Amazon Discovers Mobile Phones Are The Russian Winter of Brand Extensions

FrozenSoldierIn WWII, the Russian winter wasn’t kind to the Germans (see poor soul on the left).  The term “Russian Winter”  lives on as a warning and a metaphor describing ill-advised odysseys into hostile territory.  Attempts to launch an MVNO (Mobile Virtual Network Operator) have become an expensive Russian Winter for many brands.

The latest victim appears to be Amazon and, if today’s (October 24th) earnings call is any indication, it’s a colossal mess.  Recall, the Kindle Fire Phone launched on July 25th.  On Monday September 8th, the price was cut from $99 to 0.99 cents (on a two-year contract)… and the next day Apple held the iPhone 6 launch event.

FirePhone

It took confidence (hubris? cojones?) for Amazon to launch the Fire Phone, a product that would confront the Apple flagship, in the middle of the 60-day countdown to the vaunted iPhone 6.

Today (a mere 90 days after launch) Amazon made some financial admissions about the Fire Phone… including that it was taking a write down to the tune of $170 million and had $83 million worth of inventory in stock.  Ouch.  In a prelude to the earnings call, yesterday (October 23rd) desperation became a package deal as AT&T began offering an Amazon Fire HDX-7 tablet for $50 when you buy a Fire Phone.  This is not the final epitaph for the Fire Phone, but it’s certainly not a rosy horizon.  Meanwhile, the Apple iPhone 6 backlog wait-time has reached nearly 4 weeks for new orders according to estimates taken today from Apple’s online store.

Amazon is not alone here.  The annals of mobile phone history are full of brand extensions that have a horrible track record.  Actually, “horrible” might be charitable.  Now, niche brands conceived specifically for for mobile voice, messaging or data have a less horrible, but still sordid, history.

Metaphorically speaking in the context of Russian Winters for brand extensions, if Amazon is the Germans, then ESPN was Napoleon.  In 2006 ESPN tried and also failed to launch their own mobile phone.  I could go back and recount that debacle, but Business Week’s Tom Lowry summed it up quite well it in an article he wrote back on October 29, 2006:

sanyo_espn_phone“…Just seven months after launching its own cell phone and service on Super Bowl Sunday, ESPN abruptly announced it was scrapping its heavily hyped Mobile ESPN.  Becoming your own cell-phone provider–leasing wireless spectrum from one of the big carriers and delivering programming directly to customers–is not for the faint of heart… ESPN, the $5 billion-a-year jewel of Walt Disney Co., takes pride in knowing what sports fans like and how they want their games, highlights, and analyses served up. Yet despite investing nearly $150 million in Mobile ESPN, say industry sources, the company signed up just 30,000 subscribers, way below a possible breakeven mark of 500,000…”

Yes, there are some exceptions.  Some say that Virgin Mobile is a brand extension and I will agree with you but also ask you to double check the ownership structure of that venture and its history.  They were also sold in Sprint stores and if you flunked credit, the representative cheerfully pointed to the display and said, “Have you considered Virgin Mobile?” That’s a strong, symbiotic relationship.

Ironically, Apple helped blaze a path for brands to offer a compelling (and far less expensive) mobile experience: THE APP.  None other than ESPN learned from its MVNO train wreck and was an early leader when it came to launching a veritable suite of eponymous apps.

OK, But Why Does This Keep Happening?

The mobile carriers are typically all-too amenable to MVNOs because they provide a source of revenue without the fuss of handset subsidies, retailer commissions, imputed marketing expenses and the like.  The margin on a wholesale deal is, thus, pretty tasty (In a past life I worked for a carrier and knew about the wholesale MVNO contracts).

If the MVNO fails, and the W-L record of MVNOs is 3-57 (my rough approximation), it is also a source of very low cost subscriber acquisition to the carrier who lovingly embraces the MVNO subscribers who are already on its network.  Failed MVNO subscribers usually get a letter that starts with WELCOME TO SPRINT!

The brand extension odyssey typically starts with an offsite strategy meeting:

PictureOffsite

Following the strategy meeting and subsequent weekend at the Betty Ford clinic, the brand engages a carrier.  It usually goes something like this:

CMO of Brand: “Hello Mr. Carrier, we want to launch our own mobile phone. Our beloved brand is all-powerful and… [insert roughly 13 minutes of brand stats and associated diatribe here].  In conclusion, research shows 98.26% of our customers currently use a mobile phone and our analysis indicates the overlap between mobile phone use and our brand is statistically significant.  Thus, a mobile phone carrying our beloved brand will be a category killer.”

Wireless Carrier:  We are enthralled and humbled.  Yes we’ll sell you wholesale minutes, messaging and data.  We would be fools not to associate with genius such as you.  Please sign here.

