When Finger Licking Good Meets the Urban Pothole

An oft-stated observation made in connection with the economic crisis is that companies, when confronted with cuts in R&D, marketing, and advertising, have chosen first to cut their advertising budget as a means to bring expenses more in line with projected income. I would tend to believe that the reason for this lies less in the fact that advertising is less significant to the economic well-being of the company than is R&D or marketing, but rather that advertising is more akin to a current expense. As such, the absolute amount expended in a given short-term period can be calibrated to the general level of economic activity that is taking place, more or less, at the moment.

That said, the economic exigencies of the moment do seem to generate create ways to seek maximum advertising bang for the corporate buck. A real curiosity in this direction was noted in a short item that appeared in the April 20th issue of Business Week. Entitled "A Chicken in Every Pot(hole)", the item described how the corporate parent of Kentucky Fried Chicken, Yum!, expended $3,000 to fund the repair of 350 potholes in Louisville, Kentucky (if my memory serves me, Louisville is the corporate headquarters of Yum!). On each pothole, there appeared a message--"Re-furbished by KFC." Keeping with the low cost nature of this advertising campaign, the chalk-based advertising fades within a month or so. The item went on to note that the campaign has been extended to other towns, including Warren, Ohio and Chattanooga, Tennessee (for all of you non-Americans, an atlas might be in order to locate these two smallish towns, both of which are interestingly located in states that are contiguous with Kentucky).

Said the KFC spokesperson: "We thought we could refresh the streets and try a new form of advertising." Retorting with a degree of skepticism, brand consultant Laura Ries queried as follows: "What does deep-fried chicken have to do with potholes." Unfortunately, the Business Week item fails to consider the question further, and one can ask whether the item was brought simply as a short curiosity intended merely to entertain the reader rather than to consider how companies can successfully advertise despite the challenging economic times.

Okay, even if Business Week declined to engage in a serious consideration of the underlying issue involved, I feel compelled, if for no other reason that professional and intellectual curiosity, to offer several comments.

First, while the pothole cum civic message is characterized as advertising in the news item, it seems to me that it is more of a hybrid of sponsorship and advertising. By this mean I mean that the use of the KFC mark is connected with an activity which Yum! presumably wants to be connected, rather than merely an ad directed towards creating custom at the nearest KFC eatery. The comment by Laura Ries not to the contrary, it would appear that Yum! finds the connection between the KFC mark and good citizenry to be an attractive combination.

A SPONSORSHIP OPPORTUNITY IN THE MAKING

Second, the economic downturn does not mean that all forms of sponsorship have been put on hold. True, the trend has been to cut sponsorship of events at the mega level (especially in sports). Here, to the contrary, a modest amount of advertising expense was committed to funding a specific type of short-term sponsorship with presumed benefit to the overall perception of the brand.

Third, the ad/sponsorship campaign (if it can be called that) is local in character. Louisville is a mid-sized town best known for the Kentucky Derby; Warren and Chattanooga are even smaller. Perhaps the message of good corporate citizenry is more easily delivered in these secondary or tertiary urban settings. (Don't get me wrong, I was born and raised in another such town only 30 miles from Warren and there is a lot going for this kind of environment).

Thus, precisely because a major brand might choose to forgo a nationwide sponsorship campaign invites local experimentation. I suspect that there are large urban centers in the U.S. that would have been delighted to have had their potholes repaired. Assuming that this is impracticable from a budget point of view as a form of sponsorship, one wonders what a large company might to in very large urban center to achieve the same effect as the KFC-sponsored pothole covers in Kentucky, Ohio and Tennessee.

THE NEWEST LAB FOR ADVERTISING EXPERIMENTATION?

Branding, Innovation and Premium Pricing: The P&G Challenge

Procter & Gamble is the Harvard and Yale, or the Oxford and Cambridge, of the world of consumer brands and marketing. It is the ultimate proving ground for those with aspirations in the field. For that reason, I read with particular interest an edited version of an interview with the CEO of P&G, A.G. Lafley, as published in the April 13, 2009 issue of Business Week "("How P&G Plans to Clean Up").

