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We all have read about Coopetition: how to collaborate with competitors.

Now we are beginning to learn about the opposite: How to compete with collaborators. Shall we call it: Collabetition?  

What happens when your strategy leads your organization to pursue what strategy expert Koby Huberman calls “more to same” – selling higher-value higher-margin products to your existing customers? What if that strategy brings you head-to-head with those with whom you collaborated, crucial strategic partners, because you are now supplying products that your partners once provided? 

This now seems the case with Google. Google is launching Knol, a user-written ‘wikipedia’, in which users write content. Google’s business model has until now been that of a ‘conduit’ – a search engine, the leading one, that brings users to content generated by others. When Google begins to generate ‘content’ by itself,  it becomes a competitor to some of its key collaborators, to whose sites Google’s search engine brings millions of eyeballs.

Google insists this is not the case, that it remains a ‘conduit’. But the launch of Knol, and what I believe will be Knol’s rapid growth in usage, belies this. It was probably inevitable that Google, in its search for growth, would have to move beyond the search business and into content creation. How it manages this ‘invasion’ will be crucial for Google’s future.

This has happened before. Years ago, there was tension within the “Wintel” community – the collaboration between Windows (Microsoft) and Intel (microprocessors), as Intel put more and more software onto its chips, threatening to move up the value chain and appropriate some of Microsoft’s revenues. A competitive war was averted, partly because Intel has now moved to seek value elsewhere, for instance in mobility, mobile devices and wireless. Collabetition has also pre-empted key strategic moves – Dell’s direct-sale model has not been embraced or copied widely in the PC business, partly because for HP or IBM to engage in direct sale would place them directly in competition with their collaborators, value-added resellers.    

Strategically, moving up the value chain is crucial for growth and profit. Often, doing so leads to collabetition –  head-to-head competition with those in the value chain with whom you closely collaborate.  How to manage this key transition takes wisdom and planning. A good example of a company that managed it successfully is Infosys… see the fine case study by D.V.R. Seshadri on how they did it*.  
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*See D.V.R. Seshadri and James Narus, “Value Chain Migration at Infosys” (A), Int. Journal of Technology and Innovation Management  Education, vol. 1, issue 1, 2006 (available on request from smaital@mit.edu)

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Increasingly, in the media business, innovation is about a race in which the winner takes all. Movie studios seek blockbuster hits, and run business models similar to VC’s – 9 losing movies are paid for by one ‘winner’ that strikes gold. 

Benny Meyer, chairman of the film studio Warner Brothers, has proved it. Warner Bros’ innovative Batman film The Dark Knight [See July 26 blog, “The Dark Knight”] just broke box office records for opening day, grossing $66 m. in receipts. The film may come close to Titanic for overall lifetime revenues. As Warner’s parent company Time-Warner downsizes, Warner Bros. films make big bucks for its struggling ‘mothership’. When new movies launch, there is ‘buzz’ – word of mouth quickly decides which picture is worth seeing, and then everyone has to see it, so they can talk about with their friends who have also seen it. Great movies that come second fare badly; it is winner take all. 

Not long ago, DVD sales were a key part of movie business models, often grossing more money than box office receipts. DVD sales often rescued movies that did badly at the box office. Now DVD sales have slowed to a crawl. The same thing has happened to movies as happened to music – pirated downloads. Moreover, this was predictable! But movie studios missed it, just as music companies missed it. 

Time-Warner CEO Jeffrey Bewkes notes (in an International Herald Tribune article), “Around the world the consumption of entertainment products is growing rapidly. The question is, how do you offer it? And how do you get paid for it?”  
 
This, of course, is the eternal key innovation question. How do you create value? And how do you capture it in revenue and profit?

A key principle of benchmarking is, you learn more outside your industry than within it. Music is a separate industry from film, but closely related – both generate ‘content’. Had movie studios tracked the music business, as Meyer clearly did, they may have better grasped the sweeping changes occurring in the industry, and may have adapted to the ‘winner take all’ blockbuster model, in which again, box office receipts drive profits, rather than DVD sales.

Time Warner now appears to be asking the right questions, and coming up with at least some of the right answers, led by its movie productions.

Innovation is about breaking the rules. Or, as Oracle founder Larry Ellison said in a recent talk in Israel,  “innovation is finding the flaw in the conventional wisdom”. [He clearly found it – the proof is Oracle, #462 in the Fortune 500, whose $18 b. revenues in 2007 were up 25 % over 2006. The bottom line wasn’t that bad either: $4.24 b., in net income, up 26% from 2006.]

The question is: Which rule should you break? Answer: The one that seems most inviolable, most sacred.

Take, for instance, the holy of holies: Raising money. After all, the rules about money are set by those who write the checks. Want a check? Follow their rules and procedures religiously. 

Recently, Eli Reifman, entrepreneur and kabbalist, founder of Emblaze, spoke to TIM’s MPEC participants.   His topic: How he raised over $2 b. by breaking some of the rules while adhering to others. If results are the best proof-of-concept, Reifman has results. Emblaze Group had revenues of $387 m. in 2007, but has lost money for the past three years, partly because of interest payments that probably accrued through financing acquisitions. Yet Emblaze survives and grows, partly because of Reifman’s skill in raising money.

