Apple vs. Microsoft: embracing the Zeitgeist - Part 2

The ‘digital ink’ was not yet dry in my previous post “Apple vs. Microsoft: embracing the Zeitgeist - Part 1” , when Apple (AAPL) surpassed Microsoft (MSFT) in market capitalization. And consistent with the case I’m making in these articles, I'd expect that difference to widen in the future.

In my previous post, I used two very unorthodox words to describe Apple’s unique recipe for success: enlightenment and selflessness.

Why is Apple enlightened? An old colleague, the then global Market Research guru of the company I was with at that point, had a maxim that has stuck with me through the years. It’s a very simple four-step doctrine, and yet, quite difficult to truly follow: 1) listen to your consumers; 2) listen to them again; 3) believe them; and 4) act on it. As I was explaining in the first part of this article, it is steps 3 and 4 were most companies struggle. It is where insights collide with pre-established paradigms that things go awry. Yet, even if this doctrine is followed to the letter, there are yet another two pitfalls that must be dealt with: exactly which consumers do we need to listen to, and how literally do we take what they say. These are two pitfalls many companies also fall into. Based on outdated marketing precepts, they think in terms of “our regular brand users” or “competitive users”; or, being a little more sophisticated, the “creative class” or the “social adventurers”. Then, they take what the consumers say to the letter, and build the literal meaning of the collected insights into their decision making process. All these very easy to make mistakes will, most of the times, result in initiatives that are unsuccessful and leave everyone scratching their heads: “we did all the research… what went wrong?”. As I explained in my article “The spirit of the times” , today marketers must free themselves from the constant chatter around them, climb the proverbial mountain and scour the horizon to understand where society is going as a whole. And in seeing the direction, they need to embrace it and decide to lead it. Not fight it, not trying to steer it, but just position themselves at the forefront of the future and start building it before the rest get there. That ability to hover above and beyond the noise of the market today and understand where society is heading as a whole; to believe in what you’ve seen; the will to truly embrace that future and have the capacity to articulate it and to build it ahead of the arrival of society to that point, that is what I call enlightenment. That’s what Apple is doing: Apple goes beyond the interests of particular groups or segments. Apple is reading and decoding society as a whole, seeing where it is going and just delivering against it. But, wow, what a delivery! There is where the second component of their formula kicks in: selflessness. The secret of Apple is that they simply understand that what they must deliver is an experience, not just a product. It’s not about features, it’s not about trying to force fit my technology or to impose my view of the world onto others. Apple is masterful at understanding the experience the consumers want, and making technology work to provide it. They don’t sell operating systems, chips, memories and hard drives. They don’t brag about search capabilities, speed, computing power and other technical irrelevancies. No. Apple delivers beauty, the feel of your fingers gliding on the screen, simplicity, reassurance and reliability. At Apple, the consumer is truly the center of their attention; not a prey that needs to be persuaded to buy their fares, but the capable individual they need to serve. And in that selflessness resides their power and their dominance. Interesting, isn’t it? Apple dominates by seeking to serve. And those who seek to dominate, end up pushed aside.

The iPad is just a superb example of that vision and understanding of where consumers are, where they are going and what they really want. The immediate reaction heard in the techie circles was: why would the consumers want one? It’s not a laptop, not nearly as powerful; it’s just a bigger iPhone that doesn’t even make phone calls. And yet, consumers flocked to it. But why? Simply, because it is the experience the consumers were longing for. Think of where laptops have been heading: smaller, lighter, netbooks. And despite these changes, you constantly hear people complaining about having to carry their clunky laptops. Think of where connectivity is going: it is a mobile world. In this small global village, consumers want… no, need to be plugged to the grid 24/7. And yet, even the mighty iPhone is rather small for most of the things consumers want to do with their connectivity. Think of the future: what is the ideal scenario for anyone? The portability and simplicity of the phone with the comfort and power of the laptop. Some sort of cybernetic transformer that can be unfold from a small phone into a larger and spacious… what’s the word? pad!... that facilitates work and fully blown entertainment anywhere. Some technologies like flexible screens will likely get us there. But in the meantime, as we arrive there, Apple starts preparing the terrain with the iPad. Apple will take us there. Apple has become a symbol of the zeitgeist. As such, owning Apple is pretty much owning a big piece of the future.

