Sure, they spent a fortune building new products. But does that mean you should buy them?
A TALE OF CLOSE SHAVES & BUILDING MARKETSHARE
Gillette. Even a whisper of the name brings to mind images of razors and shaving. Despite a multi-category product line, the company is best known for men's personal grooming products. At the top of that heap sits their men's shaving line.
Gillette has ruled shaving since the days of the safety razor, the favored tool of my father. Every week he'd drop a double-sided blade into his beloved device. And every day he stood there at the bathroom sink, clad in boxers and tank top undershirt, splashing hot water on his face, lathering up with his favorite shaving cream.
I'd stand behind watching, soaking in the subtlety of his technique. He always carefully shaved twice, first in one direction then the other. I absorbed every minute detail, my eyes glued as he deftly stroked around lips, chin, ears and nose, with only the occasional nick. I memorized this process as part of every boy's fantasy -- to be just like dad some day.
Discounting a few bloody pre-pubescent experiments, shaving would never be the same for me as for my father. After racking up a huge market share in safety razors -- and adding all sorts of adjustments and closeness dials -- Gillette could take the safety razor no further. So in 1971 they changed their blades, moving one on top of the other, and created a new razor known as the Trac-II.
This shaving miracle revolutionized the industry. Razor burns and nicks were now "things of the past". Gillette made a lot of money and further solidified their market domination. Imitators arrived but the kingbird never relinquished its perch.
The Trac II was the best shave a man could get -- a clear example of technology triumphant. Though the razor was relatively cheap, the blades were expensive. But that didn't matter. It was new, cool, improved, and safer. Although my dad still used his safety razor, its days in our house were numbered. The Trac-II was too perfect a Father's Day gift to pass on.
To protect its market share and margins, Gillette wisely realized they needed to build an even better shaving solution. So in 1977 a new razor arrived ... the Atra. It was into this arena my shaving career launched. Despite my clumsy first attempt (actually a bloody christening), Atra was a real improvement. Even my father liked my clean close shaves.
Looking back, Atra wasn't very different from Trac-II, featuring the same basic twin-blade shaving system. To differentiate the products, Gillette spent millions adding a pivot hinge on the blade cartridge, a sure-grip handle, and a higher price for the Atra-specific blades. Millions of dollars spent for a few design tweaks. You might speculate Gillette had lost its corporate mind. But consumers took to Atra like mad. And the following Father's Day my dad got another razor from me. These things were slowly replacing neckties.
Soon Gillette improved the grip and shaving angle, and added a "Lubrasmooth" lubricating strip. This "Atra Plus" became the new ultimate, at the expense of more R&D dollars. Amazingly it may have cost more to add all the subsequent improvements than to build the original Trac-II. Staying on top was expensive, but necessary. Gillette needed growing sales of high margin blades to fund its kingdom.
Restless by nature, Gillette continuously heard the footsteps of competitors. Hundreds of millions of dollars later, they shipped another "ultimate" solution -- the Gillette Sensor. Sensor broke new ground, boasting a new handle and blades individually mounted on springs for automatic adjustment. The pivoting action was refined. This sounds impressive, but these truly incremental changes were costly, justified only by their ability to spur sales.
Proving that sometimes money is well spent, Sensor was the best selling razor ever. To ensure their money train didn't derail, Gillette unloaded additional bags of money improving Sensor to SensorEXCEL with miraculous microfins. These apparently did something that consumers appreciated.
Eventually the shaving giant deduced the twin-blade concept could go no further. They spent the equivalent of several small nations' Gross National Product solving the tricky problem of creating a 3-blade shaving system. The heady justification: if two blades worked great, three would be better -- or at least sell better and for more dollars. And now we have the Mach3 -- a razor developed for an estimated cost of ONE BILLION DOLLARS.
To be honest the Mach3 is a wonderful razor. Gillette changed the pivoting head providing better control, and used three extra-thin mobile diamond-like carbon tipped blades, supposedly durable yet comfortable. They added indicator gel comfort-strips telling when to change blades and new grips for proper handling. Quite a package. The new Mach3 blades are naturally pricey, which of course is the whole point.
