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Beer, Jelly Beans, Ice Cream

September 2nd, 2014

Over the course of my travels, I had several interesting connections with beer. First of all, I saw several interesting micro-breweries in the Rockies and in Vancouver. More interestingly, at breakfast in the Vancouver hotel, I saw a man wearing a “Yuengling Ice Cream” hat. Yuengling Ice Cream? Isn’t Yuengling beer?

Apparently, it is both. During Prohibition in the 1920s, when manufacture of most alcohol was banned, the Yuengling family turned to running a dairy to support the family. It produced ice cream for 65 years, when it stopped and refocused on beer. By most accounts, it has been successful; most beer drinkers know of and have had Yuengling Beer. However, in the last year, the family has turned back to its dairy tradition, and begun manufacturing and selling ice cream.

The company’s return to ice cream likely is driven by two factors:

  1. The success of the Yuengling Beer brand. While companies like Toyota and Honda needed to create a new brand to move up-market, Yuengling may be successful leveraging the beer brand into a parallel market, ice cream. At the same time, the alcohol affiliation with the Yuengling brand may instinctively drive away one of the most important demographics: children (and their purchasing parents). While Baskin-Robbins or Ben & Jerry’s may have flavours affiliated with liqueurs such as Bailey’s or Kahlua, these are individual flavours specifically tailored to the adult market, not the entire Baskin-Robbins or Ben & Jerry’s brand.
  2. The memories of those who grew up on Yuengling. The national – and global – markets today are vastly different than they were in 1985. Children who grew up loving Yuengling Ice Cream are now well into their 40s with children of their own. If they wait too long, they are likely to lose that “market memory” entirely. Twenty to thirty years is the right time to get those adults to introduce their children to a love of their own youth.

Surprisingly, there is no “beer flavour” ice cream. I expect eventually it will arrive, as Yuengling leverages its beer flavouring expertise to attract people who remember great Yuengling Ice Cream but today enjoy Yuengling beer.

Where I did find beer flavour was…. jelly beans. Jelly Belly “draft beer” flavoured jelly beans are manufactured in their plant in California, just north of the San Francisco Bay. I was surprised at how realistic it tastes. Clearly, Jelly Belly knows it is marketing, at least partially, to adults who like beer, and thus sell both Candy Corn and Draft Beer flavoured… all without alcohol, of course.

Klondike Wastes

August 29th, 2014

In Seattle, south of downtown, is the National Park Service Klondike Gold Rush Museum. It is 2 floors of fascinating exhibits on the history of the 1897-1898 Klondike, Alaska, gold rush. Like most parks, they have Junior Ranger booklets and badges, and even participatory activities; my kids “panned for gold”.

What struck me most about the entire exhibit - businessperson that I am – were the numbers on a plaque hung near the door. During the rush of 1897-1898:

  • 100,000 people traveled to the Klondike
  • 30,000 (30%) actually made it to the Klondike; the rest could not manage the difficult trek of the Inside Passage plus the Chikoot and White Pass trails
  • 4,000 (4%) struck any gold at all
  • 300 (0.3%) earned $15,000 or more in gold

$15,000 was chosen by the Park Service as the amount required to have earned a reasonable return. In other words, if you didn’t earn that amount, after giving up wages and the sheer cost of travel, you might as well not have come.

The numbers are staggering. If you were one of 1,000 people leaving for the Klondike, only 3 of you will have gotten any  real benefit. If 100 of you were on a boat, only one person in every 3 boats would have found it worthwhile!

What a phenomenal waste.

The Klondike gold rush may have created some millionaires (or the late-19th-century equivalent), but for the most part it destroyed wealth as surely and as swiftly as a good market crash.

 

There and Back Again: A Transportation Technology’s Tale

August 28th, 2014

With respects to JRR Tolkien, whose writing I greatly enjoy (Peter Jackson’s movies somewhat less), I have been thinking about the changes in the infrastructure of transportation technology since a visit to the San Francisco Cable Car Museum a few weeks ago. I recommend it for a great short visit. It has history of the cable cars and the 1906 Great San Francisco Earthquake & Fire, lots of historical pieces, and the mechanism that actually drives today’s remaining cable car lines. Even better, it is free, which is quite a treat in the very expensive San Francisco.