Disclosure: I own shares of AAPL

Apple vs. Microsoft: embracing the Zeitgeist - Part 1

In my last post, "The Spirit of the Times", I discussed how, in order to be successful today, a brand needs to embrace the zeitgeist or the spirit of the times. Today I will start illustrating this idea with a series of very investable examples.

The most influential brand of our time is, by far, Apple (AAPL). How many brands or companies are there whose endeavors are so eagerly followed by press and consumers alike? While most companies need to resort to stunts and massive PR efforts to try to attract the attention of the press, Apple’s every move is news. Journalists line up to try to break the latest idea Apple is working on. We, as consumers, are simply enthralled by the succession of amazing technologies Apple makes available to us. And even those of us who don’t have that many Apple products wished we had them. As an investor, there is no doubt in my mind: Apple is a core stock that must be owned and retained for the years, if not decades, to come. But why? What is Apple’s spell?

Many marketers and analysts have tried to rationalize it and decode it: innovation, design, courage, Steve Jobs. All those traits (except for Jobs, of course) are not unique to Apple. How do they pull them together, what sort of alchemy do they apply to combine them in such a successful proposition then?

In my view, I would summarize Apple’s magic in two words: enlightenment and selflessness. Now, these are words that much rather seem to describe the Dalai Lama than a company, and that you will hardly find in any business or marketing text. They are kind of lofty and pretentious, aren't they? So, am I being petulant here?

The best way to start explaining my choice of words is by some quick comparative analysis: why aren’t other Apples out there? Most companies invest a tremendous amount of resources talking to consumers, gathering insights, trying to understand what is important for them. All too often, though, those insights are unconsciously sifted through previously established paradigms. These paradigms are based on the knowledge and understanding accumulated by a company or industry through the years: what worked or what didn’t in the past, previous understanding of the consumers and products, assumptions built on experience and so on. Paradigms die hard. The world changes around us, but we have a tendency to cling to old paradigms. More often than not, new insights are either forced to fit the old paradigms or simply, discarded as outliers. Even when new insights are gathered and understood, the second sin most companies go through is to stubbornly try to, once again, force an existing solution into meeting the new insight. Most companies develop an introspective understanding of the world, of their industry and of their own capabilities, and end up believing it as the absolute Truth. That is, we tend to fall in love with ourselves and end up drinking our own Kool Aid.

For me, one of the most blatant examples of this behavior is Microsoft (MSFT). With regard to their operating system, their last true innovation was Windows XP. Everything else has pretty much been a cosmetic improvement over the same platform. Their product, their view of the world has become so ingrained in their organizational psyche, that they basically dismiss any consumer understanding that doesn't fit their own paradigm. To illustrate this point, think of this capital sin: they launch a Home version of Windows 7. Home, OK? For you and me, basically. Fairly profficient in turning the computer on, writing a few emails and surfing the Web, but not much more. One day, you are more or less happy at your computer when an error occurs and the message that you get is an unintelligible code accompanied by a “Talk to your system administrator” instruction. I don’t know you, but at home we don’t tend to have a system administrator lurking around in case Windows decides to misbehave. OK, so you don't know what to do and, of course, try to see if the Help function in the system can shed any light on your problem. Have you ever tried to use Windows Help? You need a doctoral degree in Applied Electromechanical Astrophysics just to get a shot at understanding what they are talking about. If this is their “Home” version, I don’t even want to imagine the nightmares the IT guys go through with the Enterprise one! The issue here? The company's focus is on the product, not on the consumers that are going to use it. What prevails is the vision and understanding of the engineers creating the software. Sure, they listen to the consumers; they have extensive ethnographic and anthropological research on how the consumers use the products. But then, they develop engineering solutions to what they perceived the consumer is asking for. They force the insights into their own paradigms. After all, Applied Electromechanical Astrophysics has become part of the pop culture, hasn't it?

So Microsoft, proud of its accomplishments (and tickled by Apple's constant snipes at them), goes and spends a fortune in media with a campaign that try to convince consumers that “Windows 7 was my idea”. Yeah, right. My “System Administrator” kind of disagrees. See, you can’t resolve with advertising what your product doesn’t deliver. Microsoft has become an introspective behemoth that ended up believing that the world truly is what they see through the lenses they’ve built for themselves, and that reflects in everything they do. Windows Mobile? As clunky as the parent application. Office? Still the standard, but getting harder to use.

