu Plus, both priced at $7.99/month, a fraction of the cost of cable, makes thousands of movies and even more TV shows available, including back episodes.


19 of the Top 25 TV Shows are Available Online for Free within 1 Day of Airing

The primary holes in online content are major sports (NFL, MLB, NBA, etc.) and original premium cable shows, although you can buy previous seasons episodes of your HBO favorites on iTunes or get them on DVD via Netflix. Cable companies undoubtedly know how important sports and original premium content are to maintaining their subscriber base so we don’t expect these to be available online, even for a price, anytime soon.

Given the landscape, how will this all play out?

1. Over the next 3 years, expect a trickle of folks - mostly young, tech savvy, non-sports fans living alone - to drop cable in favor of Internet TV.
2. In 2014 or 2015, the first big wave will hit as the early internet TV adopters spread the word and average bandwidth speeds hit the 8 mbps mark.
3. Later in the decade, as the number of cable subscribers starts dropping, the fun will really begin. Holdouts like the NFL and the premium channels, seeing the writing on the wall, will find ways to start offering their content online. That, combined with bandwidth speeds approaching 20 mbps, will turn the trend into an avalanche.

So, when will you pay your last cable bill?

Topline Strategy Adds Technology Diligence Practice

We're pleased to announce that as of October 1, 2011, we have formally added a Technology Diligence Practice by becoming the operating partner in a joint venture with Semaphore.

Many of you may already be aware that we have been working closely with Semaphore to provide Technology Diligence for the last 5 years. During that time, we’ve worked on dozens of engagements with Semaphore where we’ve been able to bring Market Strategy Consulting and Technology Diligence together to answer questions for investors and companies such as:

• Can the market support the company’s growth projections and if so, can the company’s technology cost-effectively scale to support the growth?
• Which of the three new markets we are considering has the greatest market potential and what will it take adapt the product to serve it?

Our joint venture comes on the heels of the retirement of my close friend and colleague, Cris Miller, who founded the Semaphore Technology Diligence Practice in 2001 and has been its driving force for the last 10 years.

With Cris’s retirement, Semaphore decided that the best way to continue the practice was through this joint venture. As Semaphore’s President, Mark DiSalvo, said. "Through our long partnership, Topline has developed a great understanding of the Technology Diligence business as well as built strong relationships with our senior technologists and major clients. Having them take the business forward, while we focus on our core Private Equity Funds-under-Management Practice, was a natural."

While Cris is retiring, he will be lending his support to ensure that the transition is nearly seamless for Semaphore’s clients. He will be joining Topline Strategy as an advisor, providing his decades of wisdom to our continued efforts.

Read more about our Technology Diligence Services.

What is Google Really Up to with Google+?

In the last 3 weeks since Google+ was launched, I've been innundated on articles about the service from all directions - Newspapers, magazines, bloggers, you name it.

I've read articles about some of the great features like Circles and Video Chat that blow away what is possible on Facebook. I've read others about the genius of Google's invitation only-preview, which creates buzz and demand through exclusivity and helps avoid the problem of throwing a party no one comes to (Google Buzz anyone?).
 
What Google has accomplished so far with Google+ - creating a head-to-head Facebook competitor that is being taken seriously - is an impressive feat on its own. But, I'm left wondering what Google is really up to. Does the company seriously think it has a chance to challenge Facebook on its own turf? Here's what may really be going on. These are our top 3 hypothesis - from least to most probable.
 
3.  Google is Trying to Compete with Facebook Head On in Social Networking
For the same reasons that no one has managed to unseat Microsoft as the leader in operating systems, eBay in online auctions, Apple in digital music, or Google in search, it seems equally improbable that anyone, including Google, can unseat Facebook in its core Social Networking market. When a company like Facebook creates a new market, it tends to be 'Winner Take All'. It makes sense for everyone in the ecosystem - customers, partners, developers - to go with the leader. This is why we advise clients moving into new markets to ask themselves whether they believe they can get a 50% market penetration. If not, they are either defining the market wrong or shouldn't go after it.
 
