business model

Note to American Idol: Fight Disruption with "Jobs to Be Done" Focus

My old guilty pleasure, American Idol, ended a few weeks ago, and I got to reflecting on the dynamics of the show itself and whether an article I wrote just before last year's finale would prove to be prophetic on review.

Last year's analysis discussed how AI was being disrupted, and whether the producers were either ignoring the problem, or didn't get it. In my review, I suggested some prescriptive changes that they needed to undertake to avoid an otherwise inevitable fate.

So, how did I do?

Last Year's Analysis and Predictions, Issues and Opportunities

  • American Idol rules the roost; as #1 rated show, it has become complacent and resistant to necessary change and highly susceptible to disruption
  • Any changes have become largely cosmetic (incremental "sustaining" innovations), and they've "overshot" the audience needs on the "slickness dimension" and no longer approximate an "authentic" experience
  • The reality that creates ratings for Fox is that only a couple of the top 12 are actually good enough to have a chance at winning.  The rest are there to become the train wrecks we want to vote off, to sass back at Simon, to sing gloriously out of tune and make us laugh, to impress with their self-absorption or self-delusion or just plain wacky personalities, to do whatever they do with Paula, and most of all, to give the audience time to get to know the eventual winner and build a following to buy their records.
  • The ruse being perpetrated is that the show is really a singing competition, when in reality the producers have constructed a promotional stage which sells lots of advertising (because of the entertainment value in seeing train wrecks get voted off the island) and a vehicle for selling pop records, crafted in the form of a quasi-reality show
  • A large minority of the audience has seen the wizard behind the curtains and tired of the deception, and using the power of the web, started to turn the tables on the show's producers, exposing the sham and actively working as a block to "Vote for the Worst", keeping the train wrecks going as long as possible at the expense of singers that the judges and producers actually wanted to "win". Last year, this resulted in the best singer (by any objective measure) being voted off early and two mediocre performers making it to the finale.  The resulting winner's album was awful, and sold miserably (opening week sales for Jordyn Sparks first AI record were less than 1/2 same stat for Fantasia, the previous worst-selling AI winner, and only about 40% of the same stat for Taylor Hicks, who was generally considered a bomb and was dropped by his label).
  • The voting system that Idol uses is suspect to begin with.  By asking the audience to vote for their favorites, and as many times as they want, they have created a system which generates revenue but can't reliably identify either the best singer or the audience favorite(s). Even superior voting systems (audience votes for the worst and the person getting the most negatives is eliminated, one vote per person, one ballet with yays and nays for all contestants tabulated, it is open to manipulation, but the way it is, the best singers and performers are routinely voted off several weeks too early.
  • Because of the above, the grand prize of a recording contract has become meaningless, and even a bit of an albatross. The contestants voted off early routinely get recording contracts and outsell the winners, because they a) can sing better, b) have more control over their albums (AI doesn't dictate what they can sing or how it gets produced), and c) therefore better songs, or at least songs they are better suited to sing, get on their albums.
The Two Davids: David Cook and David Archuleta

The Two Davids: David Cook and David Archuleta

Note that to try to deal with the last point, the judges practically fell over themselves this season to tell the voting audience as bluntly as possible who they thought needed to go and who should stay in an apparent effort to ensure that one of their favored singers actually won this time. They became so transparent about it, that Paula got caught offering judgment about a song that hadn't yet been sung, casting the wizard's curtain wide open.

Our conclusion: the above factors are causing audience disenchantment, and eating into viewership. The cynical business model that AI uses to milk the show for maximum revenue was easily disrupted by a little website exposing the underlying deceit.

The Results Are In

So, are these predicted results actually happening?  If so, how are they manifesting?

  • Viewership in 2008 was down an astounding 7% from 2007
  • In a year where the two stars were considered "hot" guys, the primary viewing audience of women aged 18 to 34 was down by 18%
  • The median age continues to skew ever upward, from mid 30s a few years ago, to 42 today.  Hardly the prime music buying age group.
  • The over 50 age group has increased in viewership.

All this suggests increasing irrelevance to the trendsetting youth audience, boredom among core fans, and disenchantment and disenfranchisement from the process. Typically when this sort of thing begins, it is irreversible because by the time executives acknowledge it is a serious problem (whether the product is a tv show, a newspaper, or a me-too generic cell phone, it's too late to make the major changes necessary to right the ship.