Rules not to break: The key rule never to violate, when you seek money, is this: Never fail to understand fully, and appeal to, the underlying motive of the investor. 

•  For venture capitalists, it is ‘exit’ and little else. When seeking VC funds, be sure to present a forceful and realistic model for a 10x (ten-times) exit, one that brings the VC investor 10 times his or her investment.  

•  For an investment fund manager, the motivation is the bonus. Bonuses are based on investments outperforming the industry – not the market. If your Earnings Per Share falls by half, but that of the industry falls by two-thirds, you have outperformed. The investment manager’s bonus is secure. So, in speaking to them – show how and why you will outperform the industry. 

Which money-raising rule can and must you break, according to Reifman?

•    Do It Yourself…  break the rule that says, you need experts (i.e. investment bank clerks) to do everything for you, including writing the prospectus. 

A prospectus is just a business plan, Reifman explains. It is written in sometimes obscure language. When floating Emblaze on the London AIM market, Reifman did the IPO paperwork in record time. He and his colleagues read the British securities law, word for word. They acquired the appropriate template, filled in the blanks, and reduced the accepted time for writing a prospectus from three months to three weeks. Keep in mind, he says, that the junior employees of investment banks who do the ‘grunt work’ often, perhaps usually, know far less than you do. 

Reifman says raising money is a key skill. Like any skill, it can be learned. Problem is, there are no courses.   MBA programs teach the economics of finance, the theory, not the minutiae of practical IPO’s. You have to learn this skill by learning-by-doing, Reifman says. Conquer your fear, tackle it – and you will have a skill that can give you and your company enduring competitive advantage.

Reifman used an effective analogy to drive his point home. Want to learn parenting? He asks. He and his wife did. Before their first child was born, they called a well-known parenting institute. We want to learn how to be good parents, they said. How old is your child? They were asked. Not yet born, they said. Come back in a few years, when you have a child, they were told. Reifman now speaks widely on parenting, based on experience and common sense, partly to those who do not yet have children.  

Want to learn how to raise money? There may be no choice but to overcome your fears and tackle it yourself.  Learn by doing. 

Reifman arrived for his talk on a motorcycle. He is known in his industry as a maverick, and among other things speaks to 3,000 people every week on kabbalah. He says that the set-in-stone maxim – businesses must maximize profit – is false. Not so, he says. And indeed, Emblaze is not profitable. But who cares? It has money to spare, while other startups with brilliant technologies die, because their oxygen supply – money – runs out. 

There is one last rule Reifman urges us to break, a small one. Avoid Powerpoint, he advises. In his ‘road show’ presentations, he did not use slides. Maybe your audience will say, what a jerk, he came unprepared.  So what… they will remember you. By not using 285 slides, you have already differentiated yourself. And, you have forced yourself to prepare, to put the knowledge into your own head instead of onto the slides.

When it comes to innovation, alas, Sony just does not get it. And this, despite its brilliant CEO Sir Howard Stringer, a UK citizen knighted by the Queen*.
 
Many years ago, Sony and JVC (Japanese Victor Corp.) raced head-to-head to develop a home video recorder. Sony should have won hands-down. And in fact, technologically, they did. They developed Beta-Max technology which gave a superior crisp picture. But business-wise, Sony lost. JVC’s VHC technology was designed-for-manufacture, and as JVC raced down the learning curve, costs fell, and with them, the prices of its VHS recorders. JVC triumphed. Sony’s superior technology lost to a far better business design. And Sony ultimately was humiliated, having to lease JVC’s VHS technology. When master recordings of videos were made, they used Betamax technology; but our home machines were VHS. 

Today, Sony is locked in a similar duel, this time over e-book’s, with Amazon. Sony’s entry in the race is the Reader, a neat portable device for reading electronic devices, launched by Sony two years ago. It has a great screen, and is restful and easier to read than a compute screen.

Against it, Amazon has launched Kindle. Kindle, with inferior technology, will win – in fact, it already has.

Why?

A superior innovation model. Kindle follows Jeff Bezos (Amazon founder and CEO) and his philosophy of avoiding “cognitive overload”, meaning “help people avoid thinking too hard when they buy something.”  Amazon pioneered ‘one click’ shopping. Now, with Kindle, you can easily link to Amazon’s on-line store and download 145,000 titles. Moreover, Kindle connects to a 3G mobile network, so you can download books and newspapers within a minute. Sony’s Reader does not have this feature. 

And Sir Howard? After being trounced by Steve Jobs’ iPod, he has now ordered that 90 per cent of Sony’s devices should be networked, connected wirelessly, within two years.

Two years? Amazon already did it. Too late, Sir Howard.
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*Based in part on: John Gapper, Why Sony Lost the e-book battle,  Financial Times,  Thursday August 7, 2008, page 7.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
August 2008
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