New Netflix price surge. Should Netflix livestream sports?

Yesterday, Netflix announced their new price structure. Per WSJ:

Netflix will increase the price of its most popular plan 18% to $13 a month from $11. That plan allows users to stream from two screens at the same time. The most basic plan, which allows a single stream in standard definition, will go up one dollar, or 13%, to $9 a month. The new rates will go into effect immediately for new customers and be applied to the accounts of existing customers in the next few months, according to a person familiar with the plans.

The increase in price is not really surprising in my opinion. Netflix has been investing heavily in original content. WSJ reported that the investment would amount up to $12 billion this year. Netflix needs to enlarge its war chest and the additional revenue from the new prices will help with that. It doesn’t hurt that Netflix has some wriggle room to up its prices, according to Priceintelligently. Additionally, as some content owners such as Disney or Warner Media plan to launch their own streaming services, Netflix will likely have to pay more to retain popular shows or movies.

But there is only so much room for increase in subscription prices. If Netflix pushes too hard, they may lose viewers. Consumers will have more options with the arrival of Disney, Warner Media and NBC, in addition to major current players such as HBO, Amazon, Hulu and Showtime. A normal user should not be expected to pay so much for subscriptions every month. Netflix may need to find another area to grow its user base and revenue.

Should Netflix go for sports?

Sports is a hugely important part of our life and hence it is important to businesses that want our money and attention. To see how important sports become to social media and streaming services, here are a few headlines:

The last headline is very interesting. Coming from Vietnam, I can tell you that football (as millions of people in the world outside the US call it) is a religion in my country and hugely popular in that region. Premier League, in particular, attracts football fans in Vietnam in a way that few leagues do. We have to or at least, used to pay for cable TVs to be able to see the games. The service is subpar, and the fees are slightly cheaper than a Netflix subscription. Vietnamese users pay around $8-9 a month for a Netflix subscription while a cable subscription costs around $5-7. If the fans can stream games from their laptops/computers or project games onto TV through Netflix, it will be a game changer. Fans will strongly consider the service, especially with hours of shows and movies as well.  

But does it make sense for Netflix to do so from a business and financial standpoint? Let’s run a scenario.

Together, Vietnam and Thailand have 165 million people in population. The total number of Netflix subscribers in the two countries are just 500,000 (300,000 for Vietnam and 200,000 for Thailand). If we just assume that 40% of the two countries’ population are young from 15 to 40 years of age, fitting the target demographic, I presume, for Netflix, the Total Addressable Market (TAM) is around 66 million for Vietnam and Thailand. I don’t have the number of subscribers in Laos and Cambodia, but if we apply the same assumption to those countries, the TAM is 9.2 million potential subscribers. For the four countries, the TAM is around 75 million.

If a subscriber is worth $8/month and Netflix gains around 100,000 subscribers a year each in Vietnam and Thailand, as well as 50,000 each in Laos and Cambodia, the total revenue can be around $230 million in 3 years, $30 million less than what Facebook pays for its exclusive rights. Also, the total number of subscribers should be at least 1.7 million, barely a fraction of the TAM mentioned above (75 million).

If we increase the subscription price by $1 in the original scenario, the revenue will be around $259 million, almost as much as what Facebook paid.

If the number of subscribers in that scenario goes up by 30%, the revenue in 3 years will be around $300 million and the subscriber count in 4 countries for Netflix will be around 2.06 million, still a small fraction of the TAM.

Of course, all of the above are assumptions which can be way off the mark, but to me, it seems that it is an opportunity there for Netflix. Besides the financials, gaining more subscribers can make Netflix more valuable due to network effect and give them more data about the users. Netflix paid $100 million to keep Friends on its network for a year. Given that amount and the potential upside of providing sports to international markets, I believe Netflix should give it a try. Plus, it can’t afford to see competitors add sports to their selection without doing anything.

I admire the consistency and focus of Netflix. They have been very consistent on their long-term view as a video streaming service. Nonetheless, the situation may necessitate some changes in the future.

Informative newsletter and tech sources

Where we get information matters. As there is so much information/noise floating around, a good curator and/or a great content provider has become increasingly important, at least to me. Here are a few of my go-to sources every day. Keep in mind that these are related to business and technology, two areas I am invested in. 

CBInsights

It offers deep-dive reports into technology and business. There are many free reports that can be downloaded or consumed immediately on site. What I like about CBInsights is that their researchers really roll up their sleeves in their work and offer great insights, sometimes from a surprising angle. Their use of visualizations such as tables, graphs or mind maps is pretty rad as well

The Hustle

It’s a newsletter on business and tech. Apart from offering what news you should know at the beginning of a day, The Hustle has a great team of copywriters. Their witty and funny writing is what hooks me up. The newsletters don’t have the same level of deep investigation as CBInsights does, but if you want a skim of what is going on out there in business and technology, it’s pretty good. Oh, if you want to do some B2B marketing, it can be a promising channel. I have seen Airtable, Microsoft and Salesforce sponsored content by The Hustle

Morning Brew

Same as The Hustle. I consider The Hustle a tad better & funnier. Still it’s worth giving Morning Brew a try

Ben Evans newsletter

His newsletter is on a weekly basis. It’s a collection of articles in technology and business that he thinks are important. 