Will American Idol will take my advice?  There's no doubt they have to do something and we're highly likely to see some changes next year, but the question is, how will they diagnose what's going on, and therefore come up with appropriate solutions. (It's at this point that I should helpfully point out that if they want to get the skinny on how to counter this disruption before it kills the show, I'm available as a consultant.)  Here's a little free advice:

  • The dynamics are old, and some highly visible changes are necessary. First to get the shake up should be the judging crew.  Only Simon is core to the program -- it's time for Paula and Randy to go. Besides, the show needs more authenticity, and you can always count on Simon to say what he thinks in an entertaining way.
  • Sacrifice some of the revenue stream from voting to create a system that isn't as vulnerable to manipulation (people need to believe that their votes are meaningful if they're going to keep paying attention and spending money to vote).
  • Recognize that music trends don't stay the same forever. There was a minor nod in this direction this year as David Cook got more kudos and promotion from the judging crew as the show progressed. The interesting thing about him was that he already sounded like a lot of what's on the radio, and his looks and personality didn't hurt either, so it was easy to imagine him as the winner.

Jason -- CATS is sung by cats?! -- Castro

Most of the material that gets sung on the show is from a time before these kids were born (was it such a big surprise that Jason didn't know that CATS showstopping Memory was sung by an old dying female cat?), so it isn't that surprising that it's more popular with people older than 50 than with teenagers and 20 somethings.

It would help the producers to look at this from a "jobs to be done" perspective, rather than a "what we want to sell" perspective. The job to be done is to engage the youth audience (primary music buyers), identify a new "star" that they relate to, and create records that are current and interesting to that audience.  Like Chris Daughtry did (but then, he had the advantage of being voted off and picking his own band and music -- hmmmm.)

Understand that superstar singers and bands sing hit songs. After spending most of the season telling contestants that song selection is critical, how much sense does it make to give your winner songs which don't fit their style (make a blues guy sing a sugary pop song, for example), or which are simply crap (letting amateur song writers write stuff that is total trash musically and lyrically) and then asking a newly minted winner to make it a hit song is absolutely nuts.

One possible voting system that could work better would be to count song downloads from iTunes in the 24 hours following the performance show. Even if it cost the same as texting in a vote, the fact that you get the song with it would be a big discouragement to VFTW, and iTunes doesn't let you buy the same song twice (at least not easily).

These are some easy big things that would make things more authentic, freshen things up, and introduce some sustaining innovations to counter the disruption to American Idol's artful guise.  There are several smaller things as well, but the above would be a healthy start.  If not, watch for even bigger declines next year, and a franchise that may not recover from disruption.

Boeing's Big Boo-Boo: A Very Non-Disruptive Innovation (Part2 of 3)

In this 3-part series, we dissect the failure of Boeing's inflight satellite-based internet service, Connexion by Boeing. The first article looked at the laboratory-designed business model that was untested before scaling to business unit size, but based on made-up assumptions and faulty analysis.  In Part 2 of this series, we look at the marketing mistakes and myopia that contributed to the colossal failure.

Recap: An Unworkable Business Model

In Part 1, we discussed how Boeing was so sure that this innovation couldn't fail that they invested more than a billion dollars over 6 years with only $25 million in offsetting revenue before folding their tents. We can't say for certain that anything was learned because at the end, Boeing maintained that the tragic events of 9/11 were their undoing, even though clearly this was designed as a "Spruce Goose" from the outset.

The business model was truly unwieldy. Depending on super high-cost satellite service, Boeing needed more than 10x the number of planes that had been outfitted by the time the program was shut down to have the necessary equipment installed, and had they achieved that level of penetration, more than 40% of all passengers on every single flight (assuming the flights were 100% full) needed to pay full price for service just to break even. And, it cost $500,000 per plane to install, and the pricing assumption was that passengers would pay more than the cost of their monthly broadband service at home per hour in the air.

Moreover it required a presence in the US market where internet usage is still the highest and the majority of commercial flights begin and end. But even on the carriers where Connexion was deemed a success, usage rates were in the single digits, and Boeing never changed its stance or its business model to encourage greater use.

It brings new meaning to the phrase "what were they thinking".