In the article, Lafley shared his thoughts on how P&G is confronting the economic slowdown. Of particular interest are Lafley's observations about the centrality of innovation to the success of P&G (claiming a greater than 50% success rate for new products against the industry average of 15% to 20%). And what is innovation for Lafley? It is connecting creativity and innovation "to the customer in the form of service that meaningfully changes their lives." An example of this process was taking the innovation of a highly water absorbent material and recasting it into a diaper product--"Pampers", which "created this entirely new product category and that created an industry." In so doing, P&G can create the kind of brand that supports the premium pricing that lies at the heart of the P&G business model.

Now here comes, in my view, the really interesting observation. Lafley characterizes "Pampers" as an example as a "discontinuous innovation", and further declares that P&G wants "discontinuous innovations" to constitute up to 25% of the P&G product mix. Maddeningly, the article does not elaborate on this comment. So let my make my own observations. Especially since Clayton Christensen's pathbreaking book of 1997, "The Innovator's Dilemma", changes of products must take into consideration whether the product innovation is "disruptive" or not.

As a first approximation, relying with some trepidation on the Wikipedia entry on "disruptive technology", three categories of innovation can be identified:

"Revolutionary or discontinuous--An innovation that creates a new market by allowing customers to solve a problem in a radically new way. (E.g., the automobile)

Evolutionary--An innovation that improves a product in an existing market in ways that customers are expecting. (E.g., fuel injection)

Disruptive--An innovation that creates a new (and unexpected) market by applying a different set of values. (E.g., the lower priced Ford Model-T)"

Christensen focused on "disruptive technologies", whereby a new product based on a combination of innovation and/or technology displaces the market leader. The key here is the process. A disruptive technology usually comes from an niche player that blindsides the market leader by parlaying its product into a lower-priced alternative, which ultimately creates a new market category.

This is not the P&G paradigm. In particular, P&G does not have the interest in relying on product innovation to drive down price in the process of creating a new product category. The opposite is true. As Lafley states, the P&G goal is innovate in the service of creating brands that can support "premium pricing." Indeed, Lafley is dismissive of private label competitors, describing them as being concentrated in the food industry, where commodification is the name of the game. "Private labels are imitators. P&G brands and products are innovators," according to Lafely.

So here are my questions:

1. Is the Lafley goal of 20%-25% of all P&G innovation being "discontinuous"
itself a departure from the way that P&G has carried out product innovation in the past?

2. Is there a difference between "private label" and "generic products"?

3. Are "generic products" bereft of innovative contribution?

4. What will be the role of patents and trade secrets in the P&G discontinuous innovation process?

5. To what extent is this focus on "discontinuous innovation" a response to the broadening challenge of "generic products" across a wider array of product classes?

6. Can P&G continue to rely on the nexus between innovation, branding and premium pricing to carry them through this recession and the possible tepid recovery that will follow?

7. If the answer to (6) is less than a resounding "yes", are we at the cusp of a reconceptualization of branding and the pricing that goes with it?

Any thoughts?

Where exactly is that medium-priced product?

Spotify will not launch an unlimited download option

Regular readers may recall an earlier post from Andrew Logie about ‘free’ music service Spotify, which allows users to listen to a huge and expanding library of music to rival other major music services. Rather than downloading tracks, music is streamed from the Spotify servers (although some caching does go on in users’ computers). 

Right: 'download' can mean different things in different business contexts

Writes Andrew:

The business model might be described as ‘Freemium’ in that the free service is backed up by a premium subscription model. Although the ‘free’ option is supported by adverts, this on its own would not generate enough revenue to support the service. Users can go Premium for £9.99 a month and listening will not be interrupted by adverts. The biggest problem facing the service is how to convert users who listen for free into users who pay a monthly fee. At the moment, the Premium offering just doesn’t offer enough to tempt users away from the free service.