The 'Winner Take All' maxim applies even doubly so for Facebook and other network effect businesses where the value is directly related to the number of users. People want to be on Facebook because they want to communicate with everyone else on Facebook. Regardless of how great Google+ Circles and Video Chat are, they aren't worth much if the social network is a ghost town.
 
We suspect that the Google executives are well versed in the Winner Take All dynamics of tech markets and also know how difficult it is, short of a major disruption, to unseat an incumbent. Therefore, we give this option the lowest probability rating.
 
2. Google Doesn't Expect to Beat Facebook, but They Still Want Their Piece of a Big Market
A client of mine who used to work for GE once repeated Jack Welch's mantra that GE would be #1 or #2 in a market or it would get out. She then added that what he really meant was GE would be #1 or it would get out. The #2 was just window dressing. Likewise, it is hard to believe that Google has any interest in being #2 in anything. With $29 billion in revenue last year, a 20% year over year growth rate, an industry best operating profit of 29% and a market cap of $194 billion, the only thing that can move the needle for them is domination of a massive market. While there are plenty of businesses that would consider themselves wildly successful setting up a niche social network with millions of users and tens of millions in revenue, Google isn't one of them.
 
Google needs to swing for the fences. That's why the company is dabbling in self-driving automobiles, solar power stations and other far flung markets. It's looking for the next home run. So, while we give this explanation a slightly higher rating than trying to unseat Facebook, the probability is still very low.

1. Google is Practicing the Art of War
The most likely explanation is that Google+ is just one skirmish in a much larger war about where consumers live online: In Google? Or in Facebook? Do you email your friend via Google Mail or post on their Facebook wall? When you're looking to kill a few minutes on your handheld do you play a game on Facebook or search for the latest scores via Google?

Over the last year, Facebook's monthly unique visitors have grown by 17% while Google's have grown by only 7% and if the trend continues, Facebook will overtake Google as the most popular Internet site.

 

 
So what does Google do about this? The Chinese military philosopher Sun Tzu counsels, "Attack along unexpected lines" and "Give your enemy no rest". By going right at the heart of Facebook, Google has taken these lessons to heart.

In April of 1942, just months after Pearl Harbor, the US launched a bombing raid, called the Doolittle Raid, on the Japanese island of Honshu (home of Tokyo). The raid caused the Japanese Navy to redeploy units to guard the homeland, leaving the Allies free to operate in the Indian Ocean (where they had been under fierce assault). It also led Japan to pursue an all out attack on Midway Island, a launching point for potential US raids on Japan. The decision to attack Midway was a strategic blunder that all but ended Japan's expansion in the Pacific.
 
By creating a credible alternative to Facebook with Google+, Facebook has to strike back. But, there will be a cost to Facebook as it redeploys resources to confront Google+. Google can only pray that the cost to Facebook is as high as the Doolittle Raid was to Japan.

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If your company is seeking strategic guidance on how to beat or fend off a competitor like Google or Facebook, contact us at info@toplinestrategy.com

Should You Buy Groupon on the IPO?

Special thanks to Ron Adams,CPA, CVA, ABV, CFF & Mark Shifrin, ASA for providing a valuation analysis of Groupon in support of this post. Ron and Mark run the Valuation Services group of mid market investment bank Capstone Partners. The Valuation Services group provides valuation services in support of tax, legal and equity events.

Late last week, Groupon filed for an IPO that will value the company well above the $6 billion that Google reportedly offered last November. It could value the company as high as $20 billion if the estimates are accurate.

So should you buy Groupon on the IPO? With revenues estimated to reach $2.6 billion this year following revenues of $713 in 2010 and just $30 million in 2009, the company’s growth has been nothing short of miraculous – exceeding even that of Google. As a point of comparison, Google was valued at $34 billion at the close of its first day of trading, If you had bought its stock then (assuming you were not an insider and did not get the IPO price) your investment would have grown by 393% – a pretty good return by any measure.

