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Category: Business & Tech_newsletter

Decision and Positioning #014 – Netflix “Possibly” Anticipated HBO’s Hesitation, Utilizing Counter-Positioning to Discourage HBO from Entering the Online Streaming Arena

Hey everyone, hello! Last week, we talked about HBO’s reluctance to dive into the online streaming platform too early, and the quite rational reasons behind this decision. However, these reasons might have been precisely what Netflix anticipated about HBO, thus using these “rational” reasons to dominate the online streaming platform alone. For those who wish to revisit our previous newsletters, you can click the link provided.

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The Masterstroke: Counter-Positioning

What exactly is “Counter-Positioning”? In simple terms, it occurs when a startup adopts a business model that is “opposite” to that of the established market leader, in such a way that if the market leader were to follow suit, it would damage its existing business. This often leads the incumbent to make one of three decisions:

  1. Delay adopting the new business model,
  2. Implement it half-heartedly,
  3. Or a combination of both (delaying the decision and then implementing it half-heartedly),

Eventually, this leads to a gradual decline in market share, inability to counteract the startup, and finally, the incumbent decides to align with the startup’s approach—usually too late.

Why, then, if counter-positioning is so disadvantageous, are market leaders reluctant to change immediately?

The hesitation often stems from several factors:

  • Investment in Existing Infrastructure: Market leaders have heavily invested in their current operations, and a pivot to a new model might mean writing off those investments.
  • Brand Perception and Customer Expectations: Changing the business model might confuse customers or dilute the brand’s perceived value, especially if the brand is associated with a particular service quality or product type.
  • Internal Resistance: There can be significant internal resistance within large organizations against drastic strategic shifts, especially from those whose positions or departments might become less relevant.
  • Financial Risk: The uncertainty of success with a new model presents a financial risk. Market leaders running profitable operations might be particularly risk-averse, preferring the status quo to the uncertainty of a new venture.

Netflix’s strategic use of counter-positioning effectively capitalized on these hesitations, positioning itself in a way that made it difficult for HBO to directly compete without jeopardizing its existing business model. By the time HBO and other traditional media companies recognized the inevitability of online streaming, Netflix had already established a dominant position, illustrating the effectiveness of counter-positioning as a competitive strategy in the fast-evolving digital landscape.

The reluctance of market leaders to change, despite the evident need to adapt to new business models, primarily stems from two reasons:

Reason One: They’re Still Making Money!

Why change something that’s currently profitable? The biggest hurdle for market leaders when considering a shift in strategy or entering new markets is the risk associated with moving away from a model that is still generating profit. The concern is that any change might lead to decreased profitability, or worse, losses. This mindset is particularly prevalent in companies like HBO’s parent company, Time Warner, which had significant investments in cable companies and other cable TV channels. The business model was straightforward: more cable TV and premium channel subscriptions equated to more money, and it was lucrative. Moving HBO to a primarily online platform risked cannibalizing its own cable business and harming the revenue of other cable channels under Time Warner, including CNN, which benefited from cable subscriptions without requiring additional fees.

Reason Two: Corporate Management Cares (Can Only Care) About Current Profits!

Senior corporate managers, though operating at executive levels, are essentially high-level employees. Their job security and compensation are directly tied to the company’s current financial performance. Good performance can lead to bonuses and job security, while radical changes that result in short-term losses can lead to dismissals. Even if management recognizes that failing to adapt might spell regret in 10 to 20 years, the immediate consequences of change deter action. Given the uncertainty of whether they will still be in their positions in the distant future, managers prioritize current success and compensation. Without the mandate to sacrifice short-term profits for long-term viability, there’s little motivation for them to undertake significant changes.

This dynamic underscores a fundamental challenge within many established companies: the tension between short-term profitability and long-term strategic positioning. While startups like Netflix can maneuver with agility and adopt disruptive models without the burden of existing profitable operations, legacy companies struggle with the inertia of their success, often leading to delayed responses to market shifts until it’s too late.

Market leaders are more inclined to embrace change when they see profitable opportunities combined with a pressing need for transformation.

