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Wednesday, November 3, 2010
Choice and Scale
By Jaffer Ali
Our old friend and chief digital cheerleader, Henry
Blodget is at it again. In a recent article, he peddled
the notion that a merger between AOL and Yahoo! was a
"no brainer" because digital scale would finally be
achieved through the increase in content choices for
audiences.
Oh really?
Conventional wisdom seems to support Mr. Blodget. But as
we have experienced so many times in history, more often
than not conventional wisdom is just plain wrong. And it
is wrong once again.
OK, let's examine how increased choices actually work
AGAINST scale. Take a stroll down the toothpaste aisle
of your local drug store. You might find 47 different
types of toothpaste. As the SKUs increased, sales per
SKU decreased. This is not even controversial.
So what did toothpaste manufacturers do when faced with
its competition creating multiple brands for the category?
They in turn created multiple brands. Their goal was to
increase the aggregate customer base by satisfying ever-
smaller niche, consumer audiences.
Consider the state of the television industry in 1965.
Three networks dominated the airwaves. Choice was limited.
But oh how they scaled. Today, if you have Comcast or
Direct TV, you have 600 choices to watch. The audience
per channel is pathetically low. Increased viewing choices
have not led to increased scale. They have achieved the
opposite.
With the Internet, our choices have been increased by
several orders of magnitude. The result has been declining
scale. I believe it is axiomatic that as choice increases,
scale decreases. So on its face, an AOL merger with Yahoo!
will not automatically lead to scale and quite likely
would exacerbate the growing decline in scale as the
choices proliferate.
Think of YouTube, God's gift of overwhelming choice. How
many clips actually scale to reach 25 million views? Maybe
three clips per month? Maybe three out of how many millions?
To solve issues of scale, we need to move beyond what
I call the "Narcissistic Era". We may be slowly emerging
from the notion that every audience or consumer idiosyncrasy
should be satisfied. As the "one-to-one" mantra took hold,
audiences started believing that they were entitled to
their own universe.
As the one-to-one narcissism took hold, new "philosophers"
rationalized the phenomenon with a new buzz phrase; long-
tail marketing. Marketers busied themselves chasing their
long tails, and are still reeling from dizziness!
Amidst an environment of plenty from WW II forward, brands
rushed in to feed the narcissism. Media rushed in to feed
that self-absorption. Increased choice is the ingrained
uber meme. And what is the dialectical consequence? A
decrease in scale on almost every front.
The answer to this dilemma for many is to achieve scale
through aggregating choices (the Blodget way). But a far
more existential solution would be to figure a way to
limit choice to achieve scale. Walgreens and Wal-Mart may
be helping manufacturers. How? Walgreens announced that
they were going to eliminate 25% of SKUs in 2010 and then
reduce it even more in 2011. They want more sales per item
sold. Wal-mart is doing the same.
Amazon has millions of SKUs and of course will sell more
than $20 billion worth of merchandise. They recently
purchased Woot.com, which sells ONE item per day. The
reason for buying Woot? Amazon wanted the vendor relation-
ships that Woot has developed through its focused, volume
purchasing, and the deeper margins produced via more unit
sales per SKU carried.
In our own e-commerce division ( www.PulseTV.com ), we
reduced SKUs from 15,000 to 800 and introduced a daily
deal of one item highlighted per day. Margins increased
significantly, and so did sales! With our media company,
Vidsense, (www.Vidsense.com) we created a video widget
that is placed on websites across our network and which
limits the viewing choices to a maximum of six. The
result? We can now deliver up to 15 million qualified
viewers a day to a single destination site with just
these six viewing options.
So, if you want to achieve scale in your business model,
start thinking of ways where "less is more." Think about
Henry Ford laughing all the way to the bank because he
had the good sense to paint all of his cars the same
color.
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Jaffer Ali is the CEO of Vidsense and PulseTV.com.
He can be reached at j.ali@Vidsense.com or by phone at
708-478-4500 ext. 105.
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