BUT, companies like TIVO, MySpace and Netscape offer cautionary tales: Not every high flying tech company makes it. Some come crashing down almost as quickly as they rise. TIVO went public in late 1999 with a market cap of $4.4 billion. Today, the company, still public, is worth about 1/4 of that amount. MySpace was acquired in 2005 for $770 million – and at the time, people thought they had given the company away. Today, the decision to sell looks a lot better. And Netscape, whose IPO in 1995 was a cultural phenomenon, was dismembered by AOL and Sun Microsystems just 3 years later.

To help decide whether you should buy Groupon, we turned to Ron Adams, CPA, CVA, ABV, CFF  and Mark Shifrin, ASA, who lead the valuation practice at Capstone Partners, LLC, a boutique investment bank, to add perspective on what a $20 billion valuation means.

"If you put aside the extreme valuations that come from excessive exuberance, the best way to value a stock is to value its future cash flows,” says Ron. “To get to a valuation of $20 billion, you’d need to believe that there is a good chance Groupon can reach revenues of over $50 billion by 2018 and have an EBIT (earnings before interest and taxes) of 20%. For a business where at least half the revenue goes right out the door to merchants, 20% seems like the upper limit of what Groupon could achieve. For comparison, Apple had revenues of $65 billion and an EBIT of 28% in 2010; Amazon.com $34 billion and 4.1%; and Google $29 billion and 35%.” (click here to download a PDF of Capstone’s Groupon valuation model)

So, will Groupon be the next Google?  Or will it follow in the footsteps of TIVO, MySpace, and Netscape?  To some extent, the issues that led to the undoing of TIVO, Netscape and MySpace are all present in Groupon.

Netscape: Netscape’s undoing was that it rose so quickly it could not consolidate its lead before competition jumped in. While the company was still solidifying its market position, Microsoft turned its complete attention to killing the company (a reaction that Netscape accelerated by stating that it wanted to replace Microsoft as the operating system). If it had more time to fly under the radar before incurring Microsoft’s full wrath, it’s possible Netscape could still be a major player today. Like Netscape, Groupon has exploded so quickly that it has triggered an enormous competitive response. In the case of Groupon, there isn’t just one competitor responding, but hundreds including goliath’s like Google and Facebook. A recent NPR story on Groupon said “Businesses report getting calls every day from another Groupon clone wanting to do a deal”

TIVO: Despite all of its ingenuity, TIVO was ultimately a Sustaining Innovation – not a Disruptive Innovation. Sustaining Innovations are ones that wind up as features of existing offerings.   Disruptive Innovations are ones that enable start ups to beat incumbents despite their scale and market position advantages. They are usually based on a hard-to-duplicate technology breakthrough (like Google or Salesforce.com) or on the network effect, where more users result in more value (like Facebook or LinkedIn). In the case of TIVO, the cable companies were able take over the market by duplicating DVR functionality and integrating it into their set top boxes, making it a more appealing choice than buying a stand-alone TIVO. Like TIVO, Groupon doesn’t have an obviously disruptive technology and is at risk of being overtaken by other online giants.

MySpace: MySpace’s rapid ascent masked a fundamental problem with its business. As Facebook has shown, what most people want from social networking is a way of bringing their offline life online, not participating in an online singles bar. After the initial fascination, people tired of MySpace and the company faltered. In Groupon’s case, consumers may never get tired of getting deep discounts, but there are already signs that merchants may be getting tired of giving them.

A big part of the Groupon’s success has been its ability to offer discounts of 50% or more. However, recent deals, while technically offering a deep discount, are eroding the Effective Discount by only covering part of the purchase. Several months ago, we bought a restaurant Groupon offering $50 worth of food for $20. A recent Groupon for a similar quality restaurant offered $20 worth of food for $10. While the second Groupon appears to offer a 50% discount, because the average meal for 2 at the restaurant is about $50, the Effective Discount is only 20%. (The average spent for the meal is $40 - $10 for the Groupon plus $30 to make up the difference between the value of the Groupon and the price of the meal. With a total cost of $40 for $50 worth of food, the Effective Discount is only 20%). If Groupon cannot find enough merchants willing to provide the deep Effective Discounts that has driven its success, it will have a fundamental problem on its hands.