Part 2: Counting the Marketing Mistakes

"Extensive" market research" by Boeing came up with a definitive statement that "38% of frequent travelers are willing to pay at least $25 per flight for full, high-speed access to the Internet and their corporate network". Clearly, Boeing believed that it they built it, the users would come, and had boxed themselves into a cost structure that embedded this assumption.

Which leads to the first marketing failure: a dependence on MBA-styled market research. Asking dopey questions has never been shown to result in better odds of being successful at innovation than a coin toss would yield (at much lower cost, but then it doesn't seem as scientific), and in this case, not only was the research instrument flawed, but the wrong question was asked.

Consider this: if I had an urgent deadline that absolutely couldn't wait until I landed, I might be willing to pay $25, so I'd probably answer yes just to influence the outcome (so that the service became available), however, the real question should have been "at this price level, how often would you use the service", just to mitigate the built-in bias.

And, whatever answer you got, you'd test it a dozen different ways for validity. At this ridiculous price level and with this billing model, I might use Connexion once or twice a year, but more likely never. Certainly on flights from the US to Europe, most of the time in the sky is overnight, so who is waiting for my urgent communications anyway?

Ignoring all that, and the fact that I represent the prime target market, the really head-scratching fact is that Connexion's business model required between 30 and 40 percent of all passengers on all flights to pay for this service every time they got on a plane, and nearly 10x as many planes carrying the service as had been outfitted.

What's Wrong With This Picture?

What really stands out is the lack of a "gut check". No comparison seems to have been done to the pricing models that have worked for similar services, the rate of adoption that they experienced, or when the growth rates exploded and what triggered them.

Moreover, the obvious comparison to another overly high-priced satellite communication service that was highly touted but also failed miserably, namely Iridium, was clearly missed. Admittedly, a "gut check" is less quantitative, but it can be immeasurably more accurate.

So, they got the pricing wrong, but that's not the only factor that was going to limit uptake. Marketing apparently never considered any of these barriers to adoption in their business model.

    1. Loss of sleep time. Because most of the travel time on US to Europe flights is overnight, that means the service is competing with sleep time on at least half the potential flights. If I have a meeting first thing on arrival, best case is that I lose several hours of sleep time because of the number of time zones crossed, so unless I'm desperate, I'm highly unlikely to even open my PC. Even if I do work on my PC, the constraint on my available time to use this service is so severe that the cost seems even more ridiculous.
    2. Other activities competing for my time.  Movies, food, bathroom breaks, getting up to stretch, drinking, reading, listening to music, watching a DVD, talking to my travel partner, doing PC work that doesn't require a connection - there are numerous things to do that I don't have to pay anything extra for.  As my colleague Mike Urlocker is fond of saying,"Don't trust what people say; trust what they do".
    3. Scoble notes that most flights don't have access to power. Oops.  Unless I'm in business class, I'm pretty much assured of not having enough battery power to get full value for my connection fee, and even in business class, not all planes have power connections, nor is it easy to know ahead of time if you will have power or not. In the grand scheme of things, as battery life gets longer and longer (mine will go 5 hours at near full power) this is a minor irritation, but it is definitely a nuisance factor that will prevent potential users from plunking down their cash.
    4. Desire to be off the grid. Scoble also notes that many of the techno-geek frequent flyers at Microsoft (if they don't want it, who does?) get some welcome relief from being out of touch for a few hours on their flight. A feeling we can all identify with, I'm sure. And, at the outrageously high price tag, anyone who might otherwise use the service has a good excuse in the high price for not bothering.
    5. Lack of space. Ironically, economy class on long-haul international flights is much more cramped than on domestic flights. I've been on flights where I couldn't get upgraded, and the first thing the passenger in front of me did was recline his seat causing multiple fractures in my kneecaps. As anyone who's been on an older L1011 or a 747 knows, the space between rows is too small to fit in even if the passenger in front of you doesn't recline. Assuming the seat in front of you is in upright position, it is nearly impossible to work on anything other than a micro-laptop, and as soon as the person in front wants to sleep, you not only can't work, your circulation gets cut off too. This is perhaps the strongest incentive to not risk paying the fee and not being able to use the service.
    6. Poor promotion by airlines. In the initial 3-month market test by Lufthansa, the first and most successful airline to offer the service, they claimed an average of 50-80 simultaneous users per flight, 95% of whom were happy with the service. How does this jive with the actual results after launch. How often do you try something once just to see whether it's worth it? Most of us do. But after the first time, value, accessibility and awareness become much more important. Also not disclosed is how many of those users simply logged on to Lufthansa's FlyNet portal, which was a free service. 180 flights per day is a tiny fraction of the actual flights in the air - Boeing noted in their initial announcement of Connexion that there are 41,500 flights worldwide each day. If you were going to be on one of the 0.4% of flights that had the service installed, did you even know it was available and plan your time accordingly? Unlike all the press release hoopla, there was little product differentiation going on in the market, and even less promotion to make people aware when they were going to be on an internet-enabled flight. Even at the gate, there was often no posted notice that you were boarding a Connexion flight. Boeing depended on the marketing efforts of the airlines, and the airlines attitude seemed to be "if we have it, they'll figure it out and use it." At least with Lufthansa, you knew what you were getting because they commited to install Connexion on all long haul flights, and implemented relatively quickly, but their average users per plane (if they were all paying customers) was still only 1/2 what Boeing needed across the system to succeed.
    7. Lack of uptake by US carriers. When the very first announcement of planned service was made in June 2001, Boeing said that American, United and Delta Airlines had signed letters of intent to adopt this service and equip 1,500 planes with Internet connectivity. Of course, on 9/11 that commitment evaporated, and to date, no US-based airlines have signed on. This is a bit of red herring, since if this had gone ahead and all 1,500 planes were outfitted by now, there would still be only 10 times the number of planes that currently have the service, and we've already pointed out that they needed 400x the number of users to make this fly. However, it would certainly have increased awareness, and possibly led to price drops or more innovative business models that would have given this a chance to reach critical mass.
    8. Lack of direct communication with end-users. Connexion considered their customers to be the airlines, although they were clearly dependent on very large scale adoption by the real customers - the end-users. In an utterly amazing statement of 'not getting it' Boeing said "Each of the airlines brings an unprecedented level of knowledge about the in-flight connectivity needs of passengers." as it announced the pending partnerships with US carriers.  Right.  Just like they understand my need for sufficient room to sit, and my need to pay a fair price for services, and my need to be treated like a customer rather than a filled seat. Boeing, as a near monopoly provider to US carriers also didn't get that if you want a mass market to develop, you can't dictate the terms.