You may wonder if we're better off with all this wonderful technology. I found out one day, when I accidentally purchased a box of SensorExcel blades instead of Mach3. As it turns out, my SensorExcel did a perfectly fine job. Moreover, the less expensive SensorExcel blades lasted a day longer than their pricier cousins.
Make no mistake; the "experience" of shaving with the Mach 3 was superior but the end results were very close. I don't think anyone saw a difference when looking at me -- or cared. Moreover 'I' felt the Sensor did a capable job. A billion dollars produced a better, but not DRAMATICALLY better product.
THE POINT OF THE STORY
Here lies the main points of this column: Companies spend great sums of money to build successful and useful products and create a platform. Once this platform exists, consumers become comfortable with it. To encourage spending for "upgrades" requires significant improvement; this in turn requires costly research and development. Additionally improvements must not completely change the use of the product. Put simply: to get people to buy a new high priced razor, you've got to improve it substantially without forcing anyone to learn shaving all over again.
Meeting this expectation (and selling revised products) becomes increasingly more expensive, while over time added benefits become less dramatic. This is the law of diminishing return. Worse, if products fail to improve, lower priced competitors take over.
In case you haven't guessed yet, this column isn't about shaving...
HITTING THE DEVELOPMENTAL WALL
At some point nearly every product hits a feature improvement wall, where additional function comes only at huge cost. Once this occurs, the company faces a difficult and dangerous decision -- what to do next?
One strategy is to simply stop development and milk the cash cow. This is really a slow exit strategy, acknowledgement that the game is soon over and it's best to sell whatever you can. This is a poor long-term solution for any viable firm or product, ultimately embittering customers. One of my favorite tools, MacAuthorize, followed this path. The original maker milked it as long as possible with little to no change. Eventually OS changes made it so incompatible it was finally abandoned and left to die. The taste of bile filled the mouths of their customers, who vowed never to support the company again.
Visionary companies choose a bolder course, dropping or pushing aside old platforms and blazing new trails. Most fail. But a few succeed, establishing a clean and solid foundation, which lowers the cost of future development. Reaching this panacea represents the greatest technology product hurdle. Gillette successfully crossed this barrier with their Trac-II.
Few established companies attempt the bold leap of writing new products from a blank page. Outside of development costs, and the risk of failure, the greatest hurdle is the time and energy required to build a replacement product from scratch while maintaining existing product sales. Many such firms instead choose to buy a smaller company already making the product.
Other firms maintain platforms via periodic code rewrites. This costly move sometimes leads to irritating "no new feature upgrades", but does create a fresh code base for future changes. Over time loyal customers ultimately see the benefit, but the challenge is getting them to pay for it along the way.
Finally some firms hold their ground and play the waiting game. They believe the market reveals the proper time for change. They stand by, hoping to avoid penalty.
Which strategies are companies using? Let's review examples...
A FEW STORIES OF WIN & LOSE
WordPerfect. After dominating the DOS arena, they did not take the Mac or the Windows OS seriously. The company wasn't willing to expend the effort involved in essentially starting over with graphical user interface (GUI) applications. Given their market strength they maintained the status quo, waiting for things to "shake out". Because of their delay, WordPerfect was largely unsuccessful in making their leap to Windows (and Macintosh) computing and market leader became market victim. The company never recovered.
Microsoft bet the farm on the GUI, making sure they developed applications filling every possible business need. Though they trailed in market share in nearly every business application category before Windows, once Windows 3.0 arrived Microsoft assumed dominance.
Like them or hate them, Microsoft isn't afraid of taking risks. They develop with the future in mind. Plus, they possess an enormous cash reserve and can buy innovative companies and products as needed, bolstering their line-up and reducing competition.
Apple Computer faced challenges for years. They successfully migrated from the Apple II platform to the Macintosh, pioneering the GUI. They also somewhat successfully re-worked code to move their OS from system 6 to more modern versions with 7, 8 and 9. They successfully changed processor architecture to the PowerPC. But one challenge has been their Achilles' heel "modernizing" the Mac.
They spent several years and billions of dollars searching for an answer, while spending addition sums patching their existing OS. The combination created a huge cash and attention drain, sending Apple to the brink. Finally Apple made a bold leap, purchased NeXT and acquired the core technology suitable for a whole new foundation.