So, going back to the original question: Should you buy Groupon on the IPO? As Capstone’s analysis shows, the company will need to be unbelievably successful to provide any kind of return on a $20 billion valuation. While it is too early to count Groupon out, this is one IPO we’ll be passing on.

The NY Times Paywall: Hail Mary Pass or Stroke of Genius?

Special thanks to Compete.com who provided web traffic information on the NY Times for this post. Compete.com helps the world's top brands improve their marketing through the information they provide on the online behavior of millions of consumers.

On March 28, 2011, the NY Times instituted a Paywall on its site to do what has historically proven all but impossible – getting readers to pay for content online. With its circulation plunging (down 17% between 2006 and 2010) and traditional sources of revenue like classified ads stolen by Internet competitors like Autotrader and Hotjobs, the company had to do something.  So, was instituting a Paywall a last ditch attempt by a desperate company or a stroke of genius?  Can this strategy save the Times? 

The NY Times faces a trend that has become extremely common in digital era – the proliferation of free competitors. Beyond publishing, the phenomenon of free competitors extends to software (through Open Source), online services (through free email marketing tools, invitations, greeting cards, etc) and more.

In a market filled with free competitors, companies essentially have 3 alternatives:

• Find a way to survive on advertising alone
• Create a ‘Freemium’ model where limited services are provided free, but higher levels of service are charged for
• Offer enough value that customers are willing to pay for your service outright.

In the case of the NY Times, they were left with no other option other than trying a Freemium model. Online advertising alone could never support the business. Looking out to the future where the paper is only available digitally, it would still cost somewhere between $500 million and $800 million a year to run The Times. Currently, the paper generates just $140 million in online advertising revenue, and given that digital newspapers are already a maturing category, it‘s hard to see, how online ad revenue could increase enough to cover operating costs and earn a reasonable profit.

Is the NY Times Paywall an Act of Desperation?

So was the decision to go Freemium an act of desperation from a company whose business was collapsing  or is it a legitimate strategy with a real chance of success? Creating any successful Freemium is very difficult. It requires:

• Developing a deep understanding of the customer base, how it segments, and how the needs and behaviors of each segment differ.
• Crafting targeted offerings that deliver enough value that customers will actually pay for them
• Setting the free vs. pay bar at just the right level- not giving away too much while at the same time attracting enough free users to develop into paying customers.

A Brilliant Strategy with Brilliant Execution

In our analysis, the NY Times has done a brilliant job of setting up its Paywall and has a real chance to make it work. The company needs somewhere between 1 million and 2 million total subscribers (print + digital) to make the business a success. Most of these subscribers will come from ~1.5 million who are currently print subscribers. With digital subscription prices of $15 to $35 per month, not too much less than the cost of a print subscription:

• The loss of print subscriptions can be stopped ("If I have to pay for it online, I might as well keep getting the paper")
• Print subscriptions may even grow ("If a print copy is only a few dollars more a month, I might as well get it in print copy too")
• If a customer switches from digital to print, the company is pretty much financially indifferent.

The rest of the subscribers will come from the pool of ~2 million digital readers who are currently above the paywall threshold of 20 articles per month but are not print subscribers. Given that the company sold 100,000 subscriptions in just the first few weeks, it seems likely they could increase this number by a factor of 2, 3 or even more.

Finally, the company does not count any traffic that comes in via a search engine or referral from another site like HuffingtonPost.com toward a user’s 20 articles per month limit. This segment – for whom the NY Times was not the destination but simply a link – would be unlikely to pay for the site so blocking them access would not increase subscriptions. But, leaving this door open enables the company to profit from this incidental traffic (worth $10 million to $30 million in revenue per year) while exposing potential future subscribers to the site.

What Does the NY Times Experience Mean for Other Businesses?

