Picking the Right Game

"Some brands have experimented with connected watches. Patek has not. Why? It’s not our field. Can you imagine? Am I going to fight against Apple, which has nearly the same budget as I do in R&D, except they have five more zeros at the end of it? I can’t compete with that. It’s another way to fabricate watches. We have always been dedicated to mechanical watches, this is what we know and what we enjoy. Working on something electronic may be fun, but it’s not my business. You have to give it to the pro, and I’m not a pro in this type of technology." - Thierry Stern

When business owners consider new business lines, strategic acquisitions, or some other strategic shift in their business, the excitement of the deal or initiative often overshadows the commonsense answer to the question: what game are you trying to play? For example, in an interview with Thierry Stern, CEO of the renowned watch brand Patek Philippe, Stern notes that he chose to play the game that Patek Philippe has always played - the luxury brand game rather than enter the tech-enabled wearables game. And why would they compete in that market when people are willing to pay over $100,000 for a mechanical watch? Why would they choose to compete in a game where they have no expertise, are less capitalized, and aren't desperate to capture a customer in a broader ecosystem (Apple)? Quite simply, these are two very different games.

So how do you know whether a strategic acquisition or a strategy shift in your business is the right move?

The simple answer is that you must decide on the game you want to play. To decide on what game your business should play, consider the competitive landscape, the capital requirements, and the business model changes associated with a strategic shift in your business.

For example, in a Bloomberg article detailing the difficulties that AT&T is having profitably integrating Time Warner into their business, it is evident that AT&T did not consider the competitive landscape in the media business carefully enough prior to its acquisition:

"AT&T chief John Stankey said he believes HBO Max can be one of the three or four services most people pay for on a monthly basis. Executives at WarnerMedia are more optimistic than ever given the recent boost from original movies like “Godzilla vs. Kong.” But competition is expensive. Netflix is going to spend $17 billion this year on programming, and Disney isn’t far behind. Winning is a matter of existential importance for those two companies, which derive all of their value from their entertainment operations."

Why choose to compete in an area that isn't a focus for your business against companies who are wholly focused on the same market and are willing to do anything to survive? Why not keep the main thing, the main thing? Why try to marry two businesses that have different business models, are in different industries, and have different economic profiles (telecom vs. media)?

Business owners always have options for where you should allocate capital. When considering new strategic initiatives, consider whether the shift will be a distraction and take resources away from more profitable endeavors. Survival is first priority, and growth initiatives are secondary. Currently, AT&T is having trouble competing in a secondary focus area (media) when its main focus is maintaining its blue chip status in the telecom industry:

"AT&T is still a phone company. Streaming is not and never will be its main thing. Several senior executives at WarnerMedia have remarked over the past year about how little AT&T’s investors and analysts seem to care about HBO Max, or the economics of streaming. AT&T must worry about paying a dividend, and regaining market share in mobile. It’s now looking up at both Verizon and Sprint/T-Mobile. Spending billions of dollars on HBO Max is a distraction from those efforts."

Finally, consider how the strategic shift or acquisition may impact your business model and whether the impact will be positive or negative. In Ben Thompson's recent piece, Distribution and Demand, he details how AT&T's business model is incompatible with that of Time Warner:

"AT&T, on the other hand, acquired highly differentiated content with its acquisition of Time Warner (which it renamed WarnerMedia). The problem for AT&T is that differentiated content has a business model that is orthogonal to AT&T’s core business. Whereas AT&T competes for customers in a zero sum game, content is best leveraged by reaching as many customers across as many distributors as possible. That means that what would have been best for AT&T’s core business — being the exclusive way to get access to WarnerMedia content, thus giving a reason for customers from Verizon or T-Mobile to switch carriers — would have been value destructive to WarnerMedia, because the cost of producing its differentiated content would have been amortized across fewer customers."

It is clear that business model implications are not to be taken lightly when considering an acquisition or new line of business, especially if it would result in playing a different game (Patek Philippe vs. Apple Watch, AT&T vs. Netflix).

Before making any strategic shifts in your business, you have to ask yourself: what game are you playing and is it worth switching tables?

Patek's Thierry Stern on green dials, smart watches, and running the family business (Hodinkee)
+ "Some brands have experimented with connected watches. Patek has not. Why? It’s not our field. Can you imagine? Am I going to fight against Apple, which has nearly the same budget as I do in R&D, except they have five more zeros at the end of it? I can’t compete with that. It’s another way to fabricate watches. We have always been dedicated to mechanical watches, this is what we know and what we enjoy. Working on something electronic may be fun, but it’s not my business. You have to give it to the pro, and I’m not a pro in this type of technology."

