Starbucks Value Meals

Starbucks announced today the launch of their new value meal program where consumers will be able to purchase a discounted combination of a coffee drink and breakfast food. They are also training their baristas to emphasize the value of Starbuck's drinks including the fact that "90% of Starbucks drinks cost under $4." By refocusing the brand as a "value" product in the consumers mind the chain presumably is hoping to better weather the recession and compete more effectively against McDonalds.

I fear however that the strategy may backfire on the chain. Most consumers consider Starbucks drinks to be a luxury indulgence, something to help sooth an otherwise hectic day. By concocting their own crazy drink, they turn their morning caffeine fix into a statement of their own personality. This brand image has been carefully nurtured by years of carefully coordinated messages through the store, baristas, and general PR.

This new move counters all of that. By offering discounted combos and emphasizing the products value, they risk creating a new brand image of mediocre quality and low prices. Many consumers will begin to shy away from associating themselves so blatantly with the brand and potentially seek out alternatives. Meanwhile, in the value segment, Starbucks will be going up against the McDonalds machine and if anyone can succeed in providing an adequate product at rock bottom prices it will be McDonalds. In the end, Starbucks would lose the high end and fail at the bottom, leaving the chain listless and significantly overbuilt.

Perhaps I am wrong and Starbucks will successful deal with McDonalds while keeping its high end image. It has dealt with every potential competitor so far with no problem and has quite a bit of brand capital to spend. In the meantime, I'll take a number 2 with soy please.

The DVD Death Spiral

BusinessWeek is running another article this week about the sudden collapse the major movie studios are witnessing in the DVD business model. Citing a 32% decline in DVD sales for the 4th quarter of 2008, the article claims that these studios are desperately looking for ways to boost revenue.

In a way it makes perfect sense that DVD revenue would be declining for studios. Just a few years ago the general practice for most film consumers was to build up a personal library of their favorite movies, supplemented by what was available on TV or at the neighborhood video rental store. Assuming an average consumer bought about 2 movies a month on average, this is about $30 to $40 a month per house-hold to be split between the studio, distributor, retailer and other parties.

Now many of these consumers are outsourcing their video collection to an online services such as Netflix. Charging low rates (for instance one plan is only $16.99 per month), they give the customer complete access to almost every movie ever made. This simultaneously saves the consumer money and vastly broadens the number of movies to be accessed. A winning formula all around for the consumer, but the studio and related parties have just seen their potential revenue cut in half.

In a way the Netflix model is a form of social insurance, where the company's customer base have agreed to get together and pool their resources to build a film library. This reduces the number of duplicate copies of any given movie in the population leading to a more efficient distribution of resources. As more and more movies become available for instant streaming and competing services raise the quality of service, even fewer people will think it makes sense to keep a private film library. So the question for the studio becomes, what do they do with the vastly reduced potential revenue?

One option is to cut costs, we will probably see a decline in the number of big budget summer blockbuster type movies if this is the case. For instance a cheap but well made indie flick that gains a few Oscar nominations may become a far more profitable movie goal when you can no longer count on millions of consumers to shell out $15 to $20 to add a particular movie to their own collection.

Another possibility would be to do the opposite. By focus on the experience aspect of movie watching and continue to build even bigger and more elaborate blockbusters, the consumer will be compelled to watch it in the theater to get the full experience. As theater attendance increases, the movie companies can at least partially offset the decline in DVD revenue. This could become an even more viable strategy as movie attendance grows in international markets increasing the total potential theater revenue the studio could achieve.

In any case, it should exciting to see the industry continue to evolve. I only hope that the movie studios do not stick their head in the sand and refuse to address this growing problem, or even worse attack the online video providers themselves in a vain attempt to protect their rapidly changing business model.

Are Apps Profitable?

BusinessWeek ran a story recently on the Apple Application Store business model and specifically wondered if applications will ever become profitable for developers. Interestingly, the story doesn't actually state anything concrete about how much money application developers are making, except to suggest that since most apps are priced at $0.99 or free, it must not be much. While it is certainly possible that these developers are making substantial amounts of money selling millions of apps at these low prices (the cost of serving up an additional app download is fairly minimal after all), I think the author is also a bit pessimistic about the future price point for apps.