The strategic challenge that the NY Times faced – deciding among Ad-supported, Freemium, and Pay Outright models –  is one that most companies who play in markets where there’s effectively no cost to adding an incremental customer will have to deal with. Although it hasn't received much attention, the high-flying email marketing company ConstantContact is currently facing this exact problem. Up-and-comer MailChimp is undercutting ConstantContact's Pay Outright model with a Freemium model.  As the NY Times experience shows, it’s hard to get this right.  Success requires a combination of great strategic thinking and a deep understanding of customers and the market.

Does Steve Jobs' Absence Matter (to Apple Shareholders)?

In the next 10 days or so, Apple will announce its first earnings since Steve Jobs stepped down from his role as CEO of Apple on January 15, 2011 due to health reasons. So far, the market has taken a wait and see attitude as to what it means for the company. After a relentless rise where the stock has more than tripled over the last 2 years, it has been trading in a narrow range for the last 2 months. The market is undoubtedly waiting for the next earnings report and the future guidance that comes with it to reassure them that Apple will be okay without him. Or, to confirm their fears that it won’t.

Often the market overreacts to news like this. In the end, one person rarely makes a critical difference in a company as large as Apple. But this case may be an exception.

To understand Steve Jobs and his unique position, first, let’s consider the cases of some of the other technology visionaries. Starting a world-changing company is a very, very difficult feat and in our view, Bill Gates, Sergey Brin, Larry Page, Mark Zuckerberg, Larry Ellison, Michael Dell, Jeff Bezos and a few more deserve the billions that they have earned.

Yet, without diminishing their accomplishments in any way, greatness does not come from genius alone. In his book Outliers, Malcolm Gladwell makes a compelling case that timing is equally as critical to creating mega-success. Bill Gates was fortunate to have been ready when the PC was born, Jeff Bezos when the Internet first took off, and Sergey Brin and Larry Page as the Internet’s growth was making it too unwieldy for first generation search technologies to handle.

Strengthening Gladwell’s case is the fact that there are very, very few cases where companies, despite the presence of the same visionary founders, are able to replicate their initial success within an order of magnitude (or maybe even two orders).

Google is a great example. Google has probably tried harder than any other company to create new transformational innovations outside of its core business. Yet despite all the investment they’ve made in Google Mail, Google Docs, Google Books, Android, and countless other products, Google is still a one product company. Over 96% of their revenue in 2010 came from Internet advertising.  The only part of the business where they have achieved leadership outside of search is YouTube, which they bought.

Microsoft is a similar story. Practically all of the company’s success can still be tied to having DOS chosen as OS of the IBM PC. In 2010, the company earned over 73% of its operating profit from the sales of the Windows OS and Office Suite. If you include the contribution of the Backoffice tools (SQL Server, Sharepoint, Exchange, etc.), which could easily be considered extensions of the Windows Server OS, that percentage goes up to 93%. Everything else – Xbox, Windows Live, Bing, MSN, etc. – contributes just 7% of the operating profit.

This brings us back to Steve Jobs and Apple. What makes Steve Jobs truly unique is that he has done it more than once on a grand scale – In 1984 with the Mac, 1995 with Pixar, 2005 with iTunes, and 2007 with the iPhone.  My belief is that there are many individuals who can take what Steve Jobs has already created and take it forward. Assuming the company picks the right CEO to replace him, Apple should continue to soar on the strength of what Steve Jobs has already done. What is at risk is the next innovation that could take the company to new heights.

So what lesson should you take from Steve Jobs, Google, and Microsoft? The answer: Unless you have a Steve Jobs on your staff (not just a Bill Gates or Sergey Brin) you can't count on 'The Next Big Idea' to fuel your growth. Even if you do everything right, there is just too much uncertainty. Instead, what you should focus on is maximizing the opportunity you have. While Microsoft and Google may not have created a second transformational innovation, they made the most of the businesses they were in. They deeply understood their markets and competitors. Strategically expanded into adjacent areas. Made smart acquisitions. Found new channels. Expanded globally. Capitalized on new technologies.