OK, so what about Apple? Yeah, about that… I’ll continue in my next post.

The spirit of the times

In a world regimented by the relationships we had to establish and upkeep in order to have a life, the role of branding was very clear. A brand was to project to others your personality and your character. The ensuing advertising was very straight-forward. A brand would show the type of character you wanted to portray and presto, it was selected by those who required that specific trait.

Nowadays, however, things have changed. The most important change is that people can choose. No, I am not talking about choosing between flavors or between different brands in a given category. Today, people can really choose: choose what to believe, choose who to relate to, choose what to care about. Ultimately, they can choose how to live their lives. The drivers of this change are very simple but very profound: a) access, and b) closeness. In other words, globalization. Not just globalization as an economic trend or economic doctrine, but true globalization: being aware of what’s going on in any part of the world the instant it’s happening; not being limited by geography when choosing who to relate to or what to talk about; the empathy created by being first-hand witness –through the power of media- of the suffering and triumphs of people on the other side of the world, and ultimately, the understanding that we are all interrelated. It’s never been easier or cheaper to move from one place to another. Not that long ago, self-expression and creativity was limited to those who had well-honed artistic skills. Today, self-expression and creativity takes the form of pictures in Flickr, videos in YouTube or a page in Facebook. Suddenly a world is open for everyone and people are exposed to the myriad of experiences that life can be made of. And people today want to have them all. Like never before, life can be fulfilling and diverse and varied and exciting. There is no time to waste and certainly, no conventions to obey to. Molds have been broken, closets have been pried open and non-committal experimentation is possible. In this new world, what you need to be is secondary to who you want to be and what you want to do.

In order to be successful, brands need to follow suit. Consumers today are far more complex and far more fluid than never before. A brand that defines its business, its character or the consumers it serves in too narrow of a way might soon find itself displaced and out of favor among consumers that just moved on to the next thing. The typical criteria for consumer segmentation just don’t work anymore. Demographics like gender or age or geography are simply irrelevant. Lifestyle? There are as many lifestyles as consumers out there.

As a marketer, what do you do? Successful brands need to engender familiarity, trust and a sense of consistency. They can’t be erratic. They can’t change with the wind. But at the same time, they can’t be stagnant. This is the new positioning challenge marketers are facing in this brave new world.

The solution is to embrace and stand for the values that fundamentally define the era we are living in and that in one way or another, touch or are embraced by most people. In other words, praise the journey, not the destination. What is exciting about this approach is that, as a brand, once you stand for a given value or set of values, you can embrace whatever is the expression of such values at any given time and still remain true to yourself and to what consumer have learnt to appreciate in the brand. In very simple terms, as long as you stand for music, you can play any tune. But if you stood for swing, you’d be facing very tough times in a world dominated by hip hop and country. If as a swing brand you started flirting with hip hop or country, then you’d look inauthentic and out-right opportunistic; therefore, not credible and definitely not trustworthy.

This way of defining your brand, and the consequent implications on how your brand communicates and interacts with consumers, is what I’ve called Marketing to the Zeitgeist.
Some examples, and the impact on investment decisions, will be covered in future postings.

Marketing to the Zeitgeist

Two years ago, I wrote a couple of posts in this blog where I discussed the new principles of Marketing that the readers should look for in order to spot products and companies with potential to become lucrative investments. These articles where "Cracking the consumer code" and "Consumer values to look for". The practices and values these posts refer to remain as valid today as they were two years ago. However, there's more to the story. It's not only the way to do marketing what is changing, but fundamentally, the very nature of branding itself and what brands today need to represent for the consumers. I even submit that venerable and seemingly sound concepts like 'target consumer' are, at best, outdated if not outright archaic.

As I continued studying today's consumers' values and the brands that have done the best job in becoming uniquely relevant to them, I coined a concept that I think captures and explains the distinctive marketing approach that separates the brands that are destined to endure the test of time, versus those that will likely fizzle as quickly and soundly as they once grew. I call the concept Marketing to the Zeitgeist. The following diagram explains it in a historical context. It's meant to represent how marketing and branding thinking has evolved through time, and how the required new thinking for today is that, in order to thrive and survive, brands need to embrace and stand for elements of the zeitgeist, or 'the spirit of the times'. I will elaborate on this in my next post.