Revolution magazine has now announced that Spotify is planning to launch an unlimited download option – a sort of ‘all you can eat’ for a fixed monthly fee. What they seem to suggest is that users would be able to download a file to their computer, much like they do when they download using iTunes. This came as some something of a surprise. I have been expecting Spotify to try to improve their Premium offering, but I didn’t expect unlimited downloads, and not for so little as £9.99 per month. Indeed, according to an article by Pocket-lint, a spokesperson from Spotify denied that they were planning such a service:

"Spotify's core aim is to provide a user-friendly music streaming service with the added flexibility of offering paid-for downloads in partnership with our external partners. That is not set to change”.

What appears has to have happened here is that Revolution magazine has misinterpreted, deliberately or otherwise, comments by Spotify’s chief executive Daniel Ek in relation to a hotly anticipated mobile application and its threat to iTunes.

Ek had indicated that they were in talks with mobile phone operators in relation to the rollout of a streaming mobile service, presumably so that the quality of service over the mobile networks is garunteed. If succesful, this would allow users to use the Spotify service on their mobile or network enabled music player. Up to now, Spotify has only been available on a PC or Mac connected to the Internet. With the mobile application, users will be able to stream anything from the Spotify library from anywhere with network coverage. This is undoubtedly a threat to the iTunes model of paying for downloads then loading them on a device. That doesn’t mean however, that they will be launching an unlimited download service. Yes, Spotify may cache files on a device to make it run smoothly, but it’s a long stretch to say that’s a download service!

Technology and IP: Is There a Next Big Thing?

An issue that has occupied (some say "preoccupied") me for some time is whether we are entering into a period of technological stagnation. The concern has been expressed, as I recall, by no less an icon than Andrew Grove. While cast in various forms, the claim can be distilled to the following: the growth of the hardware/software revolution from roughly the 1950s to the begin of this decade was accompanied by the rise of new industries worthy of their name--e.g. Intel, Microsoft, IBM and HP. These companies can all be characterized by their success in monetizing technology and the IP rights therein, whereby IP protection is a basic component of commercial success.

By comparison, this decade can be best characterized by Web 2.0, networking, and online social communities. Whether My Space, Facebook, Wikipedia, or You Tube, their success in accumulating the eyeballs of their tens, if not hundreds of millions of user, has not been translated into the kind of monetization that we witnessed in the earlier period. Even the flagship company of this decade--Google-- is still more notable for its stock price than the absolute size of the gross revenue that it is generating. As soon as one leaves Google, the profitability of even the most notable Web 2.0 companies remains clouded. Moreover, from the IP perspective, Web 2.0 is not IP driven-- witness the internal struggle within You Tube, where the increasing adoption of professional contents (protected by copyright) will likely enhance You Tube's profitability, but may well diminish the social (and largely non-IP) experience of its users.

But can it be monetized like a Pentium chip?

Interestingly, when I raised these issues with a prominent Silicon Valley colleague who recently visited our offices, his eyebrows furrowed, and a certain unease was observed in his defense of the technological and commercial future of the Valley. Indeed, a week later my colleague sent me a thoughtful email in which he particularly pointed to biotech as the next new development that will push forward technological development in Silicon Valley and beyond. Maybe yes, maybe no--but even if "yes", somehow I don't see how this industry, with its long R&D and regulatory gestation, and the centrality, almost too much so, of patent protection, as taking the place of the computer and telecon industries, with its dynamic mix of copyright, trade secrets, and patents, as the new beacon of technology.

By "almost too much so, of patent protection", I mean that it appears that biotech, more than other tech industries, tends to rely on patent protection as a sine qua non of competitive advantage. Patent protection is exclusionary by nature, so it is not difficult to imagine a scenario where, if there is notable biotech profitability, and the public comes to view the industry as earning "excessive" profits, there could be a backlash against IP protection, in general, and patents, in particular. If that comes to pass, then the industry and the patent protection on which is relies might well find itself between the proverbial "rock and hard place". The more successful the industry, the greater the pressure to weaken patent protection; the weaker patent protection becomes, the less robust the industry will become.