The cable car was introduced by Andrew Hallidie, inventor and public figure, in 1873. Before then, like every other city around the US (as well as the world), public and private transportation were provided by horse and carriage, or foot. However, as SF expanded from the edges of the Bay, it encountered those famous and beautiful, but difficult to climb, hills, for which the city is famous. Many horses could not get up or down the hills, let alone pulling a carriage full of people behind them. Those that could were more expensive, burned out quickly, and left quite the residue behind for the city to clean. All in all, horses were a very expensive and inefficient – not to mention barely effective – proposition.

Hallidie recommended using the then-becoming-effective electricity to drive a few key stations, where huge wheels would cause the cables to move under the streets at precisely 9.5 mph (15.2 kph), and cars could move by gripping the cables.

Within a few decades, however, electricity distribution had caught up in efficiency to electricity generation, which had enabled the entire cable car system in the first place. Putting an electric engine into the car and letting it draw electricity from wires under the ground or overhead – what most of the world calls a trolley – became more efficient than cables under the street. When the great earthquake destroyed much of the cable car infrastructure, it made much more sense to invest in trolleys, rather than cable cars. SF almost lost them all, until they were declared a National Heritage and, thankfully for pictures and movies and tourists, the few remaining lines have been retained.

Finally, unlike SF, most cities have eventually moved to completely independently-powered trolleys, without cable lines overhead. We call them buses.

What I find fascinating is how the development of transportation technology went full circle.

  1. Fully Independent: Each unit moves under its own power – literally, horsepower
  2. Fully Centralized: New power generation – electricity – surpasses the old independent power, leading to central power and locomotion, i.e. cables
  3. Semi-Centralized: New power distribution and locomotion efficiency begin to overtake centralized locomotion, and the engine is moved back into independent units, with power provided centrally, via overhead or understreet lines – trolleys
  4. Fully Independent: Power generation and locomotion fully overtake centralized, with self-powered units – gasoline buses

Whether the next state is electric buses, or gasoline buses, or liquified natural gas (LNG) buses, the final state remains independent units moving down city streets under their own power, with no central distribution of power or locomotion.

Just about every other system that depends on power works this way. Right now, with home lighting and powering, we are in the semi-centralized state. Houses (in the modern era) were originally lit with oil and heated with wood or kerosene. Nowadays, most are done by electricity, but the distribution is provided via a central network. This makes each home highly susceptible to the network – as several outages in the last decade have shown – and exposes each one to surges from the others.

Will home power generation eventually go the same way as transportation?

It is hard to tell. Most home units cannot support a wind turbine and do not have a major waterfall on their property. Solar is growing, but still low efficiency and more expensive than coal/oil/LNG-generated power. But if trends hold, eventually each home or at least neighbourhood will become independent in power, similar to each car being independent in transportation.

Why Pay for Something You Can Get for Free?

August 26th, 2014

A few weeks back, I took the family on a big vacation. Normally, that means hefty airfares – upwards of 18,000 miles covered can cost a pretty penny – especially for a large family. However, since I am a regular traveler, I did every single ticket on airmiles, and paid only the taxes required.

As my readers know, most of my miles are on United, which opens up the Star Alliance network for tickets – Air Canada, Lufthansa, Swiss, Brussels, Singapore, ANA, etc. My first leg was 6,000 miles to Newark airport. At the time I booked, United did not have award seats available directly into Newark (EWR), but did have on Air Canada via Toronto (YYZ). We take what we can get, and I booked several seats on the Air Canada flights.

An interesting element of interline award ticketing is that an airline must pay its partners for seats. Thus, if Air Canada gives a miles seat to one of its Aeroplan members, it costs them nothing but potential foregone revenue. By contrast, if Air Canada gives a miles seat to a partner like United, United must pay Air Canada for that seat. It is a pre-negotiated rate, much less than it would get on the open market, which is why Air Canada only opens up a few seats, but it still costs United real money.

The day before my flight, I checked United on the nonstop into Newark. After all, I far prefer to fly nonstop than via a connection, which adds time and the potential for a missed connection. Sure enough, United had 12 seats open on the nonstop, far more than I needed… but not 1 award seat.

