Monetization Nation Podcast

“The tectonic, technology-driven shifts that characterize the Internet Century have rendered some of the commonly accepted strategic fundamentals we learned … on the job incorrect.”

- Eric Schmidt, Former Google CEO

I remember arriving at college my freshman year in 1992 and having no idea what the internet was. And yet, by 1996 I was creating Adoption.com.

Blockbuster vs. Netflix

The story of Blockbuster and Netflix is a great example of the tectonic shift from bricks and mortar business to internet business.

Blockbuster was the king of video rentals in the late 90’s. They owned more than 9,000 stores in the United States, had 84,000 employees around the world, and had 65 million registered customers. The company received $800 million in late fees alone in one year and at its peak was valued at $3 billion (Source: Business Insider). They must have felt invincible in their industry. 

Netflix was created in 1997. It wasn’t the streaming giant it is today. Back then it was simply an online video rental company. It’s main differentiators were that it shipped the DVDs to customers and it didn’t have late fees. The founders of Netflix, Marc Randolph and Reed Hastings, believed that the internet was the future but weren’t having much success competing with a giant like Blockbuster. 

“While Blockbuster… focused on brick-and-mortar video stores, technological innovations meant that competition was on the rise.” 

- Irene Kim, Business Insider 

In 2000, Randolph and Hastings met with the Blockbuster CEO. They came with the offer of selling Netflix for $50 million. Owning Netflix would allow Blockbuster to be the king of both physical and online video rentals. But the CEO laughed at the deal, considering Netflix to be a niche business. 

When Randolph and Hastings went into that meeting, Randolph describes feeling like “a country mouse in a big city” standing in his shorts and t-shirt when Blockbuster’s CEO came in with his “beautiful Italian shoes” (Source: GQ). However, the Netflix co-founders understood the powerful tectonic shift taking place while the Blockbuster CEO did not. 

Ten years after that ill-fated meeting, Netflix was posting earnings of $116 million while Blockbuster was declaring bankruptcy. Blockbuster had the resources, reach, and reputation. If they had effectively leveraged the shift to the Internet, they would have catapulted their growth. Instead, the Netflix small startup was able to surpass the giant industry leader greatly because they took advantage of the tectonic shift. 

Do you remember that giant phone book that used to get dropped off at your house every year? The yellow pages were filled with different size advertisements of businesses to help people find whatever they were looking for. Advertising in the Yellow Pages was so popular because its audience was ready to spend when they opened the pages. In fact, 9 in 10 customers who saw Yellow Page ads made a purchase (Source: Simmons Market Research Bureau). Many industries enjoyed great returns from their Yellow Page advertisements, such as attorneys who gained $17 per dollar spent, restaurants that earned about $3.50 per dollar spent, and car dealers that earned around $280 per dollar spent (Source: CRM Associates). 

“The Yellow Pages have offered advertisers and businesses an extremely strong and steady return on investment in a medium they can count on — providing a direct, measurable, cost-efficient vehicle for their marketing expenditures.”

• John Greco, President and CEO of the Yellow Pages Integrated Media Association

The Yellow Pages were slow to adapt to the internet. In 1995 Elon Musk approached the Yellow Pages with an offer to partner with them and get the Yellow Pages online. As Musk tells it the executive “picked up the Yellow Pages – this book, this big thick book full of ads, this multibillion-dollar risk industry – and threw it at me and said, ‘You ever think you’re going to replace this?’” (Source: CNBC). 

By the 2000’s, internet search engines were already beginning to cut into the Yellow Pages’ profits with 1 in 3 consumers using internet over Yellow Pages (Source: AdAge). Yellow Page publishers slowly began putting their content online as well as in print around this time but search engines were continuing to change the game. 

Google introduced targeted, pay-per-click advertising that was changing the world of advertising. As Larry Page, Google’s Co-Founder and CEO described the new product,  “AdWords offers the most technologically advanced features available, enabling any advertiser to quickly design a flexible program that best fits its online marketing goals and budget.”

“Yellow Page usage among people, say, below 50, will drop to near zero over the next five years.”

• Bill Gates, said in 2007 (Source: Seattle Times)

Over the years, consumers turned more and more to internet searches. By 2014, more than half of the United States had replaced their phone books with online searches (Source: comScore). Marketers turned to internet advertising because of the returns and flexibility it offered while Yellow Pages has a 1 out of 5 rating in overall satisfaction (Source: Rhino Digital). 

The yellow pages already had the relationships with the advertisers, the reputation and loyal subscribers. They could have been unstoppable in transforming to a business search engine. However, they were slow to take advantage of the tectonic shift occurring and because of that they’ve practically been buried by search engine startups. Google took full advantage of this shift and has experienced massive growth thanks to it. In 2019 Google had $29.9 billion in just ad revenue while the yellow pages announced their last printing of their physical phonebook (Source: Owler). 

