Retailers decide to stop slitting own throats

Wal-Mart has announced that it will stop selling the second hottest tablet line, Amazon’s Kindle. In doing so, it joins Target in ending support for its online rival.

Revenues aside, the support for the Kindle seemed puzzling by both retailing giants. Now that they have settled into a comfortable duopoly, the greatest threat they face comes from Amazon‘s continuing successes in moving people out of stores to their web browsers. This calls to mind a Marxist critique (source unknown) that rich countries in their greed will finance their own downfall.

Both Wal-Mart and Target continue to sell the world’s leading tablet, the iPad, from a company that’s an also-ran in online content (except for music). They also sell Barnes and Noble’s Nook line, which is promoted by the leading book retailer but is an also-ran both in hardware and proprietary content.

This raises the question: when or how will the coalition of willing anti-Amazonians be formed? Apple and Wal-Mart are losing the online content battle (which Target has ignored), so is there a possibility for a shared platform, content format standard or other deeper cooperation? Otherwise, it’s hard to see how the tide will be reversed that has favored Seattle’s online shopping conglomerate.

What happened to disintermediation?

A front page story in the WSJ Friday talked about Wal-Mart’s price war for online books, with $10 bestsellers. The money quote is pretty good:

"If there is going to be a 'Wal-Mart of the Web,' it is going to be Walmart.com," said Walmart.com CEO Raul Vazquez in an interview. "Our goal is to be the biggest and most visited retail Web site."

Wal-Mart is also planning on getting into electronic books. Amazon is responding every way that it can.

But there was one passage that I think that deserved more scrutiny:

The price war sent shivers through the publishing world. Wal-Mart's move, and similarly low prices for electronic books, may ultimately condition consumers to expect new titles to cost $10, a price that would force the publishing industry to re-scale its entire business, including the advances paid to writers.

"The endgame is rather scary for authors," said one book executive.

Here’s my question: why is it scary for authors?

Authors sell to publishers who (sometimes) sell to distributors who sell to retailers who sell to consumers. If there’s a price war that cuts the retail price to consumers, where is it written that authors are the ones who should suffer?

A decade ago, pundits and academic researchers and MBA teachers were saying that e-commerce would bring “disintermediation.” This means the starting and ending point of the value chain (content creator and content consumer) are essential, but one or more of the intermediaries is superfluous or obsolete.

Under this scenario, either the publisher or the retailer could get cut out of the detail entirely. For example, my favorite band released their latest album by self-publishing, cutting out its 30-year publisher Warner/Elektra/Asylum. (BTW, the album was initially released directly and exclusively to Wal-Mart, and sold quite well.)

So at best, for the publishers this suggests a three-way scramble between authors, publishers and resellers (mostly Amazon) to create a 2 vs. 1 coalition to squeeze the margins of the third. At worst, the top selling authors will emulate the top music artists and begin to bypass the publishers for direct distribution.

Of course, the returns and economies of scale are seriously skewed here. Amazon & Wal-Mart are running their price wars with the very top bestsellers, the same books that earn back their typesetting and printing setup costs in a day — and that keep the publishers’ doors open. Authors of million-copy novels can dictate terms to (or bypass) publishers in a way that authors of 500-copy academic books cannot.

Still, this re-opens the question of which intermediaries (if any) uniquely add value — and which ones have negotiating leverage. There are many publishers, but in the US only one Amazon. Even adding Wal-Mart and BN.com, the publishers don’t have a lot of options to disintermediate retailers. To me, the endgame for publishers seems scarier than a Stephen King novel.

Hat tip: Good Morning Silicon Valley on SJMercury.com

Is that all?

I was underwhelmed by the (long rumored) Dec. 26 announcement about iPhone sales at Walmart.† After inspecting the iPhone sales activities at two different Walmarts in San José, two weeks apart, I am now under-underwhelmed.

At both stores, there were signs over the theft detectors at the door — two weeks ago they were more prominent, but today they shared billing with the promo for Open Season 2 (new on DVD!)