I had several extended calls with United, but nothing could get them to open up the seats as award seats. Apparently, with just 12 coach seats left on a 200-coach-seat 777, United felt pretty strongly that they could sell them. The real questions, though, are:

  1. What are the chances United will be able to sell them?
  2. What are the chances United will be able to sell them for more than it is costing them to pay Air Canada for my seats?

Let’s say that Air Canada sold my seats to United for $700 each. If United can sell their seats at the last minute for more than $700, then by all means, they should hold onto those seats. On the other hand, if they cannot sell every last one for more than $700, then it would make sense for them to give me the unused inventory, and save themselves the $700 per seat they will have to pay Air Canada.

Unsurprisingly, they did not sell every seat. Actually, they did not sell a single one…. nor did they open them up to awards.

I sat in the airport lounge with my family, waiting for the Air Canada flight, watching the United flight taxi away from the gate… with 12 open seats on board.

Personally, I enjoyed the Air Canada flight. I grew up in Canada, hold Canadian citizenship, and still think maple syrup and hockey are among the greatest inventions of modern man. Flying Air Canada is like being home in so many ways. But what a waste for United to pay someone else for something they could have gotten for free.

Lessons of a Vacation

August 25th, 2014

After a short hiatus, I am back to my regular publishing cycle. I took a few weeks of much-needed and long-overdue vacation time, making my way through the Canadian Rockies out to Kamloops and Vancouver, then down to Seattle and San Francisco.

I look forward to your readership and comments again.

To get us started, a few lessons from vacation (or “holiday”, for our British colleagues):

  1. Take a break. Regularly. Truly driven people – consultants, entrepreneurs, executives – have a tendency to be on 24x7x365. If we are not being productive, delivering value, creating, we feel like time is wasted. We need the break to recharge our batteries. We need a few hours each day, a day (or more, if possible) each week, and some real time each year. Humans cannot survive without sleep, nor can we be productive without a change of mind and scenery.
  2. It isn’t “all for the vacation.” Sure, we love our families, and enjoy our vacation. And sometimes, when we get real time off, we wonder how our “real” lives have become so hectic and harried. But most of us who are driven to work and be productive do it not just to pay for vacation. We are driven to be productive because of our work ethic, because of the value in our work. I may enjoy vacation tremendously, but what drives me is the satisfaction of a client, higher service levels and hence profits, more satisfied customers of mine and, by extension, their customers. Don’t fall for the “we just work for the vacation” claptrap; recognize the value of your work for itself.
  3. It’s OK to wish vacation could go on. It’s hard to return to the real world, and it’s OK to be sad about it, but don’t let it stop you from returning. You will feel great when you start accomplishing things again.

Vacations are great for themselves, for the perspectives they give you on life, and for the ability they give you to be even better when you return.

Apple and IBM

July 16th, 2014

Apparently, Apple has decided to partner with IBM in selling to the enterprise, as reported by CNBC and the Verge. Apple is open to new distribution channels, i.e. IBM, to expand sales of its iOS devices into the enterprise.

There are a number of striking elements and open questions about this partnership.

Jobs vs. Cook

It is highly unlikely this partnership ever would have taken place under Steve Jobs. Referencing Ben Horowitz who was paraphrasing the Godfather, an Apple employee was quoted only last week in the WSJ as saying that Jobs was a wartime CEO, while Cook is a peacetime CEO.

Steve Jobs viewed IBM as the evil empire. He delighted in tweaking their nose, mocking their culture and being everything they were not. The phrase “Think Different” meant different than the old boring guard, Microsoft and IBM. Indeed, in the movie Pirates of Silicon Valley, a young Bill Gates manipulates Jobs into doing what he wants by threatening to “work with IBM.”

Whether this move is good or bad, it is vintage Cook and absolutely not Jobs.

Distribution Channel Culture

Apple has always kept tight control over product placement, preferring to sell directly to retail when it can, and going through well-controlled channels otherwise. IBM is a different beast. Granted, Apple is much larger now than it was when it had to shun standard corporate channels, and therefore can pull its weight with IBM in ways it could not even a decade ago, let alone in the 1980s, but IBM has certain ways of doing business that will not change materially due to selling iOS products. An iPhone or iPad is still one quiver in the IBM arrow, who will make much better margin selling WebSphere or Lotus than Apple Keynote for iPad.