Currently, most applications are mere novelties, simple games, or repackaging of services that are already available for free on a website. None of these products inspire a user to pay a substantial fee, resulting in a huge array of very low priced apps. However, as the phones and OS platforms continue to develop and become more sophisticated, this is sure to change. In time, application developers will be able to develop real software tools which provide enough value to the consumer that they would be willing to pay for it. With rumors of a new iPhone on the way and videos circulating of the new Palm Pre running multiple applications simultaneously, we can already see that this is happening much faster than anyone expected.

In my opinion, as the mobile sphere matures and smart phones become common place, the application industry will become as profitable as the computer software industry. The real question is just whether these businesses will make their money through the traditional pay to use model or the ad-supported model being pushed by Google, or perhaps something else entirely.

Layoffs and the Eventual Recovery

The Economist this week is running an interesting article on how companies are handling their downsizing and the potential future impact of these actions. As more and more firms jump in and use the recession as an opportunity to do some restructuring, the question becomes are these firms planning sufficiently for the eventual rebound. According to the article: "As a rule of thumb, a careful cull of the 10% of lowest performers can make a firm leaner by removing fat without damaging muscle. It is going beyond the 10%, as many firms are now starting to do, that poses the real risks to a firm’s competitiveness."

"This crisis is revealing how few firms have really thought through their talent strategies, says Mark Spelman of Accenture. Claims that “our workers are our most valuable assets” are too often platitudes, the emptiness of which is now being revealed. But those firms that have thought seriously about their talent needs have the opportunity to get ahead of those that haven’t, says Mr Spelman, not just by shedding poor performers but also hiring scarce talent from outside, in what is now a buyer’s market."

Amazon.com Announces More Good News

Well it is always great to find a bit of good news amongst all the notifications of further layoffs. Bucking economic trends, Amazon.com released 4th quarter results today with 9% increase in net income and 18% increase in sales. They also projected continue growth in the first quarter of 2009, citing their prime shipping program as a key strength. It seems especially reassuring that, you can see the company had extremely strong net sales growth in its non-media category (41% for North America, 45% World Wide). In fact, in the 4th quarter, North American net sales were almost at parity between the two categories (Media and Other Merchandise). It seems to me that many of Amazon's customers are shifting more and more of their purchases to the site to maximize their benefit from the prime program.

Another interesting tidbit in the statements is that Amazon seems to have continued growing their workforce substantially during 2008. Now standing at 20,700 employees, that is an almost 22% growth since last year. I wonder if the company is taking advantage of everyone else cutting back to sweep up some top talent... it would make sense given the aggressive investment the company is making into new categories (cloud computing, Kindle, Amazon Fresh, etc).

Lets hope for more good news from local companies!

Business in 2012

The Motley Fool is running an interesting series of articles on how many of our flagship tech companies are going to look in the year 2012. One of the author's premonitions on the future of local tech giant Amazon.com, had an interesting thought about their Prime shipping service that will be a key advantage for the company. Many of Amazon's competitors are specialized retailer's with a focus in a specific niche such as in jewelery, clothes, etc. For many of these retailers, consumers do not make frequent enough purchases to make investing in a prime-type shipping service worth while. Over time, consumers shift more and more of their buying dollars to Amazon, because they sell everything and they get "free" shipping there. The article does point out that Wal-Mart, Target or a similar real world retailer could potentially offer up a similar prime-type service, but so far they been too slow to adopt to the online environment and could give Amazon.com plenty of time to develop an unassailably dominant position. The Motley Fool also has some pretty interesting thoughts on Google, Netflix and Apple, among others.

Meet the Firm: Alliance of Angels

We had a fascinating meet the firm today with a local non-profit called Alliance of Angels. They work with local Pacific Northwest entrepreneurs to help connect them with angel investors and find the resources they need to take their business to the next level. Some of the services the Alliance of Angels brings to the community include hosting pitch clinics to educate entrepreneurs on how to best present their business plan as well as networking events, forums, and a screening process for local investors. Some of their successful alumni include such notable startups as BuddyTV, Redfin, and the Coffee Equipment Company (makers of the Clover espresso machine and recently acquired by Starbucks). No doubt a huge service to the Seattle startup community.