Thursday, March 31, 2005

The Commoditization of Everything

"The Commoditization of Everything" by Oren Harari

My friend recently told me that Frank, his 78 year old father, is thinking of switching high speed internet providers. Currently Frank uses Comcast, but a friend of his told him about Astound, a relatively new little company based in Minneapolis which provides cable service in only three communities, one of which happened to be the California town Frank lives in. As Frank put it, Astound’s monthly rates are significantly less than Comcast’s, his friend’s experience with it has been zero-defects thus far, and the company’s quick personal (no phone-hell) responses to his own inquiries impressed him. Frank is seriously thinking about giving them his business.

Think about it: here’s a huge company called Comcast, big enough to have purchased the entire high-speed business from AT&T, enjoying deep pockets, marketing muscle, scale, scope, and the talents of who-knows-how-many great business minds. And it’s probably going to lose Frank’s business, as it has already has lost his friend’s business. And all the deep pockets and marketing muscle won’t help, because basically—high-speed internet is becoming a commodity. That is, from customers’ perspectives, at first high-speed was a “wow!” sort of experience, especially when compared to 28k or 56k modem. But now it's becoming an undifferentiated, routine service offered by many vendors, and accordingly, driven primarily by lower prices with even lower margins.

Comcast is facing a significant problem that many companies are facing, and one which Astound will one day face--and one that your company will too. It’s the commoditization of everything. And in today’s environment—buffeted by extreme globalization and technological advance which makes the world smaller and more transparent-- the speed of commoditization has markedly accelerated.

The solution for Comcast boils down to this: Companies that are able to continually, innovatively de-commoditize their products, services and value propositions are the ones that will enjoy higher margins, higher customer loyalty, and higher returns for shareholders. To justify its humongous costs and girth, Comcast will, for starters, have to create new zero-defects markets of "interoperability"--making pcs, cellphones, PDA's, TV top boxes, video game consoles, digital cameras and digital music players compatible with each other and easy to use. Comcast can't stay still and simply rely on scale and scope.

Starbucks gets it. Starbucks originally transformed a lowly commodity (a coffee bean) into a high-margin, high-growth, high-buzz value proposition. But now designer coffee is becoming commonplace and one can order a good cappuccino latte at any hole-in-the-wall eatery. Perhaps this reality explains Starbucks’ increasing emphasis (and apparent success) on developing new, rich elements which enhance the customer’s experience—like constant product and menu innovations, debit cards for quicker point-of-sale transactions, WiFi environments, MP3 music and CD burning capacity, and the like. Rabidly loyal customers keep on paying through the nose, because they continue to perceive genuine and evolving value for what they’re paying.

Two quick questions about your company: One, are you admitting that whatever your company is currently providing is already becoming a commodity, or will soon? Two, are you planning and doing whatever it takes to leap beyond that inevitable commoditization?


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