Indeed, IBM’s entire business model is built around fewer high-margin sales. It has no idea what to do with an order for two $500 iPads, or even 1,000 $500 iPads with each configured slightly differently (a.k.a. personalized).

Will IBM be able to successfully sell these products given its structure?

Corporate Devices vs. BYOD

BYOD, or Bring Your Own Device, is the mantra that more businesses have been using for the last 7-10 years. iPhones (and later Android) were sold to consumers, and they wanted to use them. So rather than have an entire department inside IT to procure, manage, provision, update, recover devices, let people bring their own devices, and give them the software they need to work safely with corporate services.

Indeed, BYOD fits perfectly with Apple’s culture and image, of being a rebel, different, individualized, unbound by the stifling shackles of corporate culture and IT.

It seemed – and continues to seem – that the backoffice will continue to be dominated by enterprise software and hardware, whether sold by IBM like WebSphere and Power+AIX, or open-source and commodity, like JBoss and x86+Linux; it isn’t a space where Apple can or does play. But the user-facing front-end - phones, tablets, laptops – is Apple’s strength.

The combination of Apple innovation with user pressure and eventually corporate acquiescence to BYOD would appear to make it a strength of Apple’s to avoid standard enterprise channels.

Clearly, Tim Cook’s Apple felt there were many enterprises where BYOD simply wasn’t happening, primarily due to culture and sales channels. It could not be technology, since whatever IBM will load and configure is identical to what would happen – and for a much lower price – to a user who brought their own iPad and had their corporate IT add profiles and apps.

Cultural Cross-Pollination

Will IBM influence Apple? Will Apple influence IBM? I suspect that – after many clashes – the groups dedicated to working with their counterparts will be influenced. The IBMers will become a little more innovative, open and relaxed; the Applers will learn more about process, corporate sales and channels and locked down requirements.

But those are a small subset. Over time, one would need to become more like the other, and neither is going to be swallowed or materially affected.

Predictions

I don’t like making predictions – it is so easy to get them wrong – but my estimate is that it will fall apart within 2 years from one of 2 directions:

  • Slow sales: Some mix of IBM culture not structured to sell Apple devices or companies that didn’t want BYOD being too wary to take them, even from IBM will make the cost of maintaining the partnership too high in light of relatively low sales via the channels.
  • Cultural Conflict: Apple will continue to market its products as hip, edgy, futuristic, individualizable… everything IBM and corporate IT are not. Apple will continue to push individuals to demand BYOD. Eventually the IBM sales staff will complain enough about encountering responses like, “we don’t need this from you; our people bring them on their own.”

They could surprise us, though. It is possible Apple is seeing leading indicators of BYOD slow-down, or large pent-up demand for devices from corporate IT if only they could get them pre-configured the right way and through the right channel. Time will tell.

Is Greed Good?

July 14th, 2014

I always find it interesting when I visit Europe and find Europeans fulminating over the American penchant for “excessive greed” by sellers and consumerism by buyers. This past week, I had the ironic experience of overhearing precisely such a conversation… in the business lounge in Zurich Airport, where Internet access is terribly slow, and only available for one hour, even for business travelers and paying lounge visitors. After that, whoever you are, you must pay, 6.90 Swiss Francs, if I recall correctly, for each 30 or 60 minutes of Internet.

At heart, true, beneficial self-interest – the more civilized form of “greed” – is one that understands that the best way for me to benefit myself is by serving my customer. As long as I keep my customer happy, they will keep buying from me. But that requires continuous investment in benefits that I would otherwise have my customer pay for. In other words, being “greedy” requires acting “less greedy.”

Therein lies the great secret of Adam Smith’s capitalism. By creating a system wherein the best way to benefit myself is to best serve you, we create constant growth through… self-interest. I had the pleasure of having this explained to me by the late Sanford C. Bernstein over lunch at mutual friends a little over 20 years ago. As an arrogant and dumb college kid who thought he knew something, I had the temerity to argue with him over it, but he was quite right.

I have never much liked American airport lounges, although they seem to be making a bit of an effort lately. For example, the new United lounge in Boston is quite nice, as is the whole renovated United terminal. But wherever I go in an airport lounge in the US, I know I will get solid Internet access. Without it, no airline can possibly stay competitive. The number one user of lounges, business travelers, use that precious lounge time to catch up on emails between flights, Skype with loved ones who are hundreds or thousands  of miles away, or download music, books and videos for the upcoming flight.