Recognizing Profit Potential: Initially, when Netflix’s monthly fee was only $7.99—significantly lower than the $15 HBO could charge its subscribers—HBO didn’t see the value in entering a seemingly unprofitable market. However, as Netflix gradually increased its monthly fees—$7.99 to $8.99, then to $10.99, $12.99, $13.99, and finally $15.49—without losing many subscribers and actually gaining more, it became evident to incumbents like HBO that change was imperative. Especially as Netflix continued to expand its profitability.

Forced to Change: The sale of HBO’s parent company to AT&T in 2016 marked a turning point for HBO. The new ownership was not satisfied with HBO’s slow pace in the online streaming arena, prompting HBO to accelerate its efforts in online streaming post-acquisition.

HBO in the Post-Counter-Positioning Era

Despite HBO’s eventual full commitment to online streaming around 2018, Netflix had a substantial head start, having launched its streaming service in 2007. This decade-long gap has left HBO in a continuous game of catch-up, with no end in sight. As of 2023, Netflix reported a net profit of $5 billion, while HBO’s parent company was still operating at a loss.

Netflix, intentionally or not, utilized counter-positioning by anticipating HBO’s reluctance to enter the online streaming market prematurely. This strategic move effectively restrained HBO, transforming it from a market leader in the film and TV industry to a follower.

Counter-positioning stands out as a fascinating tactic because it turns a market leader’s strengths into insurmountable obstacles to adaptation. The big question now is whether any new startups will use counter-positioning to challenge Netflix in the future.

This strategy highlights the dynamic nature of competitive markets, where today’s innovators must continually adapt or risk being outmaneuvered by tomorrow’s disruptors.

Decision and Positioning #009 – Airbnb: Doing the Unscalable to Make 100 People Love You

Paul Graham, known as the father of Silicon Valley startups, famously encouraged new companies with the phrase, “Do things that don’t scale.”

The context behind this advice is that many founders of startups initially want to engage in efficient and scalable activities. For instance, when a company is newly established and aims to acquire users, the first thought might be to buy online ads, collaborate with influencers, or advertise on Facebook or other social media platforms because these are the fastest and most scalable methods. A Facebook post can buy exposure and even customers for as little as 500 units of currency, making it one of the most effective and scalable actions. However, Paul Graham suggests that the best method is for founders to personally reach out to and find customers. Although this is the slowest and least scalable method – given that a founder’s time, contact reach, and promotional scope are limited, hindering rapid growth and replication – Graham believes this is precisely what startups should do: engage in unscalable activities.

One of the best examples of this approach is Airbnb, the globally recognized home-sharing platform that allows hosts to rent out their spare rooms or properties. Airbnb listings range from farmhouses and castles to beach huts, treehouses in the mountains, and common suites in cities. In the past, there were even students from National Chengchi University who listed dormitory beds on Airbnb.

Currently, Airbnb is valued at approximately $80 billion, generating billions in revenue each quarter. However, in its early days, Airbnb faced numerous difficulties. No investors were willing to back them, and they had to fund their venture by selling their own designed breakfast cereals. Before reaching its current status, Airbnb made many efforts that can be summarized as “doing the unscalable to make 100 people love you.”

Making 100 People Love Airbnb, Not Just 10,000 People Like It

No one wanted to rent out their rooms, and not many were willing to use such a service. Airbnb’s co-founder and CEO mentioned that in the early days, they did many unscalable things to make 100 people love Airbnb, rather than making 10,000 people just like it.

Flying from the West Coast to the East Coast to personally serve hosts Airbnb co-founder Brian Chesky would fly from the West Coast to the East Coast to visit each host. He would even book their rooms via Airbnb and live with them for a few days, adding the first reviews for them on the Airbnb platform.

Moreover, Brian Chesky once asked hosts: “What if we had a button that, when pressed, would immediately bring a photographer to your home to take professional photos?” The hosts loved the idea. So, Chesky borrowed a good camera from a friend. The hosts were amazed to see Chesky himself turn up with a camera, never expecting the founder to be their photographer! Chesky did much more than just photography, including personally delivering the rental receipts to the hosts.

If one person is moved by your actions and falls in love with you, that love can spread. This is also the essence of “growth.” Accepting customer suggestions and finding opportunities for growth Initially, Airbnb was only about renting rooms and not entire houses. In a 2010 interview, Brian Chesky mentioned that renting out entire homes was a suggestion from one of their hosts. This host was the drummer for a well-known American singer who often toured. He didn’t just want to rent out a room or an air bed but the entire house. Chesky said this was an option they hadn’t even considered, which later became one of Airbnb’s main businesses.