Pushing the thought a bit further, let's assume nevertheless that the technological future will be a bi-polar world of biotech and Web. 2.0, alongside the commodification of more and more hardware and the increasing reliance on "software as a service" in place of fully integrated software products. How will IP fit into this new world? In my view, one possible answer is that IP will do so in an inverse way. That is to say, industries with a greater reliance on IP protection will likely enjoy greater profits than those industries for which IP is secondary, or the drift of opinion is in favor of weakened IP protection. There will be industries in both camps. If so, the next generation of technological development will be much more patchy from the point of view of commercial success and the level of IP protection.

However, I am not certain that issue has yet become a front and center agenda item. Fareed Zakaria is a leading fashioner of ideas, editor of the International Edition of Newsweek, prominent television commentator, and author of a world-wide best seller, "The Post American World". He was recently interviewed on Bloomberg radio, and a phrase at the end of the interview grabbed my attention. In conclusion, Zakaria expressed the belief that a renewed America will continue to maintain its technological leadership and generate a new era of world-beating developments such as "Google and the iPod."

Don't get me wrong. No one is a bigger fan of the information revolution spawned by Google than I am. As well, the iPod that my family gave me as a birthday present has literally changed my knowledge base, as I obsessively download and listen to podcasts on various topics on a daily basis (including the Zakaria interview itself). So what is it in Zakaria's comment that bothered me? Ironically, it is precisely his choice of examples. Somehow I don't see Google and the iPod as the future functional equivalents to Microsoft and Intel. Indeed, I don't recall any discussion in his interview about biotech and the like or intellectual property (in "The Post American World") more generally. Zakaria is not alone. We still seem far from that day.

Nokia and iPhone; Strong, Famous and Hip?

I usually keep my tweeting separate from my blogs, but this time I will make an exception. In 137 carefully chosen characters, I noted a report that appeared in Business Week, "A Bid to Reconnect with America" (April 13th), which discussed the efforts by Nokia to increase its market share for mobile phones in the U.S. from (as described) "its meager 8% share". Globally, Nokia enjoys a 37% market share. Fellow blogger and tweeter Jeremy Phillips quickly tweeted in reply that, in his view, " I'd settle for just half of that. For a foreign brand it's doing fine." Now I must admit-I was surprised by Nokia's relatively modest degree of U.S. market penetration. I had become so used to reading a 30% plus figure for Nokia's market share world-wide that I had no idea that this number masked a decidedly smaller share for the U.S. market.

The article recited a number of reasons for the single-digit market share in the U.S., including an alleged ambivalence to the U.S. market, due to "the heavy control wireless carriers exert and because wireless technology has not been as advanced as in Europe." As well, Nokia reportedly garnered more substantial returns in emerging markets, most notably China. More generally, the article concluded that, contrary to mobile users in most of the rest of the world, Americans don't think of Nokia as the cool, go-to company for advanced cell phones." I assume that the prize for image in the U.S. goes to Apple and the iPhone, with RIM and the Blackberry carving out cache of its own in the professional market. Nokia products lag far behind.

But what is hip in the U.S. is not hip in the Asian subcontinent. In a small item 10 pages away from the report on Nokia in the U.S., under the title ""iPhone's Asian Disconnect", the same Business Week issue discussed the dismal success of iPhone versus Nokia in India. There, Nokia is dominant in the smart-phone market, while the iPhone is reported to have sold less than 20,000 units. The item goes on to recite a number of reasons for the lack of iPhone's success, including price, download speeds and resistence to arrangements for multi-year service agreements. Whatever the reasons, it seems clear that in India, Nokia is at least for now the preeminent brand in the field. The item went on to speculate that unless Apple figures out a way to get local carriers to subsidize the phone, "Asia is just not going to work."

The stark difference in the strength of the Nokia and iPhone in brands in the U.S. and India, respectively, got me to ask a series of questions regarding brand strength and the fame of marks. Is Nokia a famous brand: if so, where? Does an 8% market share in the U.S. affect the strength of the Nokia mark and its status as a famous mark? To what extent are strength and fame national, regional, or international in scope?

The iPhone has been around for only a short period of time, but it has benefitted from unparalleled media coverage and a certain degree of commercial success. But, as the Business Week item suggests, commercial success may be geographically limited, both in the present and in the future. If so, does the media preoccupation with the iPhone brand trump commercial realities, whereby the strength and fame of the iPhone mark and brand transcend the commercial success of the device, at least in Asia?