At the same time, the various continental European airports I have visited over the past several months have been rather paltry in food selection and comfort and downright miserly in Internet access. I will still use the lounges when I have free access, but I would not ever recommend anyone pay for access.

A little “greed” can go a long positive way.

Pricing Lessons from a Groupon

July 10th, 2014

Last week, I had a lovely “prix fixe” dinner with my wife at a very good steak restaurant for 50% off, courtesy of Groupon. The Groupon was definitely valid when I noticed it, but the terms and conditions required that you check with the restaurant for a particular date, just to make sure it was available and open. I called, spoke with the hostess.

“Sure, it is valid, and tonight is fine, but we stopped selling that groupon a month ago. You can redeem it if you bought it, but you cannot buy it any more.” I didn’t bother arguing with her – after all, I had just spent the money – but I found it strange. What are the chances that an expired promotion not only would be available but would be the prime promotion on Groupon for that day? Of course, I knew otherwise, since I had successfully bought it.

I checked again a few hours later, and the Groupon was still available for sale.

Apparently, the restaurant owners either intended to limit the sale to certain dates and failed to do so, or intended to go back and cancel it later and plain forgot. Either way, it shows the power and danger of flash sales, and just about any form of promotions.

A seller creates promotions – Groupon, discounts, whatever they are – in order to drive revenue, market share or awareness in a particular set of circumstances. If the restaurant intends to be 50% off all of the time, it won’t do a Groupon; it will simply slash prices and be done, or constantly run promotions. Of course, there is an element of price discrimination, which allows them to capture those who would not have gone without the discount at the discount price, and also others who are willing to pay more at the full price.

But those promotions and discounts are a double-edged sword. When those circumstances no longer are extant, it is important to stop the promotion, or they will take on a life of their own. Clearly this happened.

Second, it is important to be careful to strengthen the element of time-boundedness of the promotion. People quickly learn to expect promotions, and then refuse to buy any other time. Will I go back to this restaurant? Probably, but at full price it is quite expensive, and will be a rarity. For example, I buy all my dress shirts from Brooks Brothers, as the quality is excellent… but only during their twice-annual sale. They are worth the relatively small premium during the sale, but not at the regular price. If you aren’t careful, people learn to value your products and services only at the promotional prices.

Striking the balance between offering sufficient promotion to capture the more price-sensitive consumer and avoiding expectations of constant discount, and the balance between offering incentives when beneficial given the circumstances and removing them in a timely fashion – neither too soon nor too late - when circumstances no longer dictate their placement, is one of the great challenges in pricing.

A Free Nest?

July 8th, 2014

Over coffee this week, I was discussing technology, startups, markets and business models. One of the topics that came up is Nest, the smart thermostat company that Google bought in January of this year for just over $3BN.

At first blush, it seems a strange match. Google is not a hardware company by any stretch, nor does it sell almost anything that masses of consumers buy at retail outlets, with warranties, return policies, and all of the headaches. Sure, it has the Nexus line of phones and tablets, but that is more about getting prototypes in the hands of real customers to see what they can do, as well as pushing the industry in a direction they believe is important. They also own Motorola, but that is largely managed as its own division.

My friend made the important observation that Nest is not really about the thermostat; it is about the data. Actually, everything Google does is about the data: search, Gmail, Google Apps, even Google Voice is really all about gathering massive amounts of actionable data on voice, voice patterns and human interconnection. Google makes its money on advertising, but at heart, Google is a data monetization company.

Given that they are willing to lose money on users – when was the last time you paid for search? – to make it back in spades on data, here is a radical idea. Why doesn’t Google give away Nest for free? With Nest thermostats gathering millions points of data about heating and cooling in what could be millions of homes, Google must be able to find a way to use that data or it would not have bothered buying Nest for $1MM, let alone $3BN!