In our Corporate Growth Planning practice, we work with executive teams on creating strategies to grow revenue 3x, 5x or more. While there are rarely shortages of good ideas, where companies often struggle is in sorting through and priortizing them. In our experience, there seems to be a natural human reaction to pursue the 'Next Big Thing', especially in entrepreneurial companies. The real challenge is creating a disciplined and fact-based process that leverages all of the growth avenues available, not just the brightest shiniest objects.

Did Watson Really Beat Ken Jennings?

Earlier this month, Watson, a computer built by IBM, faced off against Ken Jennings and Brad Rutter, the two greatest Jeopardy players of all time and trounced them.  In a two day match, Watson earned $77,174 to Ken Jennings' $24,000 and Brad Rutter's $21,600. While the results seem to show that the human race's crown as Jeopardy masters has been passed, a deeper analysis of the facts tell a different story.  I have no doubt that one day a computer will be Jeopardy champion, but that day isn't today. What you saw wasn't a fair match among opponents but rather something that was closer to an infomercial demonstration where the product produces "too good to be true" results based on a tilted playing field.

 We'll get to how the game was rigged in Watson's favor in a moment, but first we'll look at the Watson backstory.  When the project was approved, management explicitly required that the technology could be commercialized.  Back in the 1990's IBM invested heavily in a project that resulted in Deep Blue, a chess playing phenomenon that went on to beat the best human player, Gary Kasparov.  While the company won bragging rights, it turned out that there were no commercial applications for the technology.  IBM didn't want to make that mistake again. When Watson was approved, it was done so with the belief that its question answering technology could be applied to many fields including healthcare, as an expert diagnostic assistant to help doctors, and retail, as a next-generation recommendation engine.

 Over the years, I have seen many mind blowing demonstrations of gee-whiz technologies that never achieved commercial success.  Each time investors got frustrated with the progress of the business, the management team would cook up another demo which promised that a breakthrough was just around the corner...and in the process, relieved the investors of several million more dollars. The most egregious cases are the ones that have created some of the most high profile public flops (think the Apple Newton). My analysis is that IBM execs just witnessed one of the best gee-whiz demos of all time and before they sink in any more money, they should have independent market and technology due diligence performed on Watson’s commercial prospects. The critical question they need to answer is:  Can this generalized question-answering technology actually provide enough value over the purpose-build expert systems that already exist in fields like medicine to justify its cost? It’s a question that the Watson team cannot answer. They have too much personally invested in the program to come up with any answer other than ‘Yes’.

 Now back to the game...In Jeopardy, you're not allowed to push the buzzer right away. You have to wait until Alex finishes reading the question.  At that point, a light goes off and then you can ring in to answer.  If you try and anticipate the light and ring in too early, you are locked out for a quarter second, meaning that there is next to no chance to win the buzzer race. This is where Watson's unfair advantage comes in.  If during the period Alex is reading the question, Watson comes up with an answer that it thinks is right (based on my observation, that would be an answer that it has scored as having an 80% or more probability), it can ring in just 10 milliseconds after the light goes off - enabling it beat the human contestants, with their mere mortal reflexes, to the buzzer every time.  So, even when the human contestants know the answers, Watson gets all of the points. The Jeopardy results didn't accurately reflect Watson's question answering ability, they reflected the combination of its question-answering ability plus its superhuman reflexes.

So how would Watson have fared if it had to rely on just its question-answering ability?  To answer that question, we analyzed the results of Game 2 of the two-game series (Ideally we would have analyzed both games, but since we only TIVO'ed Game 2 and the match isn't available online, it'll have to do). In Game 2, the three contestants scored as follows:

-          Watson: $41,413

-          Ken Jennings: $19,200

-          Brad Rutter: $11,200

 However, final scores aren't necessarily a good measure of how each player fared. They are highly dependent on how players bet in the Final Jeopardy, who gets Daily Doubles and how much they bet on Daily Doubles. Taking out Final Jeopardy and Daily Doubles, the players scored as follows:

