Waystations

Apple is an enormously successful company, and as such has spurred a cottage industry in business writing as we all try to generalize lessons in hindsight from an outlier. I note this because I recently came across this interesting juxtaposition in the almost violently pro-Apple blog, Daring Fireball, about Philips exiting the consumer electronics industry: Gruber

What is the "lesson" here, in following this news article with the "bag of hurt" comment? One assumes that it's yet another example of Apple's prescience; their ability to recognize and avoid dead-end markets (and, by dint of the juxtaposition, a dig at Philips, as well, for making those hurt-bag-ful Blu-Ray players for so many years.)

It is true that Apple has, in the last decade, successfully "skated to where the puck is going," as The Great One once said. That, of course, is not the sole component of success (just ask Preston Tucker); let's also acknowledge that there is also a fair amount of luck involved. But Apple has in recent years had more hits than misses, and there are scores of valid business lessons we can all learn from how they have relentlessly prioritized design and innovation. So stipulated.

Let me say this, however: predicting the future is child's play. It takes no great skill to predict, as Steve Jobs did, what will be. Here--I'll do it for you: in the future, we will fly faster than light to interplanetary colonies, eat pills that replicate entire thanksgiving dinners, live to be 200 and, eventually, learn Chinese in minutes with a suppository. You're welcome.

No, predicting the future is not difficult. Predicting the timing of the future, however, is a singularly difficult skill, and rarely works twice in a row. Of course Blu-Ray was a "bag of hurt;' eventually we will be able to watch movies on our eyelids by clenching our buttocks. So was Philips stupid for making Blu-Ray players? That's a more complicated question than Daring Fireball's simplistic juxtaposition implies.

Let me humbly suggest something Philips and Apple have in common: they are both thriving businesses. Philips has a market cap of around 27 billion, which, while nowhere near that of Apple's, is not a lemonade stand, either. You might know the Philips name from their consumer electronics business, or maybe their electric toothbrushes, but they also make CAT scanners and radiology equipment. In fact, technology from Philips has demonstrably saved lives, which is more than you can say for the Apple Newton, which merely scheduled me for grunch with my bother-in-law.

There is a clear lesson here in this recent move by Philips, and it's one that any business can learn from, not just those with $500 billion market caps. Steve Jobs predicted the futility of Blu-Ray in 2008. He wasn't wrong. Also true: Best Buy sold a crapton of Blu-Ray players from 2008-2012. See, there are two ways to bet on the future: one, the current Apple way, is to formulate one vision of a future and attempt to conjure that vision into reality through superior design, engineering and marketing skills. That worked for them in the latter years of Jobs' tenure. There is also another way--the portfolio approach.

Transitional technologies like Blu-Ray, Minidiscs and (back in the Dragon's Lair days) Laserdiscs were all doomed to eventual failure. Duh. But their death throes lasted long enough for some companies to generate a ton of cash flow selling those corpses for years. In effect, Blu-Ray players are like interstate restaurants--they are waystations; brief respites on the journey to where you'd rather be. Sometimes those journeys take longer than you think they will, and you end up eating a taco at Exit 42 even though a 5-star dinner awaits you in Manhattan. You know you're going to get better food at the end of the journey. But the journey is a long one, and everyone's gotta eat.

The danger in the kind of thinking that compares Philips with Apple here is the danger of the false choice: simplistic thinking boils these sorts of strategies down to either/or scenarios. Smart thinking deals with both/and. The smart money knows that Blu-Ray is a bag of hurt, AND recognizes that people are still gonna buy a ton of disc players on the way to that eventual but impossible to schedule disc-less future.

Think of it this way: before Henry Ford democratized auto ownership with the modern assembly line, I don't think smart people thought cars were a passing fad. Cars were inevitable. But there were still a lot of buggy whips sold on the way to that destination. And for the smartest companies, selling those buggy whips financed their bets on what that future would look like.

And that is what, for some companies, the cash flow from those transitional technologies enabled--the financial ability to respond, smartly, to where the puck was going. What Philips announced was not an admission of failure--far from it. It was an acknowledgement that they had milked that particular cash cow as long as they could, and were wisely exiting the industry before it became cash flow negative. Really, is there any better lesson to learn about "market timing" than that?

Philips may not sell another DVD player for all eternity, but the cash flow they generated from this transitional technology was just as much a bet on the future as Apple's "all-or-nothing" bets are. The difference is that the bet Philips made didn't depend on any one future occurring. By building waystations--blu-ray players, MP3 players, headphones, etc.--they were just betting differently. If tech is a big game of roulette, Apple pushed in all its chips on one number, while Philips spread its bets, with the anticipation that one or more would pay off in the short term to finance its long term vision.

The only stupid thing Philips could have done here was to keep making Blu-Ray players in the face of dwindling cash flow. They didn't do that. Instead, they made some cash opportunistically and got out when the market indicators told them to--liquid, and ready to fight another day.

The portfolio approach is a viable and important business strategy for the rest of us. Having "waystation" products or technologies is not a sign of weakness or an inability to predict the future. In the best examples, it's an acknowledgement that the future may or may not happen when we think it is going to happen--and the most important thing you can to to greet that inevitable future is to still be in business and in a financial position to capitalize on it. The "Apple Way" is to be right about how and when that future arrives. Waystations allow you to stay in business when you guess wrong.

So, I suppose what I am suggesting is this: formulate your vision for the future. Make no small plans. But don't rule out building a few exit 42 taco stands or Blu-Ray players to profit from the present, so you are ready to cash in on the opportunities of the future. Build your waystations, and find the buggy whips that will enable the jetpacks.

Or you could just "be like Apple."