CMO of Brand: Uhh… on page 847 of the carrier agreement in section 133.31.2.1 there’s a clause that states if we don’t pay our wholesale bill, or we elect to discontinue the service, then our subscribers will immediately become your subscribers.

Wireless Carrier: (Waves hand and suddenly sounds like Alec Guinness) “These are not the droids you’re looking for.

CMO of Brand: What?  Huh?  Where were we?

Wireless Carrier: You were about to borrow my pen and sign on page 912.

CMO of Brand:  Right – OK, there I signed it.  Let’s issue a press release.

Wireless Carrier: Of course, here is our boilerplate.  Just put your name in the blank and change the date.

CMO of Brand:  Awesome!

And so it goes.  I believe that one can reasonably predict the potential success of MVNOs by using this two axis chart:

Picture1I could go on but the point is clear and boards should find the historical lessons instructive.  Amazon is just the latest company to encounter the Russian Winter when it comes to mobile phone brand extensions.

Brrrrrrrrr…

Annual Operating Plan: Step 4 of 4

ObjectivesThe final step of drafting the Annual Operating Plan should be a straightforward and efficient task: The establishment of 10 – 15 key objectives in support of the Core Goals for the year (which, in turn support the 3-year strategic plan).

Objectives are essentially sub-goals (written in the S.M.A.R.T. format) that, if met, ensure a particular Core Goal is met.  In my experience, there are usually no more than 3 or 4 Objectives attached to each Core Goal.

Let’s review the sample Core Goals I presented in Step 3 (found here) and add some numbers:

  1. “$25M” Gross Revenue @ “50%” Gross Margin;
  2. “$6M” Operating Expenses;
  3.  “$3M” R&D spend expensed on the P&L and delivery of the Product Plan
  4. At least “$3M” EBITDA and “$2.5M” Positive Cash Flow optimized in the face of any challenges or windfalls.

A solid set of objectives might look like this:

Core Goal 1: $25M” Gross Revenue @ “50%” Gross Margin;

1A.  Sequentially increase topline revenue each quarter starting with at least $5.5M in Q1 and not less than that in any subsequent quarter.

1B.  Achieve full-year Gross Margin of at least 50% with not less than 47% Gross Margin in any month.

1C.  Increase Indirect share of revenue from 40% to 45% by year end through the addition of 3 channel partners generating not less than $1M each for  the year.

The above is a clear, concise set of objectives ready to be assigned as sub-goals to the Chief Revenue Officer or VP of Sales.  Measurement during weekly 1:1 meetings can then commence in a straightforward manner.

As you can see, this is not a difficult process.  It can be made difficult, however, if loose language or complex algebra is employed.  The more specific and more conforming to S.M.A.R.T. methodology the better off you will be.  It also staves-off or eliminates complicated discussions later as executives seek bonus payouts (and pitch their value and accomplishments).  Reflecting back on the Annual Operating Plan during 1:1s leaves no surprises when that same document becomes the measuring stick for bonuses, annual reviews and subjective performance grading.

If you have successfully navigated this step – the 4th and final milestone – then your document should be completed.   It should present your mission, vision, values and clearly articulate the story of your 3-year strategic plan followed by a detailed set of current year goals and the objectives that will ensure those goals are met.

You are ready to hand out the document and start measuring people weekly, monthly and quarterly according to the specific goals and objectives set forth in it.  Quarterly meetings of management become sessions to identify solutions to increase performance rather than argue about goals and objectives.  Any sane and rational individual cannot deny the goals and objectives set form in the plan.  Measurement is a simple numerical exercise led by the “evil folks in Finance” – just kidding.

In other words, “Now the fun starts!”

Annual Operating Plan: Step 3 of 4

PlanThe easiest part of the Annual Operating Plan  should be the clear selection and articulation of 3 – 5 core goals for the upcoming year.  It is particularly straightforward if the team has completed Step 1 (see this post) and Step 2 (see this post).

In Step 3, the CEO and management team must ask and answer the question, “What must we achieve next year as the first step in the rational yet challenging 3-year strategic plan?”

My experience suggests there should be 3 to 5 core goals that conform to the SMART test (Specific, Measurable, Achievable, Reasonable and Time-based) and also be:

  • Understandable – by ALL employees;
  • Inter-related – like building blocks;
  • Operationally Sound – NOT aspirational fluff that make executives feel good

For any company under $100M in revenue, a set of 5 goals that build on each other seems to work very well:

  1. “$X” Gross Revenue @ “X%” Gross Margin;
  2. “$X” Operating Expenses;
  3.  “$X” R&D spend and delivery of the Product Plan
  4. “$X” EBITDA and “$X” Positive Cash Flow optimized in the face of any challenges or windfalls in any of the above
  5. Completion of next year’s Annual Operating Plan by “date” (I suggest Nov 15th)

Do you see how effectively the 5 goals build on and depend on each other?  This ensures clarity that is easily communicated to every level of the organization.  And, best of all, no fluff!

