Posted on Friday, December 18, 2009
Usually, when we highlight a news item, we have a fair amount to say to amplify what’s been written, but this piece in the Wall Street Journal about NCR’s misguided decision to buy DVDPlay, a business that dispenses DVDs from kiosks, pretty much covers the waterfront.
The acquisition of DVDPlay extends NCR’s misjudged adjacency move into DVD kiosks, slightly enhancing its distant second position compared to Redbox, the industry leader. (See NCR announcement here.) Why don’t we like this adjacency strategy? Well, a number of red flags stand out.
NCR looks at kiosks and thinks, well, how different can they be? One type dispenses cash. The other dispenses movies. What’s the big deal?
In fact, there are all sorts of differences. NCR is accustomed to dealing with banks for its ATMs and having a dominant brand; NCR isn’t accustomed to fighting for space in supermarkets and other retail outlets against a competitor, Redbox, that has a much bigger market presence. The supply-chain issues are vastly different–cash is cash, and you can get it from any bank, but movies, especially new ones, are a totally different story. The customers are different; the ATM customer is the purchasing executive at a major bank, while the movie-kiosk customer is the soccer mom who’s hurrying to buy something to cook for dinner while trying to figure out how to get her kids to stop squabbling.
The market dynamics are totally different, too. ATMs are a relatively mature market, while DVDs are in total chaos. Netflix has undercut the franchise of Blockbuster, which has lent its brand name to the NCR kiosk venture. Walmart and others are slashing prices on DVDs. Online video is encroaching on the DVD market and may soon cause much bigger problems for DVDs–why go to a kiosk and rent one when you can get a movie directly from your big-screen TV, maybe at lower cost, given the inherent efficiency that comes with not having to physically stock and restock kiosks? (See our earlier blog post about how Netflix is trying to deal with this inevitable disruption to their DVD rental business.)
We can imagine what’s going on here. Because ATMs are a mature business, NCR executives are looking for growth. They figure the safest place is an adjacent market, so they try to find new ways to leverage their core strengths. Someone notes that kiosks are finding success in distributing movies. But NCR can’t just make movie kiosks. Blockbuster is too weak financially to buy them by the thousands. Redbox already has a nationwide network and may be reluctant to add too many more because of all the potential threats to the business. So NCR decides it’ll get into the business itself, using movie rentals to drive sales of kiosks. (With the acquisition of DVDPlay’s 1,300 kiosks, NCR expands its national footprint to about 3,800, compared to Redbox’s 22,000.) The idea makes so much sense to the core, kiosk part of NCR’s business that concerns about the new business get brushed aside. NCR executives, confident because of their history of success, think they’ll be able to deal with the vagaries of the DVD market better than those Blockbuster executives who have been tainted by their recent problems.
But we’ve seen this film before, many times. Motorola got into the satellite-phone business with Iridium a decade ago, mostly as a way to create demand for Motorola hardware. It cost $5 billion to launch all the satellites. The business was up and running less than a year. The assets were then auctioned off for $25 million. Many companies set up finance arms so they can lend money to customers who then buy their products–only to wind up eating bad loans. In general, if the experts in a business–whether it’s mobile phones, telecommunications equipment or movie kiosks–can’t make a go of it, then it’s not a good business.
Just because NCR executives have been successful in their world doesn’t mean they’ll do well in the new one. In fact, the discipline and organization that are necessary for thriving in a mature world may hurt NCR when it tries to get hold of the fast-changing consumer-driven world of DVDs.
NCR also seems to be making a classic mistake with technology, by focusing on where the technology is now rather than where it’s going. While the kiosk business is healthy enough now, all trends indicate it could be a disaster within a couple of years.
We love movies and are suckers for happy endings, but NCR’s movie business won’t have one.
February 28, 2010
I disagree with your assesment. Granted it is not easy to move from a B2B business to a B2C but according to your logic, no company should get into anything that’s outside their core. Did you know NCR has a dominant position in the airline check-in kiosk market?
3M would not be the same company if it had remained in minerals. Nor would other companies such as GE, UT,etc.
This is a big swing and clearly redbox has a head start but do not under estimate NCR.
March 4, 2010
Thanks for the comment. As we say in the book, we believe in disagreement. It helps get at the truth.
The fact that NCR dominates the market for airline-ticket kiosks does suggest that they may be able to move beyond their core business in ATMs. Still, airline kiosks are a lot more like ATMs than movie kiosks are. NCR gets to deal with a manageable number of airline customers, rather than having to deal with a distribution system that has to tuck movie kiosks in at all sorts of retail chains or even in individual stores. With the airlines, as with the banks, NCR doesn’t have to worry about selling the end product–the airlines sell the tickets, and the banks supply the cash and related services. By buying a movie-rental business, however, NCR has to deal with all the vagaries of retail customers and what they want.
On your more general point, yes, GE moved beyond industrial equipment, 3M moved beyond minerals, and so on. It’s possible to move into adjacent markets, even ones with a tenuous connection to the core market. It’s just that the odds of success aren’t very good. For every 3M, there seem to be numerous Blue Circles–once one of the biggest cement companies in the world, it started selling lawn mowers, on the theory that cement was used in homes, and homes had lawns; the company went into bankruptcy proceedings and was then sold.
There seem to be two tricks to getting adjacencies right. First, you try to move into markets that don’t differ greatly from your core. You try to make sure that the customers are the same, that the purchases of core and adjacent products happen at the same time, that the distribution channels are the same, and so on. There obviously will be some differences, but you try to minimize them. Second, if you want to range further afield, as NCR is doing, you make multiple small bets, on the assumption that most will fail but that the one or two winners will more than pay for the losers.
The problem, to us, is that NCR is making a big bet on a market that’s too different from its core.
Let’s put it on our calendars to revisit this issue two years from today and see who’s right.