Above C-level

What do Whole Foods and Starbucks have in common? They both earned well-deserved reputations as overpriced food & beverage establishments. Not coincidentally, they both experienced massive growth in recent years while the yuppies were bringing home the (organic, free trade) bacon. And now they have both been slammed by the latest economic swoon.

Whole Foods was the latest in a string of companies that target the premium segment to disappoint Wall Street. The company posted quarterly earnings that were down 31% from last year at this time, and announced that they will cut back on store openings and also suspend dividends to their shareholders. Paired with recent store closures by Starbucks, these two companies make for an interesting case study in how once-healthy, innovative companies can become overzealous on the way to their achievements.

Shared characteristics that led to both companies’ rise and fall include:

1. Premium Pricing – Premium pricing is great when you’re the only show in town. Unfortunately for both Starbucks and Whole Foods, this no longer rings true. In the case of Starbucks, even McDonalds offers premium roast coffee (which by the way scored better in taste than Starbucks according to Consumer Reports). And Whole Foods has experience pressure from everyday supermarkets that now dedicate entire sections of their stores specifically to organic goods.
2. Overexpansion – This is truer in the case of Starbucks than Whole Foods. Starbucks expanded their number of stores to the point of cannibalization. The company was no longer broadening the market, but rather sharing the same pool of customers across a larger base of stores.
3. High-Brow Reputation – An off-shoot of premium pricing, a high-brow reputation is hard to shake. Even if these stores start to lower prices or offer coupons, it will be tough for them to rebrand and become known for more than just catering to society’s elite.

In all fairness, I have made more than my fair share of purchases from both establishments, so I am certainly not here to criticize their products or services. Nor can I deny that much of their growth over the past few years has been intelligent growth, capturing and in some instances creating a market that did not previously exist. However, the age old debate of when to curb growth lives on. Both companies felt invincible and in turn became greedy.

Now they are the ones paying the premium price.

It’s too easy, almost to the point of cliché’, to offer negative commentary on a startup who goes head-to-head with a Goliath, such as Google, and fails. But that alone, is not enough reason to go easy on Cuil (pronounced “cool”). After all, the company launched a PR campaign that featured them in numerous worldwide publications today, including the Wall Street Journal, claiming to be the “world’s largest search engine.”

With a tagline like that, they’d better deliver. But do they? You be the judge:

I’ll be back shortly with some more insightful words on Cuil. Until then, I’ll be pondering what they are doing with their $30M+ in funding to become the “world’s largest search engine”, because they are certainly not spending it on infrastructure.

“Mission Accomplished”

Recent history would suggest not using those two words in combination until victory is truly, 100%, absolutely, beyond the shadow of a doubt achieved. So back in February, when Toshiba halted development and production on its HD DVD players, I was a bit surprised to hear the media claim that Blu-ray was the clear victor in the high definition format battle. Sure there were no mid-sea jet landings, no aircraft carriers and no live-TV press conferences, but Blu-ray was widely hailed as inevitable.

Let’s first give credit where credit is due: Blu-ray killed HD DVD. However, in the age of digital, downloadable media, that alone does not secure Blu-ray’s success. Let’s examine a few recent innovations that have occurred in the home-video industry that may, very well, leapfrog the entire need for Blu-ray:

1. Cable/FiOS Video On Demand
All major cable companies, as well as FiOS, offer this service, often in HD. In fact, satellite is the only major player left in the dark due to technical constraints. The convenience of this offering is its major selling point. Since it runs through your normal set-top box there is no further equipment to buy. The downsides are that 1) the video libraries are small and typically limited to new releases and 2) the rentals usually expire after 24 hours.

2. Apple TV
Apple has offered movie and television show downloads via iTunes for the past couple of years. This made it simple for people to watch shows on their iPods – but limiting the offering to a very small market of commuters and those who just can’t get enough of their iPods (note: we all know these people). With their most recent version of Apple TV, Apple has made it simple to download HD movies using your home network and transmit them directly to your television via direct cable hookup. In fact, the entire Apple TV interface is managed via your TV, so the intermediary of the computer (i.e. the bottleneck of this whole process) is no longer necessary.