Along the way, it should also be explained to every employee that:

  • Any position will be tied to #1 or #2 or #3 and everyone owns #4 in some way
  • The bonus program is paid for by #4, not the “bonus fairy” who somehow shows up regardless of performance
  • If you see something or think of something – make a recommendation.  We all win or we all lose (ie… bonus) together and there is no victory for one department, team or individual – the organization MUST win as a whole.

All said, if you have been successful with the foregoing, then Step 3 should be successfully completed.  This sets the stage for Step 4 – which is coming soon in the next post

P.S. Unsolicited Advice to Owners:

I’d like to add something for owners / founders / CEOs with large equity stakes.  This is merely my opinion but I have come to strongly believe in it:

(-) Employees by and large DO NOT CARE about the 3-year strategic plan or the vision to sell the company.  They don’t participate in such results the way owners and C-Level executives do and, thus, won’t care or live it from the heart (regardless of what they say to your face in order to curry favor).  This is a reality regardless of whether the employees believe in your vision or if the company was voted the “top place to work in Toledo.”

(+) What employees REALLY CARE ABOUT is recognition, career growth, job satisfaction, a company seen as benevolent in the community and… (wait for it)… the bonus they can earn this year.  Employees care deeply about that basket of tangibles and intangibles.  At the same time, if the employees are truly bought in to current year plan, and it is a rational step toward your 3-year goal and other visions, then you have as much alignment as you likely will ever see.

I get arguments about this perspective and no, it is certainly not an absolute, but I have seen very few exceptions to it.  There you have it – you can motivate your people TODAY (on their terms) to help you reach TOMORROW (on yours).

Annual Operating Plan: Step 2 of 4

3YearPlanExceptional Annual Operating Plans are typically anchored to a well-crafted 3-year strategic plan.  The coming year covered by the operating plan is merely the first step in attainment of the broader 3-year vision.

Why 3 years?  In today’s world, change is a constant and the more traditional 5-year plan simply does not hold to any reasonable trend-line.  My preference , based on experience, is a 3-year strategic plan, with an annual look-back to test the accuracy (and sanity) of the previous plans.  Development of the 3-year strategic plan should be tested against the Mission and Vision (found in this post) to confirm alignment.

Following the review and validation of Mission, Vision and Values, the 3-year strategic plan session is kicked-off with a robust discussion of Sales, Product and OpEx. The CEO should moderate effectively and draw all executives into the fray.  Ideation should not be snuffed out but illogical thinking should be called out with clarity and force. Executives in the room are expected to exhibit market sensibilities, functional expertise, financial acumen and “ownership thinking.”  If not, they do not belong in a room discussing the future of the company (which will impact the lives of the broader employee base).

1. Start with Sales and Build Forward Targets at +12, +24 and +36 Months:

Assuming the Annual Operating Plan meeting takes place in mid October (my suggested calendar is found in this post), the current year’s revenue and achievements are in view.  From there, a reasonable stretch-goal for 3 years can be crafted.  The questions to ask include:

How fast is the sector growing?  A firm must meet / beat that % to maintain / gain market share.  When such growth estimates are applied, what do the 3 years look like from a sequential  top-line revenue perspective?  Does this pass the sanity test?  How fast is gross margin growing?  What floor should we set for each of the next 3 years?  (To me and those who think like me, Gross Margin is EVERYTHING.)

2. Move to Product and Validate Readiness (or Not) to Hit Targets:

Where should the product or service be in 3 years?  Are the planed product updates sufficient to support the top-line revenue forecast?  What will it take in R&D to pay for that?  A review of the product road-map should take place at a high level with detailed discussions reserved for the separate time allotted to craft current year objectives.

3. Then Perform a Sanity Check on OpEx:

What will happen to SG&A expenses?  What marketing spend is needed? Is the back office in place to support the revenue level, support, accounting transactions, etc?  How big will headcount become?  When will new facilities be required?  All such items should be brought forth and this will certainly not be the first time they are discussed.

4. Have Finance Model LIVE In Macro Strokes:

This should be an instructive session where the executive team sees their presumptions come to life in a proforma P&L.  They should evaluate and ferociously protect  what I call “scale, scale and scale.”  Specifically, Gross Margin scale, Opex scale and EBITDA scale.  If Gross Margin scales in the face of rising revenue with rational OpEx costs in check, it’s generally difficult to screw-up EBITDA as it should take care of itself.  Bonuses are paid for in EBITDA… except at start-ups and dysfunctional companies losing money while possessing (for now) the balance sheet strength to serve executive greed.