Thanks to the immense capabilities of smartphones, we are able to do almost anything on them. Mobile has become the most popular platform for gaming, social networking, and now shopping, with about four out of five Americans making purchases on their mobile devices (Source: Pew Research Center). In fact, 52% of global website traffic comes from mobile devices (Source: GS Stat Counter). 

The tectonic shift from dumbphones and desktop computers to smartphones became very apparent to me when I was sending my oldest daughter to college. I offered to buy her a laptop and her response to me was that she didn’t need one. She believed she could do everything she needed from her smartphone. Although she eventually agreed to the laptop, it amazed me to realize how much people are shifting away from desktop computers and even laptops.

The invention of mobile apps has led to the creation of many startup companies that are able to surpass their larger internet rivals thanks to the ease-of-use smartphones offer. Let’s take a look at how Uber was able to break up the near monopoly taxis held for decades. 

Taxis had been a necessary headache in the world of travel for a long time. The first problem of taxis was getting one. Hailing a taxi from the side of the road during busy traffic required riders to wave their arms and hope that a taxi would come driving by and stop just when they needed it. It was also a problem for taxi drivers who would often waste fuel and money driving around searching for passengers. 

I can remember my own very frustrating experience trying to hail a taxi in London during rush hour to get to one of the most important business meetings of my life. I stood on the corner trying to hail a taxi as literally hundreds of them drove past me. Each minute that passed made me worry more  that I was going to miss my meeting. It took me more than half an hour to get a taxi to stop and take me.  

The solution to this hailing problem was to call and order a cab. However, when you did that, it often took a very long time for the taxi to arrive. There was no guarantee that your cab would actually arrive when you needed it. It may come early, late, or never at all. And of course, as you stood there waiting for your ride, you had no idea if the taxi was just around the corner or in the completely wrong part of town. 

Once you got a taxi, you had to hope that your driver understood where you wanted to go. Airports were easy enough but almost any other location, even major hotels, could cause confusion and have you end up somewhere you never wanted to be. 

And then there’s the cost of the trip, which your driver could change on you at any moment. Regularly in my travels the taxi payment screen would tell me my cost was a certain amount but the driver told me the cost was actually more expensive because of special circumstances or fees. 

And, you never knew if the taxi driver in an unknown city was taking the shortest route, or driving a longer route to increase the mileage fee.

Based on how much difficulty and frustration surrounded using taxis, it’s not surprising that a company like Uber came along to improve things using the tectonic shift of mobile. It’s only surprising just how much of an improvement they were able to create. Uber’s ride-sharing app ultimately erased almost every challenge related to getting a ride. 

“[Uber] is the perfect illustration of how the ubiquity of smartphones enabled clever entrepreneurs to take friction out of a process that, until Uber came along, seemed set in stone.”

- Roger Dooley, Author of Brainfluence: 100 Ways to Persuade and Convince Consumers with Neuromarketing 

As you know, with Uber, riders are able to secure a ride almost always exactly when they need it, put their address into the GPS and share it with the driver so there is no confusion about the destination. The driver and rider can see the route and how much the ride will cost them even before the ride starts. Uber is so fast that I have had to stop requesting an Uber from my hotel room, because I usually cannot even walk from my hotel room to the hotel entrance before the Uber arrives. Riders are even able to see how close their driver is to them so they don’t have to stress about why their ride is a few minutes late. 

In 2019, Uber’s annual revenue was $65 billion (Source: Uber) with 110 million monthly active users (source: Wikipedia).

Taxis had been the industry leader for so many years. Buying a taxi medallion was one of the surest investments someone could make. As the New York Times reported, “Taxi ownership once seemed a guaranteed route to financial security, something that was more tangible and reliable than the stock market since people hailed cabs in good times and bad (Source: New York Times). However, by April 2020, 94% of taxi trips in New York City were from ride sharing companies, with Uber accounting for 67% of all those trips. In Chicago, traditional taxis have seen trip numbers drop 96% from April 2019 to April 2020.

The taxi industry had the resources it needed to create an app and make the other necessary changes to take advantage of this tectonic shift. But because they did not effectively adapt to the shift, along with other consumer needs, Uber has achieved dominance in their industry.

Key Takeaways 

Here are some of the key takeaways that stood out to me from today’s episode:

1. We need to quickly and effectively identify, leverage, and protect our businesses from the tectonic shifts that are constantly happening.
   
   
2. Just because our business is a powerful industry leader does not mean that a tectonic shift cannot disrupt our business. It will happen. Count on it.
   
   
3. Don’t underestimate the upstart business in our industry that is successfully leveraging the tectonic shift. Find a way to acquire or work with them, or leverage the same tectonic shift before they leapfrog us.