Apple TV hasn’t been quite the hit as the iPod, but it’s Apple, so there’s much potential. For one, the library is limited to only a handful of studios – a problem that can easily be fixed with time. And second, this technology relies on fast download speeds which are fairly commonplace in U.S. households, but still not as fast as some other countries.

3. Netflix
Netflix distributes Blu-ray discs as part of its rental service, which is great for Blu-ray in two ways: 1) it is a consistent revenue stream for Blu-ray disc manufacturers as NetFlix tends to keep large libraries on-hand and 2) it promotes the format in general, further expanding the Blu-ray customer base.

However, Netflix is also a competitor. Two days ago, Netflix and Microsoft announced a deal that would stream thousands of movies over the Xbox game console (which, in turn, prompted Sony to announce their own video download service for PlayStation 3). In addition, Netflix is developing a movie set-top box with LG.

Many of these technologies are in their infancy, and they all lack the consumer’s need to hold a tangible piece of plastic. However, in addition to not prematurely claiming “Mission Accomplished”, history teaches us one other thing: people are caring less and less about their tangible libraries. iTunes’ success has proven that downloadable digital music is the wave of the future, and it’s only a matter of time until it becomes mainstream in the video industry. The only unknown is the timeframe, which offers some opportunity for Blu-ray to capitalize if the adoption rate of video downloads continues to grow slowly for years to come.

However, my money is on the leapfrog, not the disc.

FCC Chairman, Kevin Martin has granted Comcast a “reasonable timeframe” in which to discontinue its practice of prioritizing certain web-based applications based on bandwidth. This announcement came on the back of Comcast’s public agreement this week to work with Vonage to improve the VoIP company’s phone service carried over their network.

Comcast denies all wrong-doing, but the sudden helping hand offered to Vonage raises a flag. So let’s also assume for the sake of argument that Comcast is guilty. The question is why they would take such measures when there are other, more legitimate ways to compete with poor, little Vonage.

First, Comcast owns the entire cable experience. Convenience alone should account a good portion of people who are weighing the options of Comcast’s phone service versus Vonage:

Comcast: Welcome to Comcast. Would you like to sign up for our Triple Play Preferred package that includes TV, phone and internet on the same bill?

Customer: Yes.

Comcast: But it costs a lot more than if you just sign up for TV and data through us and then use Vonage for phone.

Customer: I don’t care because I’m too lazy to call Vonage. Thank you.

Second, Comcast owns the network. There is virtually nothing stopping them from simply lowering their prices to a point at which Vonage has little or no advantage. For example, Cablevision (who has not been named by the FCC) prices their basic Triple Play package at approximately $90 per month - $25 less than Comcast’s similar offering. Is this predatory? Hardly – it’s not like Cablevision is giving their phone service away for free. They are pricing competitively to the point where, even for a savvy customer, the negligible difference is made up for in service and convenience.

Finally, Comcast could innovate – the honest way. Vonage is offering visual voicemail and virtual phone numbers so that every call is a local call. All the while, instead of enhancing their products and services, Comcast is concentrating on destroying the competition – literally.

Cable companies have held local monopolies for years. But now with competition coming from all angles – Vonage, FiOS and DirecTV – that environment is quickly changing.

Unless they enjoy bad press, fines and frequent visits from the FCC, Comcast and others would be wise to play nicely.

June’s J.D. Power survey concluded that overall satisfaction with the airline industry has reached its lowest level in three years. Amidst all of the price hikes and canceled flight routes in the news lately, this shouldn’t come as a shock to anyone. However, a more in-depth look at the results reveals a couple of surprises: namely that 1) sinking approval has more to do with poor customer service than it does with ticket prices and 2) the survey shockingly and disappointingly did not test for customer opinions on flight delays/cancellations.

When you factor in bad weather, overcrowded planes and high prices, the flying experience is inherently not a pleasant one, no matter what airline you choose. However, airline companies, to a large extent, have little control over these factors. This simply exacerbates the need for them to excel at the things they can control, namely customer service. Happy flight attendants, an efficient baggage handling system and a simple pillow can make all the difference between a bearable trip and a miserable one. Sadly, customers have come to expect none of these pleasantries. Even sadder, they shouldn’t even be recognized as pleasantries, but rather as elements of basic service.