Once the 3-year strategic plan is challenged sufficiently and agreed upon, step 2 is completed.  The foundation is intact to create the Annual Operating Plan and 1 year of goals, objectives and budgets, which should be a fairly straightforward exercise.  (That is step 3 and it will be detailed in an upcoming post.)

Annual Operating Plan: Step 1 of 4

Values-Mission-VisionDoes your organization have clearly articulated Mission, Vision and Values?  If so, can they be stated within 1 minute by anyone  in the company?  If not, all is not lost, but you do have some work to do.

Defining or reviewing and reinforcing these key items is the first part of any Annual Operating Plan meeting.   My timing for this initial step is typically around October 15th of each year.  See my other post for the calendar here.

In short, a well-crafted Mission, Vision and Values sheet defines why we exist, where we are going and what we value.  A simple web search will yield any number of examples, some memorialized in catchy graphics.  The form and visual beauty, however, is not nearly as important as the content itself and its day-to-day applicability.  Let’s examine them in sequence:

Vision: “Where we are going tomorrow” 
The vision statement describes the organization’s successful outcome as it is envisioned in the future.  “To Be…” is a common clause within a statement defining the balance between rational attainability and a picture of tremendous accomplishment – OR – an ongoing quest.  Here’s a very good example from Amazon:  Our vision is to be Earth’s most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online.
 Amazon presents an example of a “quest” within their well-articulated vision statement.   Clarity of direction (and dream a bit) is the goal.

Mission: “What are we doing today”

The Mission essentially explains the what the company does today. This is more specifically action-oriented than the vision.  Here’s an example from Google:  Organize the world’s information and make it universally accessible and useful.  Some organizations, blend Mission and Vision into a single mission statement.  Frankly, I think that’s a much simpler approach if the leadership is having difficulty defining itself (See also: Yahoo).  Near-term executional alignment among management team is the goal. 

Values: “How We Stay Grounded”

Values essentially represent the key behaviors that the organization and its people demonstrate and expect.  This list of values cannot be created in a vacuum and it must be authentic to have any impact.  The objective here is for management to define and demonstrate the valued behaviors and require all employees to (1) exhibit them in everything they do and (2) measure any challenge or special action by them.  A set of 3 is likely incomplete while a  set of 12 is almost certainly unwieldy.

Poorly executed Mission, Vision and Values documents are typically wordy, self-aggrandizing and lack authenticity – meaning they are merely aspirational do not truly describe the organization.  Such examples are the often product of unfortunate offsite strategy meetings where limes and salt outweighed sanity.  All of us have been to one of those affairs where break time was spent standing in the hall shaking your head with colleagues.  My advice: skip the offsite part, find a quiet conference room and gather the senior team.  Be bold and specific while not over-thinking things or becoming a drunken poet.

A successful result is the one in which every employee can quickly and convincingly:

(A) Recite the vision, mission and values and;

(B) Validate their authenticity because they observe them every day in the organization’s accomplishments and the behavior of its people and;

(C) Explain specifically how their job is a valuable part of the bigger picture.

THAT is a sure sign of success in taking step 1.

Do You Have An Annual Operating Plan?

Annual PlanI can’t believe its’ Septemebr already. Next year is just around the corner.  Do you have an annual operating plan?  Put another way, do you have a plan that goes beyond setting departmental budgets?  In my experience, organizations that don’t have a true annual operating plan in place by December 10th of each year perform at a lower level than organizations that do.

I have worked with many organizations and, as unbelievable as it sounds, many simply do not put time an energy into establishing an annual operating plan beyond some form of budgeting process.

The best companies build annual operating plans containing 4 components:

  • Reinforcement of mission and values.
     Why we exist and who we are.
  • Confirmation of the short-term vision.
    Where we are going – usually a 3-year look.
  • Clear articulation of 3 – 5 core goals for the current year.
    What we want to achieve “now.”
  • Establishment of 10 – 15 key objectives.
      How we will achieve the core goals.

That’s not complicated and, if done properly, it builds alignment throughout the organization.  Now, it can also be over-done which leads to confusion and complexity – but that happens much less often.  The typical situation is that the organization is so busy with the “here and now” that they cannot or will not intentionally make the time to actually plan.

How much time does it take?  Typically 3 full days over a 45 day period.  Here’s the calendar I use and recommend to clients and colleagues:

– October 15th: Kickoff – creation of 1st draft (Full day)

– November 1st: Review – discuss 2nd draft (half day)

– November 15th: Ratification – agreement on goals and budgets. (2 hours)

– December 1st: Roll-out – presentation to entire company by the Senior Team (2 hours)

The rest of December is finishing the current year on a high note as holidays and seasonal distractions pick up speed amidst the business of closing the year strong.

In the coming weeks I will take you through the simple steps to gather your staff and build a compelling annual plan that will align your team and prepare you to ave a great year.