Is Best Buy cracking?

Best Buy (BBY), in general, puzzles me. I haven't had a decent shopping experience at Best Buy in several years now. I guess it's just because they have a decent array of items that people default to this chain. Stores often look in disarray: empty shelves, displays half-done, and a most frustrating shortage of staff. Sales people are nowhere to be seen -well, sometimes: in clusters, having a conversation-, and when you happen to bump into one of them, their apathy and lack of will to help is astounding. Best Buy has lost a small fortune from the times I've been to the store willing to buy something and simply left because nobody was really interested in earning my business.

I am not suggesting to invest against the grain and rush to sell Best Buy at this point. The company enjoys an inertia that will play in its favor for the years to come. But they are becoming vulnerable. All that is needed is for a new entrant -or a current competitior- to step in and do what is necessary to provide a truly satisfying shopping experience for Best Buy to follow in the steps of the now gone Circuit City. Remain on the lookout: the next winner will look more or less like this:

a) Profuse use of digital stations to allow customers to get as much information as they need about the products they are seeing in the shelves. Today, Best Buy's -and other retailers'- model is flawed: they over-rely on the sales people to answer questions consumers might have, and yet, they don't have nearly enough of them to do that. This is critical when you are -as Best Buy is- in the business of selling highly priced, technically sophisticated items. The result is frustrated consumers. These retailers should leverage both the type of technology and the shopping behavior the Internet has trained consumers on. Call it a hybrid shopping experience.

b) On-demand sales asssociates: once a consumer does want to talk to a sales associate. he should be able to ask for one through the digital display he's been using. Don't make the consumer walk half the store looking for a sales person. Likewise, don't waste sales people time roaming areas with no consumers in sight.

c) Intensive use of interactive displays. While this is a relatively common practice today, interactivity is still an afterthought, haphazardly squeezed between spaces primarily devoted to static-display shelves. Reverse the thinking: sales space should be primarily devoted to interactivity. It's all about the experience.

d) Another learning from the Internet: allow your customers to see what their fellow shoppers have done. Have real time statistics about the products: how many have been purchased, how many have been returned, product reviews made by customers, etc. These companies need to remember that they are in the business of reassurance. Customer want to make the best decision: allow them to feel good about what they are buying.

If and when you see a retailer that is applying this model, that will be your cue: sell Best Buy and buy this hypothetical (for now) newcomer.

Home Depot: making "we can help" real

Several months ago, I stopped by the Home Depot (HD) to buy a few supplies for one of those DIY projects I embark upon once in a while. I have to say that, up to that point, I had a preference for Lowe's (LOW), which I found to be somewhat more pleasant to shop at. That day, something had changed at Home Depot. It wasn't the layout, it wasn't the product array. That day, I was greeted at the door and asked if I needed any help. On my way to the aisle where the product I was looking for was located, every single employee I encountered courteously asked me if they could be of any assistance, if everything was alright and let me know that they were available if I had any question. Not only that, but suddenly, I could find an associate almost immediately anywhere in the store. I felt good. I felt acknowledged and sincerely appreciated. I was so impressed, that I stopped one of the associates and told him that, whatever they had changed, it was working and offered my congratulations. Enough to say, Home Depot is my first choice ever since that day. I also bought shares of the company. That level of service is still there. Home Depot realized that for a consumer, the shopping experience goes beyond finding the right product at a good price. A remarkable shopping experience includes making the consumer feel good and reassured. Home Depot has understood what many companies fail to see: that a marketing proposition -"You can do it. We can help" in their case- is more than an empty slogan. It is a promise that needs to guide everything they do. Deliver on it, and your customers will reward you. Home Depot's share price is a proof of that. This renewed focus on service and delivering a supeb shopping experience will continue to fuel their growth.

They can do it. Help yourself investing in Home Depot!

Disclosure: I own shares of Home Depot

It's all about the experience!

This is one of the best summations I've seen of the characteristics of a successful brand in the new society. Look for these attributes to find promising investment ideas!

What Is An Experience Brand Jack Morton

View more presentations from Jack.

Coming back!