Not so hip in Asia?

Maybe the iPhone is the product of a particular set of cultural values coming out a particular mileu: what resonates in Palo Alto may not resonate in Mumbai. If so, perhaps perceived brand strength and fame are as much a function of media coverage as actual commercial penetration. What happens to the strength of the the iPhone brand if it never takes off in Asia, even if it remains a dominant player in North America? I'll think about these questions the next time I make a call from own modest cell phone (being a Nokia and far from being a smart phone).

Google and the value of brand advertising

Jim Spanfeller, president and CEO of Forbes.com, has some interesting thoughts on Google and the relative value that is generated in Redmond: he wonders whether Google is being disproportionally compensated “for what is fundamentally other people’s work”.

In his article, available on paidContent, he writes:

“At Forbes.com, we have estimated that Google makes roughly $60 million a year directing folks to our site. And by the way, 40 percent of those dollars are derived from the search terms of Forbes, Forbes.com or Forbes Magazine—simple navigation. Seems like a very nice chunk of change for simply being there.”

More about Eric Schmidt (Google CEO) calling the Internet a "cesspool" and on branding and relevance here.

Will There Be an Indian Form of IP Practice?

We often read how the 21st century will be the "Century of Asia". In truth, it is more than I am capable of to imagine how this tectonic shift will ultimately play out. That said, I do often wonder how the face of technology will change with the rise of Asia. One glimmer was suggested in a recent article that appeared in The Economist entitled "Health Care in India: Lessons From a Frugal Innovator" (April 18, 2009). The focus of the article is a description of various ways in which Indian innovators are coming up with novel ways to compete successfully in the medical arena. The impetus for these developments is driven by a combination of poverty, geography, an underfunded public health system, and poor infrastructure, on the one hand, and world-class technology, nascent health insurance, liberalized terms for foreign investment, and entrepreneurial spirit, on the other.

For example, the article described how "beating heart" surgery has proved so successful as an alternative to conventional surgical practices in the West that the purveyor of the method, Wockhardt, an Indian hospital chain, has seen rising medical tourism to its site in Bangalore. Another example are chains of "no-frill" hospitals that appear to succeed in squeezing out of the hospital facilities "nice to have" but ultimately non-essential elements without compromising the provision of core health services. Somewhat ironically, the increasing access to health procedures by more and more Indians enable local doctors to actually hone their skills beyond those of their Western counterparts simply because of the absolute number of surgical procedures performed.

Even if one controls for rhetorical flourish, it cannot be gainsaid that the Indian experiment in carving a distinctive path to 21st century medical innovation is noteworthy. When one considers as well the great anticipation surrounding the Tata Nano car, one gets the sense that the Indian experiment is seeking various ways to reach out to the rising middle class with goods and services that cannot be provided by the more affluent West.

The question that comes to mind is whether the Indian experience in innovation will also result in a distinctive IP practice to support this innovation. In theory, technology should more or less be culturally neutral, and in a sense, that is probably true. It is for that reason that the exploitation of technology can leapfrog countries and continents. On the other hand, I wonder whether the ways that we do IP in the West are so tied up with the manner in which we do innovation and technology that we IP practitioners become captive of the very system that we are supposed to be serving. If so, it is not only Western technology that faces a significant challenge by the rise of Asia, but the legal and quasi-legal constructs that ballast Western innovation.

There is at least one whiff in the article that supports my rumination. Reference is made to Paul Yock, head of the bio-design laboratory at Stanford University. Yock expresses the concern that medical technology innovation has focused solely on need, while effectively turning a blind eye to cost. Hence the gaze towards India. As the article observes, Dr. Yock "believes that India's combination of poverty and outstanding medical and engineering talents will produce a world-class medical devices industry." If so, what is there to say that this Indian type of innovation will not spill over into the way that patents and other IP are conceived and drafted, and the manner in which the technology is diffused and protected. It is certainly food for thought.

Is this the portent of a distinctive Indian IP?