Regarding my point about not gauging customer reactions to delays and cancellations, J.D. Power simply dropped the ball. In the survey’s seven areas of study, flight cancellations and delays were inexplicably missing from the list. This seems like a pretty glaring omission, especially in light of the fact that delay rates are significantly worsening year-over-year in some of the U.S.’s busiest airports. According to FlightStats’ June 2008 data, flights into New York’s LaGuardia were on-time only 52% of the time, down 4% from last year and flights at Chicago’s O’Hare were on-time 55%, down a staggering 10% from last year.

It doesn’t take a J.D. Power survey to state the obvious: people enjoy being on-time. Wind and storms are to blame for many delays, but timing issues are not completely weather-related. In fact, US Airways is performing much better this year than last summer according to today’s Wall Street Journal. This is the result of a more efficient flying schedule, new baggage-handling equipment and additional gates.

For the airlines, it’s time to go back to basics and restore some dignity to this industry. If I was US Airways, I’d start using my mastery (or at least comparably better handling) of the basics in my ad campaigns until the others catch up.

And if I was the other airlines, I’d start following US Airways’ lead sooner rather than later.

Electronic micropayments will have a massive effect on the traditional payments industry. For online gamers, avid Facebook users and other niche groups (yes, Facebook users – you are still niche!), this is not exactly news. But the major credit card companies are yet to recognize the potential of these markets and have not secured their futures as leaders in this rapidly growing space.

First a definition: micropayments are transactions, typically electronic, which represent a very small transfer of money. The exact amount is subjective, but for the purposes of this piece let’s assume a micropayment falls anywhere between a $0.99 iTunes download and the cost of a falafel sandwich.

Major credit card companies already play in this space. Apple’s iTunes accepts all the major networks, and even McDonald’s now accepts plastic. But neither of these channels has been won. In the case of Apple and many other web-based retailers, they also accept PayPal – arguably a more convenient and perceivably more secure method for online payment. And in the case of McDonald’s and other fast food restaurants, cash is still king. However, whatever penetration credit cards make into the quick-service food industry, I believe it will eventually be leapfrogged by something more expedient, such as mobile payments.

Diving further into the obscure, but eventually-to-be-mainstream, micropayments are happening within video games and across social networks. The Economist featured an article this week about Electronic Arts’ upcoming video game, Battlefield Heroes. In a complete shift of business model, EA is giving the game away for free via download, and instead relying on in-game “character upgrade” purchases for revenue. The methods of payment for these upgrades are TBD, but it’s fair to say that it will likely accept credit cards amongst a number of other fragmented options. Regarding Facebook and other social networks, Spare Change and a number of other technologies have sprung up to facilitate small peer-to-peer payments for widgets and other items.

To-date, credit cards have remained somewhat unaffected by this trend for two main reasons. First, micropayments are emerging, but have not yet hit the big time – as the online and mobile communities mature (literally and figuratively), this will change. Second, plastic currently feeds the back-end of online payment networks, such as PayPal. By this, I mean that people often fund their PayPal accounts using credit cards, so the card companies are still getting a piece of the action.

For companies, such as American Express, Visa and MasterCard, this “backseat revenue” produces a false sense of security because these networks are built on brand and customer experience. And as long as PayPal is the face of the transaction, they are not only taking home most of the revenue, but also capturing the intrinsic value of name recognition. Under this setup, it’s only a matter of time until the traditional guys get squeezed from the equation. Moreover, the big card companies lose transaction data sitting behind the PayPal facade. They no longer know whether their customer is shopping for a pair of sandals or a set of stereo cables – they both look like a $40 PayPal transaction. As you see, losing the micropayments battle is not only a short-term loss, but can be a gateway to more serious issues down the road.

In the fragmented market of micropayments, the MasterCards of the world hold a serious advantage if they choose to use it: BRAND! But they should make their move now while the battle is not yet won.

Priceless.