It's been more than a year now since my last post. Surely, this is not the way to keep a blog alive and interesting! During this year, I've opened this blog more times than can be counted, wanting to start writing again and sharing my views on what was going on with the market and the companies I saw thriving in a very tough environment. And time and time again, I closed it. Typical stuff: didn't have the time, need to collect more data, etc., etc. I enjoyed writing my little notes, but, gosh, they took some time. So I just decided I am going to change the format. Short, sweet posts, with ideas I may ellaborate upon over several posts, rather than trying to reach conclusions in just one, thoroughly explained article. It might demand a little more patience from whoever bumps into these thoughts, but ultimately, it might be worth it. And as many times in the past year, I need to leave now... but , hey, now I have a new post!

H&R Block should benefit from Intuit’s blunder

Know thy customer… and don’t mess up with him. Even less in the Web 2.0 era, in which news spread like wildfire and disgruntled customers can very quickly come together and turn into a virtual lynching mob against you. In this era, serious, organized, massive boycotts can happen, and can be triggered in a matter of days, if not hours, should consumers are outraged enough. It is a real threat, so companies cannot afford to fail in understanding their customers and taking them seriously.

Case in point: Intuit (INTU), the developer of the –until now- leading tax preparation software, Turbo Tax. Over the years, Intuit has been building a growing and profitable franchise of loyal Turbo Tax users who year after year would buy its new version at tax time. This has been a major undertaking for Intuit: most taxpayers are still skittish about leaving something as important as preparing their tax returns to a software application and are simply not comfortable working on something of this perceived complexity on their own computers. Nope. When dealing with the IRS, most still want to make sure an expert takes care of it and want to see a solid, tangible, black-and-white packet safely shipped to Uncle Sam in a totally certified, absolutely delivery-confirmed, personally-mailed-from-the-post-office parcel. But this of course is changing as computers become more pervasive and more and more people are perfectly comfortable with them. Once a customer overcomes his apprehensions and is persuaded to try doing his taxes by himself with the help of tax preparation software, chances are you got him for life. It is not only a superior and more effective way of doing the taxes, but as confidence and familiarity with the product is built in a process that by nature is always complicated and stressful, the users just don’t want to go out and experiment with a different application. In addition, a significant history of transferable data gets built into the software for future use, providing another strong reason to just stick to the application you’ve got to know over the years. So, for Intuit, this was a solid business model. In a society rapidly embracing the digital world as the norm in everything from the way you do your banking to how you find the love of your life, steady growth could only be expected.

But this year, Intuit screwed up. In an attempt to squeeze more money out of their customers, Intuit tried to change the rules of the game on them. In essence, Intuit tried to re-position its business as a provider of tax services rather than that of a software vendor. The first mistake was to significantly increase the price of Turbo Tax, trying to justify it by adding “free” federal e-filing to the package. This backfired badly. Many customers didn’t care about e-filing, so they perceived they were being charged for a feature they didn’t want to start with. Furthermore, realizing that a portion of their franchise used the software to prepare the taxes not only for themselves but also for other members of their family, Intuit thought they could create a new revenue stream from that. So they imposed a fee for each tax return printed through Turbo Tax. That was the straw that broke the camel back. Their former loyal customers were infuriated, and many clearly stated their intention to switch to Turbo Tax’s closest competitor, H&R Block’s (HRB) Tax Cut. Even though Intuit backtracked in their intentions, eliminating printing fees and slashing their price, the damage was done. See, as a marketer with a strong, loyal franchise, the most important thing you have to avoid is for your customers to have an excuse to go and try your competitor, lest they like it and leave your franchise for good. Intuit’s ill attempt to gouge its customers left the door wide open for that. And H&R Block aggressively took the opportunity. They positioned Tax Cut at a lower price point to Turbo Tax, including the free federal e-filing Intuit was hoping to use to justify their hike. In a brilliant, aggressive move, H&R Block even sent out their Premium Federal Tax Cut version for free to tens of thousands of consumers, pretty much eliminating a key barrier for disgruntled Turbo Tax users to try their product. And ultimately, taking advantage of its robust infrastructure as a true tax advisor, H&R Block is backing its software product with the promise of personal support to solve questions and, most importantly, to provide support and representation in case of being selected for an audit. H&R Block’s advertising campaign, “You’ve got people”, is a superb concept that goes to the heart of the emotional burden that preparing taxes means for most people. It’s a very complex and confusing process that generates a lot of anxiety and a dreadful feeling of cluelessness and vulnerability. “You’ve got people” is a comforting, reassuring message that humanizes the relationship with the company and creates in the target audience the comforting feeling of not being alone in the process.