To make customers fall in love with Airbnb, it’s necessary to establish standards that go beyond 5 stars.

Brian Chesky, to create an experience that would make customers fall in love with Airbnb, continuously thought about how to achieve a six-star rating from customers. Below are the exercises they did for understanding and achieving this.

5-Star Service: You land from your plane, exit the airport, and arrive at your Airbnb accommodation where the host is already waiting for you. This is a 5-star experience.

6-Star Service: In addition to the above, the host personally picks you up from the airport.

7-Star Service: In addition to the above, the car that picks you up is a luxury car filled with your favorite flavored chips and refreshing coconut water.

8-Star Service: Upon landing at the airport, a grand parade welcomes you.

9-Star Service: The moment you disembark from the plane, there are 5,000 screaming fans below with banners welcoming your arrival. This is referred to as a ‘Beatles-level welcome.’

10-Star Service: Upon arrival, you find Elon Musk waiting outside your room, inviting you for a trip to space.

This wasn’t just wishful thinking. In an effort to ensure hosts could provide superior accommodation quality, Airbnb provided a series of courses, value-added services, and rating methods for hosts. Just like in the early days when they would personally photograph hosts’ homes and assist hosts in providing breakfast to ensure guest satisfaction, all these efforts were aimed at facilitating hosts to provide 6-star or even 7-star services.

This is a World Without Magic

After learning about Airbnb’s story and Paul Graham’s “Do things that don’t scale” philosophy, it becomes clear that there is no magic in this world. Airbnb mentioned that they had many public launches, which went unnoticed due to their small size at the time. There was no magic in any of these launches; none of them were successful on their own. Success came through continuous interaction with customers, understanding what could be improved, and deeply winning the love of 100 people before gaining more users. (Similar to the story in the 7th newsletter issue)

Paul Graham expressed that believing simply launching a new product will gain users is a combination of egocentrism and laziness. It’s the belief that something great has been built, coupled with the desire to achieve success through a single broadcast release. However, gaining users and love is always a gradual process. Merely doing one extraordinary thing isn’t enough. Exceptional efforts are necessary, and any strategy that neglects the effort, such as trying to gain users through a large launch event, is inherently doubtful.

It’s precisely because a company is small and starting that it can deeply interact with customers, something that super-large companies (like Apple or Google) can’t do. By doing these unscalable things and being loved by a small group of people, you can build internal momentum and truly know if the users love the product. Otherwise, focusing solely on advertisements only reviews whether the ad itself is liked, not whether the product is genuinely loved by users.

Of course, this Airbnb story is only applicable during the startup phase. At that time, they could spend ample time and energy on unscalable tasks. When Airbnb grew to a company of 100 or 1,000 people, it became challenging to adopt the same strategy. Making the right decisions early on allowed them to survive and grow into a large tech company. In hindsight, doing those unscalable things to make 100 people love them was indeed sensible.

What If My Job Was a Product

How does this story relate to me? Whenever I see these company decisions, I wonder how they relate to me. I haven’t started a business, so these decisions seem like just motivational anecdotes. However, if I start to view managing my own job as a form of entrepreneurship, seeing my work as a product,

If my job was a product, I need to think further about what 6-star, 7-star, or even higher star services in my work might be (and I certainly don’t think it’s endless overtime… I welcome any ideas you may have!).

If my job was a product, I wouldn’t expect each completion of a task to be met with roaring applause, praise, or a salary reward. This is always a gradual process, and making work extraordinary requires continuous and exceptional effort.

If you like the content of this issue, feel free to share your thoughts with me, or share this article to allow more people to subscribe to the newsletter.

A VR program that allows people to spend more than 130 hours a week experiencing life in the metaverse? Business analysis of VRChat. 

A VR program that allows people to spend a total of 130 hours a week experiencing life in the metaverse – VRChat. Users can experience two lives through a physical body in VRChat, which raised $80 million in Series D funding in 2021. This article will introduce VRChat’s fundraising and its commercial potential.

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