The succession problem (Samo Burja)
+ "Only a few institutions fulfill their intended purposes. Such a functional institution stands out as remarkable. It is the exception, rather than the rule, and always traces its beginnings to a founder. Such institutions at first always have a skilled pilot — he can alter and direct the institution in a way that preserves or improves its functionality. If he weren’t able to do so, he would not have been able to create a functional institution. However, the founder cannot remain the pilot forever. Whether due to death, disease, old age, or simply new concerns, another pilot, a successor, eventually has to step in and take the reins for the institution to remain piloted. Furthermore, in order for the institution to remain both functional and a live player, this new pilot must also be skilled. Such a person extends the life of the institution, allowing it to achieve more than it otherwise would. Ensuring the institution acquires this new, skilled pilot is the succession problem."

The death and life of the central business district (Bloomberg)
+ "As 2020 began, the 21 most important urban business districts in the world housed 4.5 million workers in 100 million square meters of office space. About 20% of Fortune Global 500 corporations had their headquarters in these districts, according to a 2020 report by EY. A few months later, the lion’s share of knowledge and professional work was being done from home. In the proverbial blink of an eye, the Central Business Districts of leading cities around the world went silent — emptied of workers and the buzz of human productive activity. Even as vaccinations have accelerated and America has sprung back to life, these business districts in major cities have been slow to rebound. Across 10 of America’s largest urban CBDs, employee visits to the office stood at roughly a quarter (27%) of pre-pandemic levels according to recent data from Kastle Systems, which tracks these visits through keycards and similar technologies."

Barry Diller’s system of discovery, debate, and development. (Neckar's Notes)
+ "After starting his career at a talent agency, much of Diller’s success can be traced back to his ability to cultivate a different kind of talent. His ability to find, mentor, and develop executives was crucial to his success. He leveraged generations of hungry managers to source ideas and opportunities. He routinely gave his people a hard time, something he called “creative conflict” (and that has been described as an “aggressive advocacy and yelling system”), to unearth their highest conviction ideas. Finally, he “pushed responsibility down” the hierarchy to train and test his people. Diller gained responsibility at lightning speed, was often promoted “out of his competence.” He practiced the same in his companies, “throwing people into the water” to get a “window into their real character.”"

Why introverts make great leaders (The Hustle)
+ "A myth has pervaded the business world for far too long: introverts aren’t cut out to be leaders. Some 65% of senior executives see introversion as a “barrier to leadership,” and only 6% think introverts have the people skills required to oversee a successful team. Many businesses have a singular vision for what a good leader should be — outgoing, gregarious, an expert networker — and write off introversion as some kind of social “pathology.” This is complete nonsense."

AT&T spent $85 billion on Time Warner. It wants the money back. (Bloomberg)
+ "AT&T said it wanted to use an online video service to boost its phone business — a questionable proposition — and combined the resources of HBO, Warner Bros. and Turner Broadcasting into HBO Max. (Plepler didn’t like it, and booked a one-way trip to the Hamptons.) But now AT&T is looking to merge WarnerMedia with Discovery, as my colleague Ed Hammond reported Sunday. While the exact contours of the Discovery deal are still a bit murky, we know AT&T is rethinking its acquisition of Time Warner after less than three years."

Amazon said to make $9 billion offer for MGM (Variety)
+ "In a sign Amazon has upped its focus on entertainment, last week the company announced that it had tapped Jeff Blackburn, a former high-ranking executive who recently exited the ecommerce giant, to return to Amazon in a new role overseeing a consolidated global media and entertainment group."

Distribution and demand (Stratechery)
+ "This is why getting definitions right is so important: if you conflate controlling distribution with controlling demand, you are liable to waste billions of dollars on acquisitions that make no sense..."

Colonial Pipeline CEO tells why he paid hackers a $4.4 million ransom (Wall Street Journal)
+ "Joseph Blount, CEO of Colonial Pipeline Co., told The Wall Street Journal that he authorized the ransom payment of $4.4 million because executives were unsure how badly the cyberattack had breached its systems, and consequently, how long it would take to bring the pipeline back. Mr. Blount acknowledged publicly for the first time that the company had paid the ransom, saying it was an option he felt he had to exercise, given the stakes involved in a shutdown of such critical energy infrastructure. The Colonial Pipeline provides roughly 45% of the fuel for the East Coast, according to the company."

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