Bottom line, I expect Intuit’s blunder to have a significant negative impact in its stock performance. For this tax season, the winner will be H&R Block; we should see a positive upside surprise in its tax software business. In an investment decision between these two companies, I bet for the people!

Google this investment!

It’s been several weeks since my last post. At that time, I was reeling from the beating we took during that dramatic first week of October. Little I knew of what was ahead. Paraphrasing myself: Gosh, what a month!

Encouraging performance today. The market was just following the free fall trend that has marked the whole week. At one point, it felt like we would finally close below 8,000 for the first time. And why not? There hasn’t been a single piece of good news in weeks. There is not a glimpse of hope in the horizon. And yet, out of nowhere, we had a tremendous rally. No apparent reason! Except for, indeed, the fact that enough is just enough. Yes, we are in an economic recession. But most stocks are priced as if the world was going out of business. There is value out there, folks. I guess a few shrewd investors brave enough to see the sun beyond the stormy clouds had the same thought.

When I am considering a stock for investment, I want to think I am not buying a company or even a product. What I am buying is positioning. One way of defining positioning is the space that the combination of functional and emotional values of a brand occupies in the perceptual map consumers have of any specific category. That perceptual space will sooner or later translate to sales. The bigger the space, the more sales that brand or product will generate, and for a longer time.

You want to look for brands that occupy a very big and/or growing space in a large and/or growing category. Also, the bigger the space the brand occupies, the less space is available for the competitors, therefore adding longevity to that brand’s business potential.

Now, let’s talk of a very specific example: Google (GOOG). Online search is a very big category. We all live around the Internet nowadays. From finding out about the weather today, to planning our next vacation, to –yikes!- checking the financial news every 20 minutes to try to make sense of the madness we are living in these days. Now, how do we say when we suggest someone to do a search in the Internet? I haven’t heard anyone telling me to “yahoo” something. Nobody has ever mentioned that they found their long-lost third cousin while “Microsoft-living” his or her name on the net. We all “google” our information. Google occupies a huge space in the mind of the consumers when they think of finding information in the web. Google is the positioning leader in the all-important online-search category and they keep working relentlessly to make that space even bigger. In the meantime, Yahoo (YHOO) is struggling for survival and trying to re-kindle their affair with Microsoft (MSFT), while the latter is still figuring out how to convince the world that Vista is not the dud it is.

Advertisers know that. Heck! So do you! I guess that’s the reason why Google was commanding such a rich P/E, right? And then the recession comes, and with all its doom and gloom, we assume advertisers will cut their budgets, people will stop searching, and then we send Google to its lowest price in three years. To that, I want to highlight a few things:

- In a tough economic situation, advertisers indeed cut their advertising budgets. But they don’t eliminate them. You can’t afford to. You need to keep selling! If any, you re-direct your reduced budget to the most effective touchpoint you have available. If you had campaigns going in Google, Yahoo and Microsoft, you cut the last two and put all your money behind Google. That is a fact.

- Consumers stop buying. But they keep shopping. It is part of the coping mechanism. More than half of the thrill of buying something is actually shopping for it. We all make hopeful plans of what is that we would like to buy once our portfolios rise again from the underworld. And Internet searching (with its payable clicks) will continue to be the prime means to do this.

- When the going gets tough, the tough get going. This economic crisis will only consolidate Google’s leadership in the web search space. It is the only company in the space with the resources and the strength to thrive in these conditions. You will see smaller rivals (including Yahoo) retrenching and cutting back in their investments. Google will keep plowing ahead, taking advantage of the situation to consolidate its dominance.

Today, Google dipped below $300. It got all the way down to $280 at the bottom before rebounding to close at $312 (encouraging!). When you consider that Google can only consolidate and strengthen its position as the absolute leader in a category with a double-digit compound growth in the foreseeable future, I would say that is a small price to pay for such a Company. It is not about what could happen in the next few months. It’s about owning the Internet for the next decade! And that is a very, very big space.

Disclosure: I own shares of GOOG