While the iPhones were nowhere in site, if you ask one of the “greeters” at the door, they’ll direct you to the opposite side of the store, where electronics are. The Walmart sales experience was every bit as downmarket as I feared.

Both stores sold phones (with contracts) from 3 of the big 4 carriers. The first one had all but Sprint and eight (8!) prepaid carriers, either MVNOs like Virgin or the prepaid arms of the big four. Today’s display had all but Verizon, and six prepaid carriers. Among the T-Mobile phones on display today were the G1 and the a Sidekick, each with the keyboard half of the phone locked down and the screen half stolen by some miscreant.

At both Walmarts, there was a dedicated iPhone display, maybe 3' wide and 18" high; today’s faced away from the entry, while the earlier one faced towards the entry. The display had a stand for a phone, but two weeks ago the phone was missing. Today there was a live iPhone, with real applications, but without any 3G signal (perhaps because it was deep into the large store).


Both stores also had point-of-sale promotions for competing phones. Today it was for the Blackberry Pearl Flip sold by T-Mobile. Two weeks ago, it was for a Verizon phone that claimed to be the “hottest” touchscreen phone (not even a Storm, but something generic Korean phone).

I didn’t see anyone looking at the iPhone display at either store. However, today I did hear this exchange between two electronics clerks:

Associate #1: “I sold two iPhones the other day.”
Associate #2: “I sold one.”

To make crude guesstimate, if every Walmart electronics department in the country sold one phone a day, 52 weeks a year, that would be about 910,000 phones a year, or about 10% of Apple’s projected global sales for 2009. So no matter how lame the display, if it increases sales by 10%, it was certainly worth it.

Of course, this is only guesstimate. In the two years since it was announced, iPhone demand has highly cyclical, with most phones sold in the quarter after its release. There is also the question of cannibalization — how many of these iPhones would have been sold through another channel? So my guess is that a net gain of 910,000 is most likely on the high side.


† Apparently the company is named “Wal-Mart Stores, Inc.” but the retail stores are named “Walmart.”

Sam Walton is rolling in his grave

When I’m up late, I’ll turn anything on the idiot box rather than have silence. Early Thursday morning, it was Charlie Rose, who was interviewing H. Lee Scott, Jr., outgoing CEO of Wal-Mart. (During the show, the running gag was that Rose kept reminding Scott that there’s an opening for Commerce Secretary).

There were a few points where I agreed with Scott. For example, he and Rose were noting that the best shouldn’t be the enemy of the good, or, as Scott put it, “in business, you have to be generally correct: you don’t have to be perfect.”

The only problem with that quote was the context, which was instituting new government policies. Since we already expect government to captive of special interests, pork barrels, and politicians’ self-protection, [link] lowering our expectations further — from imperfect to mediocrity. I would have felt better if at least he’d identified first principles for economic policy, notably “first do no harm”.

However, I parted ways with Scott (not surprisingly) over one of the few areas he’s praised by left-wing activists: his push for greater government involvement in healthcare. About 26 minutes into the interview, Rose asked him about his views on healthcare.

Scott argued that government should mandate (or provide) healthcare for everyone, rather than impose a mandate only on large companies. Because “91-92%” of Wal-Mart “associates” have healthcare already, the he argued that the problem is small business and the self-employed. He predicted that in the next few years that “Those of us who have health insurance are going to be at a competitive disadvantage,” i.e. a race to the bottom.

If that point wasn’t persuasive enough, he then argued that a government failure to regulate small businesses would hurt the American economy because “large exporters” like Boeing would be at a disadvantage. Last time I checked, Boeing doesn’t compete with startups, but rather against a MNC with 50,000+ employees headquartered in the country that brought us socialism.

As a private citizen, Scott may legitimately believe that more healthcare mandates are better. However, as the CEO of the world’s largest company, Scott is not conveying his personal opinion but that of the company he represents.