The gamble paid off. The first versions of OS X shipped recently, and Apple recently updated and extended the new OS quickly and efficiently. True proof of success lies eighteen months down the road -- once OS 9.x applications are gone. For now they've succeeded.
Adobe makes good use of all these strategies, sometimes milking the cow (PageMaker), often rewriting their code and prolonging the product lifespan (their core products), and occasionally creating entirely new products. They've recently rolled promising new products into one of older and higher priced applications, protecting their profit margins. They've also purchased innovative products from others (PageMaker, After Effects, PageMill, GoLive, etc.), when they critically need to add to their product mix, and reduce competition.
MEDIA 100 & THE FUTURE
Media 100 must manage this challenge now. Originally they built a promising editing tool for the artist and enterprise rather than the posthouse. The company promised to evolve Media 100 into the ultimate editing and finishing tool. Since then, they've gradually improved the product, adding many long promised features. Yet somehow they lost momentum.
Today their flagship product shows signs of being much like the Mach3 -- improved, more ergonomic, but with new revisions not significantly better than prior ones. With several long-promised features still missing in action, the company faces a struggle in appeasing long-term users and attracting new users. Their aging code foundation appears to impair development -- increasing costs and limiting improvements. How have they managed this challenge?
Mostly the company deftly shifts strategy gears up and down while sales remain neutral. An earlier attempt at rewriting their code base failed to profoundly improve the code foundation. Worse, the minimum feature upgrade it resulted in met anger and resistance from their installed base, making additional rewrites less of an option. Though they did gain temporary breathing room for adding some features, they did not halt a growing concern within their installed base that Media 100 technology was lagging behind.
As existing user complaints grew, an idea blossomed within the firm. Missing features that distressed their installed base might not concern other market segments. Realizing that shifting their positioning would also give them a jump-start into new markets, they aimed to latch on to the Dot-Com phenomena. Desperate to add "i" to their name, despite the beginnings of the Internet-Company fallout, they changed direction and heralded themselves as THE source for streaming media creation tools. Diving into Streaming Media, they acquired several companies and properties, bolting features into their existing products, and adding new ones.
Yet sales didn't improve.
Part of their problem may be bad timing, since after this rebadging, the market turned against all things Internet. A wide array of hoped for clients were likely lost in the sea of dot-com fatalities. The recovery time to get those markets aboard could involve several quarters. Meanwhile their installed client base, watched the company turn away from their original video oriented position and grew disgruntled. The result: a recent string of annual and quarterly losses -- a dire red flag, especially given our economy's current intolerance of money losing propositions.
Eventually Media 100 Inc. must review this strategy, and consider building new products from scratch while reducing spending in other areas. Doing so could result in products better suited for the long run, eventually cutting R&D costs. It's a big gamble -- while success may soar their profit margin, failure would destroy the company.
Or they could hold the status quo, playing wait and see. Meanwhile the percentage of revenue dollars used for development squeezes profit, and the failure to produce compelling releases continues to slow sales. They can't maintain that course for very long. We can only hope they've already chosen an alternative.
Whichever path they choose next, Media 100 must cross its chasm walking upon the razor's edge, with blood and pain as their constant companions. Success waits the crossing; destruction awaits a fall.
Editor's Note: After this article was completed and submitted to Creative Cow -- but just prior to publication here -- Media 100 Inc. announced another quarterly loss. During the conference call, the CFO again confirmed that cost of development was rising both in real dollars and as a percentage of revenue, while sales revenue was falling. In his turn at the mic, CEO John Molinari announced the company's status in building a whole new product, bringing new technology to market. They expect to release this new technology in the first half of 2002, possibly 4 quarters from now. In the interim they've consolidated teams, laid off marketing and sales divisions, and reduced expenses for all but R&D. Their current expected burn rate gives them approximately 4 1/2 quarters to change the status quo. Media 100 Inc. has made the hard choice, and is willing to take a gamble. The razor's edge they walk upon is very, very narrow.
As for me, I face the challenge of figuring out which razor to use. Like most everyone, I'm just trying to avoid getting nicked. Ouch.