I always found it a bit cliché and condescending to use the term “only a New Yorker would understand”, but now that I no longer live in New York I suppose it’s acceptable. And in the case of the movie-going experience it’s true for a number of reasons, the biggest of which is the crowds. Any new or marginally popular movie shown on a Manhattan screen during somewhat peak hours is either nearly or completely sold out – often hours before the show.

Previous to Hoboken, I lived on the Upper West Side of Manhattan where my go-to cinema was the Loews Lincoln Square theatre at 68th and Broadway. And I’m not exaggerating when I say that it was borderline mandatory to purchase your tickets well before arriving at the theater, or else get left out in the cold. For Spiderman 2 on opening night this might seem obvious. But for the 6 PM showing of 13 Going on 30 in it’s third week of release, it’s not – and even that would sell out. Not that I know anything about that movie.

Given the predicament, the obvious choice for me was Fandango. At $1.50 extra per person on top of an already egregiously expensive $11 ticket, I felt robbed. But even worse was the feeling of being shut out, so the extra few bucks were worth my peace of mind.

Now that Fandango has purchased Movies.com, they are expanding their empire in the hopes of one day having all online U.S. movie ticket purchases roll into one company. For most, this is a monopoly that will go unnoticed, but in New York City, it’s a cartel. If Fandango is smart, they will gouge their customers for more in areas, such as NYC, where they are the only practical option. (Note: practical does not include a dedicated trip to the theatre hours before to buy tickets).

The best part of this deal is that the price for Movies.com was “minimal” according to the press release. Some M&A is smart, and I believe this deal falls into that bucket.

Luckily, it’s no longer my concern – I just get to write about it from Hoboken and then drive to the theatre.

A study was released this past week, and reported in the Wall Street Journal, that predicts a “six-fold jump in internet traffic between 2007 and 2012, as online video becomes the biggest driver of global data communications.”

Would it shock you to hear that Cisco, one of the world’s leading network equipment makers, was behind the study?

In this case it’s pretty obvious that internet traffic is going to continue its rapid pace of growth, so this study reveals nothing earth-shattering. However, let this be a reminder to always check your sources.

For all the (usually well-deserved) abuse the airlines take in the media, I’m going to take a break from all that for the next few minutes. Instead, I’d like to take some time to recognize the innovations this desperate industry has made over the past few weeks in the face of rapidly skyrocketing fuel costs.

Innovations, you say? What’s so innovative about rising ticket prices and baggage fees? Well, not much really. And for the sake of maintaining my loyal readership, I’m not going to write about why I agree that these companies should continue raising ticket prices. Nope – as an alternative, I’m going to spin this into a positive piece on corporate innovation in its various forms.

Usually when people think of innovation, they think of things that are cool, sexy and/or technology-related. A glaringly obvious example would be Apple’s iPod or just about anything Google-related. Bringing it back to airlines, JetBlue’s introduction of the seatback television was a groundbreaking innovation, or on a grander scale, the low-cost carrier segment as a whole.

Referring to Doblin’s Ten Types of Innovation, the ones I just mentioned likely fall into the most common buckets: products and services. In fact, because product and service innovation is the most tangible (not to mention cool and sexy), it probably won’t surprise you to hear that this is where companies spend a disproportionately large percentage of their time. However, what might shock you about Doblin’s findings is that innovations related to business model, process and customer experience add by far the most value – much more so than those related to products and services.

As a celebration of non-product and non-service-related innovation, I present to you the airlines:

Process Innovation

• Cathay Pacific scraped the paint off of its freighters, reducing the weight of their aircraft by up to 440 pounds
• Singapore Airlines is flying slower to increase gas mileage
• Delta is looking to eliminate duplicate flying manuals in the cockpit (which apparently are quite heavy)

Business Model Innovation

• In 2007, American Airlines sold 100 billion AAdvantage miles to other companies as an alternate revenue source to tickets

Brand Innovation

• JetBlue’s new “Jetting” ad campaign, trying to remind people that flying is fun
• Virgin America’s ads touting good food and even better looking people aboard their planes

Will all of these tactics work? Of course not, it’s the airline industry (c’mon, did you really think I was going to let you go without making fun of them at least once?). But more importantly, these companies are trying to find non-obvious ways to protect their bottom lines and grow their top.

Innovation: it isn’t just an iPhone.