Scott is holding in trust the seat made possible by the entrepreneurial imagination and tireless efforts of the late Sam Walton. The idea that his successor would advocate more government regulation to hurt competitors must have him turning in his grave.

Don’t get me wrong. Scott is no different than any other manager who’s work his/her way to the top of a big corporation. The selection processes reward politicians (kissing up, making peace), bureaucracy (consummate CYA) or worse yet, the overlap of the two in selective presentation of the truth to influence perceptions.

I realize that a good manager can preserve the value created by entrepreneurs, but the element of personal risk (or value added) is rarely there. Good CEOs are readily available in the labor market (even if great ones aren’t), with the main problem being that boards need to separate competent ones from those who are merely successful politicians. I gather that Scott has been an above-average manager (in an incomparably complex operation) and is now doing a “victory lap” prior to his retirement.

By comparison, entrepreneurs the ones who create value by doing something that hasn't been done before. They might offer something that people didn’t know they needed, like Steve Jobs, Juan Trippe or Fred Smith. Or they might find a way to deliver it more affordably than customers (or competitors) ever thought possible, like Michael Dell, Herb Kelleher or Sam Walton.

Entrepreneurs often continue as entrepreneurial leaders of their big companies, unless they’re shoved aside on the theory that the company needs a “real manager”. Clearly some founders develop the skills to grow their companies into the Fortune 500. In other cases, the founder grew into the job; it worked out for decades for Microsoft and Wal-Mart shareholders (among others).

Of course, successful entrepreneurs — nothing if not confident — often overstay their time. The visionaries have big ideas for time that has past. In ICT sector, we see this over and over again — tech entrepreneurs navigating a turbulent era of high uncertainty and high growth find they must cope with commoditized competition where pinching pennies is the norm. Exhibit A would be DEC founder Ken Olsen, the ultimate entrepreneur who failed to cope with the decline of the minicomputer market.

iPhone anticlimax

As predicted, the iPhone is coming to Wal-Mart. The retailer announced this morning that starting on Sunday, the iPhone 3G will be available at 2500 stores nationwide.

Also as predicted — at least by those who knew anything at all about Apple Inc. — the phone is being offered at the same price as everyone else, less the $2 Wal-Mart discount (to $197 for 8mb and $297 for 16mb models). The phones will be sold at special kiosks within the stores, which explains why there were so many leaks so early for the new distribution channel.

I still think Target would have been a better fit to the brand, but since Apple hasn’t made an official comment, we can only guess as to its motives.

My guess is that Wal-Mart was chosen not for the number of stores (Target has 1500 US stores) but their fit to Apple’s existing geographic coverage. Wal-Mart began life as the discounter to rural America, whereas the suburban Target locations heavily overlap the existing Apple Retail Store and BestBuy locations.

Wal-Mart already sells the full range of iPod players, including the iPod Touch. The existing prices seem to be about $1.12-$1.18 below the corresponding Apple price, so the $2 discount is a big improvement.

From a practical standpoint, Wal-Mart has indicated it will be a price follower, with local stores allowed to match competitor’s prices, e.g. BestBuy’s $9 discount off of list.

Say it ain't so, Steve

Apple will soon be selling its industry leading, flagship product at Wal-Mart? Yes, we know times are tight, but what does this do to the cachet? To the experience? To the brand? It’s not as though there are any Geniuses working at Commodity Central. The only good news is that it’s going to be $197 and not $99 as speculated on Saturday.

But why not Target (pronounced tahr-jey)? While (like Wal-Mart) they have high volume and ruthless cost-cutting, they have a more upscale clientele and image. Yes they have only 1500 US stores vs. 3800 in Wal-Mart (I suspect the deal is US only), but they are already selling the iPod Touch.

There is the old joke about haggling over the price. Now we know Steve’s price. Perhaps this suggests even more strongly that he’s a short-timer, since the short-term gains may be outweighed by the long term brand erosion.