-          Watson: $25,200

-          Ken Jennings: $14,600

-          Brad Rutter: $5,600

In watching the game, it was pretty easy to tell when Ken Jennings wanted to ring in but was beaten to the buzzer by Watson.  He held the buzzer chest high and you could see when he pressed the trigger and lost. Since Brad Rutter kept his buzzer below the podium, it wasn't possible to tell when he tried to ring in.  But, the data from Ken Jennings is enough to figure out the impact of reflexes.  Of Watson's $25,200, $19,200, all but $6,000 worth, was won on questions where Ken Jennings tried to ring in.  Had Watson and Ken had equal reflexes, it stands to reason that Ken would have buzzed in first in half those cases.  Adjusting for reflexes (including the possibility that Ken would have rung in first and gotten it wrong, hurting him instead of helping him) would add $9,088 to Ken's score and taken off $9,344 from Watson, giving revised scores for those two players of:

-          Watson: $15,856

-          Ken Jennings: $23,688

Since both Watson and Ken Jennings got the Final Jeopardy question right, instead of losing, Ken would have had a sizable victory over Watson.  In conclusion, we’ll end this post with our own game of Jeopardy.

Category: Man vs. Machine   

$1,000 Clue: As of February 16, 2011, although not the fastest to the buzzer, these biological beings were still the best at answering Jeopardy questions.

Question: What are Humans?

 

 

APPENDIX

I expect that there are many folks out there who will challenge our analysis. I’ve anticipated some of the objections and have addressed what I think are the three major ones below.

 1. Shouldn't some of the points that we reallocated from Watson to Ken have gone to Brad, lowering Ken's revised total? While that is true, Brad would have also taken additional points from Watson. If we had data from Brad, we expect that the gap between Watson and Ken would be narrower, but that Ken would still enjoy a solid lead.

2. What about Game 1? Watson did even better in Game 1 than it did in Game 2. Wouldn't that have kept Watson the winner? Probably not. The reason Watson racked up such a huge total on Game 1 was that it answered 29 of 32 questions correctly in Double Jeopardy.  I didn't have a tape, but I believe Ken and Brad also knew many of those answers and were shut out by the buzzer. Allocating those responses across players would have put one or both players within striking distance when they got to Final Jeopardy. Watson blew Final Jeopardy with a comically bad answer to an easy question.  So, what would likely have happened is it would have been in second if not third place heading into Game 2

3. What about the humans' own "unfair advantage".  Humans tend to ring in before they know the answer and then have several seconds to figure it out. If they had to answer right away like Watson, wouldn't Watson cream them?  While this is true, I take exception to the notion that this represents an advantage for the humans.  Instead, this represents a fundamental difference in how computers and humans process information.  While it can take humans a few seconds to work out the right answer, we can intuit nearly instantaneously whether or not we will be able answer the question. Great Jeopardy players have great intuition and rarely get questions wrong after they ring in, as Ken Jennings demonstrated by getting just 1 question wrong in Game 2. Watson on the other hand seemed to either come to an answer very quickly or never got there. It doesn't have intuition and more time didn't appear to help it significantly. Changing the rules to take out the intuition factor would shift the advantage to Watson but would be counter the goal of the contest - figuring who is better at answering questions.

Cleantech Venture Investing Still in its Infancy

On Monday, Topline Strategy be releasing our new report on the trends in Cleantech venture investing. When I first started on this report, I was expecting to find the dotcom bubble 2.0. With all of the hype and reports of phenomenal growth in Cleantech, I didn't see any reason to suspect anything different.

What I found was quite surprising - Quarter over quarter, Cleantech investing for the last four quarters, Q2 2006 to Q1 2007 was basically flat. Furthermore, with just a couple of exceptions, the leading VC firms have been just dipping their collective toes in the water.

What does this mean? From a venture capital perspective, we have barely left the starting gate of a 30 year project to build a sustainable economy and that this project is so different than what VCs have become accustom to in high tech and life sciences that it is going to take a while for them to figure it out.

Our report, chock full of data on who is investing how much in what, provides an in depth analysis of what makes Cleantech different and what VCs will need to do to be successful in the space. While the report will be formally released on Monday, you can download it now from our site.