PCI, POS and RTH (Road to Hell)

July 7th, 2014

Two interesting events came to light in the last week for me. First, I am working on getting a company towards compliance with the Payment Card Industry Data Security Standards (PCI-DSS or just PCI). These are the standards that govern the technology and processes you use to protect data when you handle credit or debit card transactions. An auditor checks your questionnaire or audits your systems and people, “recommends” changes if necessary, and then issues a PCI certification, which must be renewed each year. Despite the fact that the company itself never touches sensitive data such as card numbers or expiration dates or security codes, it still is subject to PCI for 3 reasons:

  1. Optics: Its Website is where consumers go to pay, even if they are then sent to a standard payment service. If consumers do not see the “PCI Secure” logo, they may be reluctant to use the service.
  2. Sales: If the company does not have the certification, vendors may be reluctant to sell through them.
  3. Indirect touch: Despite the fact that they don’t touch data, their Website does send consumers to a payment site. If their Web site is subtly hijacked, it could send customers somewhere unsafe.

Given the circumstances, I happen to agree that all such services should be subject to PCI certification, despite the headache and ongoing expense. The key phrase here is, “given the circumstances.” More on that in a moment.

The second event is more point of sale (POS) breaches. POS are the systems used (surprise!) at the point of sale, where you swipe your credit or debit card or pay by cash. These systems are highly networked to link your sale to the payment processors, the retailer’s inventory system, their marketing analytics, etc., as well as support. You may also recall POS as the system that was compromised in last year’s massive Target stores breach. They came in through the HVAC (heating, ventilation, air conditioning) systems and networks, but it was the POS they infected to steal all of the card numbers.

According to this NakedSecurity article, ISS, a major supplier of POS systems uses remote access to log into point of sale systems and provide maintenance and support. This is not uncommon in many systems, from routers to servers to, well, POS. After all, it would be prohibitively expensive for ISS to send individual technicians onsite to every place there is a card swipe machine, from the dozens in a Target store to the single one in a small curio shop in a small town in the Massachusetts Berkshire mountains! The problem, of course, is that each remote access may be subject to breach, provides another area of potential weakness, what is called a “attack surface.” And sure enough, ISS apparently was less than diligent in securing its remote access, providing a door to hackers, who just read card numbers as they were entered or swiped.

Once again, I am reminded that the entire edifice of payment cards is broken. Payment cards are a plastic version of checks / cheques, a paper or plastic or electronic authorization to withdraw or “pull” from someone’s account, in the hope that they will only withdraw the approved amount. This structure means:

  1. Anyone with sufficient account information – like a credit or debit card number – can withdraw funds from your bank or credit account; therefore:
  2. Every time you give those card numbers to someone – Target, your cable company, Swiss Airlines – provides an opportunity for theft, another attack surface; therefore:
  3. We expend enormous amounts of effort and treasure trying to protect every single one of those systems.

An edifice built on sand will constantly require more and more supports and effort to keep it from collapsing entirely, let alone actually standing upright. An edifice built on concrete drilled into the bedrock will stand for a very long time indeed.

In the age of electronic communications, it is time to discard the entire edifice of authorizing a vendor to withdraw or “pull” from my account if only they have sufficient secret information. All transfers of funds to someone else, like a retailer, should be “push” only. I, and only I, go to my account location – credit card provider, bank, savings & loan, whatever – enter the seller’s account information and the amount I want to send, and it goes instantly. Not in 2 business days like an ACH transfer; not in 1 business day like a wire transfer; but in seconds. This is the only way to bring sanity back to the payments process. Once this is done:

  1. Go ahead, let everyone know my account. Breach your systems. I don’t care! The only thing you will be able to do with my account information is send me money and not take money from me.
  2. If I no longer have to worry about the confidentiality of my account, 98% of PCI goes away! It is hard to overestimate how much PCI is costing industries worldwide year after year. The security auditors, or QSAs, are making a mint providing a service that is currently necessary but could go away. Vendors are expending untold sums adding protection above and beyond what is necessary, e.g. encrypting account information in databases, and, as we can see, it still is not enough.
  3. I no longer need to carry around lots of cards. I can have 0, 1, 2 or 20 accounts without needing the card.

Unfortunately, lots of businesses will, inevitably, go out of business. So be it. As Frederic Bastiat showed in the 1800s, let people spend their money where they find best. These still can be credit and debit accounts; I can push $100 to Target using a specific account that gives credit, collects end of the month, and gives miles. Or I can push using my regular old checking account. But it is high time that the entire infrastructure built around authorizing a seller to pull money from my account joined the horse and buggy in the quaint dustbin of history.