      And, I didn't even have to think hard to come up with this list of show stoppers. I'll bet there are others, but since I don't need to think that hard to make the argument that product marketing didn't even do a half-assed job, I'll leave it at that.

        Bottom line: the market research was garbage, the assumptions the business model was built on stank, and almost everything about how this was packaged, priced and marketed was wrong. Even if the US carriers hadn't dropped out of the picture, it is highly doubtful that this service had a fighting chance.

        In Part 3

        In parts one and two, we look at the absurd business model and financial assumptions, as well as the "big dumb company"-styled product marketing and lack of gut check that led to the stillborn Connexion service market failure. In the third and final part, we ask "what could they have done differently", what lessons could be learned, and whether any other approach could have succeeded.

        Boeing's Big Boo-Boo: A Study in Self-Disruption (Part 1 of 3)

        In this 3-part series, we dissect the failure of Boeing's inflight satellite-based internet service, Connexion by Boeing. In part one, we examine the faulty analysis that resulted in a business model that was impossible to execute. The type of innovation represented by the Connexion service, and how the business model came to be is typical of large-company thinking, and why disruptive innovation so rarely comes from incumbent industry players.

        Part 1: A business model that couldn't take flight

        On July 17, 2006, Boeing announced the discontinuation of its in-flight "hi-speed" internet service.  A quick analysis of the business model shows that this dodo was doomed to extinction before it took its first flight.

        Why it had no chance - by the numbers

        Connexion offered a satellite-based internet connection which enabled internet connectivity even on transcontinental flights. Started with plenty of fanfare 6 years ago, Boeing's Connexion service won the "World's Leading High Speed Inflight Internet Service Provider" award from the World Travel Awards organization in London for 3 years running.

        Said Connexion by Boeing president, Laurette Koellner, "Winning this award for the third consecutive year is a welcome validation of our success."  That was in November 2005, just a scant few months ago.

        Exactly what success was being validated though?

        Service Usage

        According to data released by Boeing, "more than 20,000 passengers have used the Connexion by Boeing service during its first year of availability."  20,000 certainly sounds like a big number, but as an absolute number, it is free of context and that context is important. Anyone who knows how to make statistics lie would agree that the best way to distort the meaning of figures is to offer them without context, or juxtaposed in the wrong context.

        In truth, 20,000 was the only number that Boeing could have published that made things look positive. In a separate announcement, Boeing offered other data which tells a more complete story. 

        A corporate backgrounder published a few months later in early 2006 shows that Connexion was available on 180 flights daily. That is 65,700 flights per year, give or take a few. 

        Assume that a few more planes were outfitted between the time of these two announcements, and perhaps the run rate was 60,000 flights per year at the time Boeing said 20,000 passengers had used the service. That is one person on every 3 flights using the service. Not such a stunning success anymore.

        So, lets be generous since we don't know the rate at which service was added during the period when Boeing had 20,000 users. Maybe it was actually 1 person every two flights. Hmmmm. Still not much of a business model.

        Revenue Streams

        Now let's look at revenue, and assume that everyone who used the service paid the top daily rate during that first year of $30. 20,000 paying customers at $30 each is a grand total of $600,000 revenue.

        We know, however, that prices were reduced during this period, and many of these passengers likely opted for the lesser priced packages, so lets give a nice round number and say they had $500,000 in air-time revenue from end consumers. This for a technology that cost over $500,000 per plane to install. I'm starting to smell some really rotten fish. (140 aircraft had been outfitted at the time this backgrounder was written.)

        Of course, there were other revenue streams from government, ship traffic, corporate jets, branding fees from airlines but it's clear that this business model and the cost structure was based on hefty uptake from business travelers. The WSJ says Connexion had $25M in revenue, but also notes that over $1B was invested over 6 years.

        Profit Potential

        What about potential for profitability? We know that there were very high fixed costs associated with this service including expensive satellite bandwidth purchased from several providers, roaming agreements with land-based providers to ensure smooth logon and hand-off of communications, and payroll for 560 employees, the majority of whom required expensive technical knowledge to do their jobs.

        Boeing didn't break out Connexion separately in its operating statements, but lumped it into a category called Other which was mostly Connexion. In the most recent quarter, Other showed a loss of $90M for the quarter (improving from a loss of $110M in the quarter a year earlier).  Let's be really generous (and for the sake of nice round numbers) and say that only $50M of that loss is directly attributable to Connexion.

        Again, for the sake of round numbers, let's say that the losses due to Connexion were approximately the same every quarter, or $200M annually. To generate $200M in revenue and break even, Connexion needed 400x the usage they were getting at last year's higher prices. (Since these are quick calculations, we aren't considering that higher usage would also mean higher expenses).

        At that rate, instead of 1 person every 3 flights, what was actually needed was an average of about 130 paying customers on each and every flight.

        Where Was the Gut Check?

        That stunning calculation leads us to the first great "Aha". What marketing/business genius put together a plan that could only succeed if a very large percentage of the target customers on every flight had so great a need that they would be willing to pay almost as much for a single flight as the cost of a month's broadband access on the ground?

        Even if there are some Fortune 500 companies that would be willing to allow that as an expense, I certainly wouldn't want to be justifying more than 1 per month of those to my boss or the corporate controller. I might be able to get away with it, but it's a nuisance factor I don't need.

        Another indicator that these round numbers aren't so far off: Boeing anticipates $0.15 per share benefit to next year's results coming from this decision, which at the current number of shares outstanding is over $113M in increased earnings. Since most of Connexion's staff will be moved into other jobs at Boeing, and therefore the majority of payroll expense will continue, that seems about right.


        • why was there no business model experimentation to determine whether the market as envisioned would or could ever materialize?
        • how were the usage, revenue and profitability projections determined?
        • how did Boeing manage to scale this service to require massive fixed costs and 560 employees to support the service before determining product/market fit and the real size of the likely market?
        • were any of their assumptions realistic, and if not, how did they miss such a gaping hole in their business plan?
        • can a big company realistically behave like a startup to test business models in "fast-fail mode" before scaling?

        In Part 2

        In Part 1, our quick analysis of the accounting clearly shows the magnitude of the miscalculation implicit in the Connexion by Boeing service. It looks as though it had no chance to reach profitability ever. So, how did this come to be? In Part 2, we examine the marketing mistakes that contributed to this colossal failure.