Ben Thompson’s Stratechery

It’s a highly regarded website on strategy and technology. There is a paywall to his daily content, but his weekly content, I believe, is free. You will learn a lot from Ben as many others, including some famous names in technology, do. 

ARK

A friend suggested this one to me a few weeks back. I am still pretty new to it. But if you are a fan of cryptocurrency, AI, machine learning, industrial innovation…it is worth a read

Coworking space + Managed Services?

I have been thinking about the prospect of marrying the two concepts: coworking space and managed services?

Coworking Space

Coworking space shops help individuals, startups and even big corporations operate without worrying about renting office, meeting rooms, equipment, or Internet. Members can also rely on these shops for tasks such as mailing, forwarding or receiving guests at reception desks. The main premise of coworking space is to help businesses focus on what matters by outsourcing low-ROI tasks to the host and to get off the ground with as low a fixed cost as possible. Moreover,  there is another marketed value proposition that coworking space facilitates random interactions and access to like-minded individuals, potential team members or investors. It may be true. Some try to offer added values such as workshops or consulting. Nonetheless, such propositions are commoditized now. There is no differentiation among coworking space providers. If we follow the continuum of resource sustainability by Jeffrey Williams, coworking space seems to fall into fast-cycle bucket. In that bucket, the only way to compete is fast time-to-market

Continuum of Resource Sustainability

Source: How sustainable is your competitive advantage? – Jeffrey Williams

Managed Services

Think about managed service providers as your extended IT department. Their primary premise is the same as coworking space providers. Managed service providers help companies to manage mundane & low-ROI tasks such as patching, updates, monitoring, installing and to start a business with a low CAPEX. Instead of spending a lot of money and time procuring hardware and setting up your own environment, you can go to Managed Serviced Providers and everything can be ready in a matter of hours or a day. Additionally, your developers don’t have much experience in migrating to public cloud? These providers will assist you. You want your developers’ valuable time on real innovation and coding instead of managing public cloud environments? These providers will do so for you. While these public cloud providers have incredible global footprint and a variety of services, they don’t necessarily offer great customer services. Unless you are willing to pay for technical assistance packages that can run up to $15,000/month, there will be little hand-holding. That’s why managed AWS market has a CAGR of 13.9%

Why not combining the two?

The two services share the same primary premise. Most startups and businesses nowadays leverage IT to gain competitive advantages and meet customer needs. Chances are that many startups or small businesses at coworking space leverage Internet and the cloud extensively. If coworking space shops can bundle managed services with their memberships, it will create more value and appeal more to members. If a coworking space can have at the minimum one or two certified Azure or AWS engineers in-house to help guide startups with their infrastructure, wouldn’t that be something of value?

In my mind, it makes sense to offer an infrastructure-level service that every Internet startup will need. Eventually, if enough coworking space providers offer managed services as well, there will still be no differentiation. The keys are time-to-market and the art of bundling and pricing. It’s quite intriguing to not see many coworking space shops do so. Perhaps, I am missing something. Or not.

Sinemia and MoviePass

If you live in the US and are a fan of watching movies at cinemas, chances are that you have heard of a company called MoviePass. It is famous for its unprecedented business – $10/month for one ticket every day. The company has suffered a great deal financially and operationally for its business model, including an urgent financing round to keep its servers running, downtimes, unimpressive customer services and frequent changes to its pricing.

In the subscription world, the mandate is that once a user subscribes, the more the subscriber consumes services/content, the better and marginal cost is trivial. Take Netflix for example. After a successful subscription, a user can watch as many movies and for as many times as possible. Netflix takes in minimal marginal costs (probably for servers, storage and networking) for every time a movie is watched. In the case of MoviePass, it’s not the case. Every time a ticket is dispensed, MoviePass pays the cinemas either the full amount of the ticket or the majority of it. Slap on it the cost of marketing, financing and operations and the business loses money.

How does MoviePass make money in that case? I suspect that MoviePass prioritizes growing its user base to the point that it is big enough for the company to convince cinemas to cut its a much better deal. Advertising can be another avenue.

The failure of MoviePass is also from the customer segmentation perspective. We moviegoers differ from one another in our consumer behavior. Some go to cinemas every week, some go for only blockbusters and some only do so once in a while. The difference in behavior requires multiple offerings from MoviePass. The less frequent users don’t feel motivated to keep a subscription every month. Movie junkies who go as many times as possible will bleed the company dry. There are some users who look at the release schedule, subscribe for only one month in which I can watch movies I like and then unsubscribe, myself included. Such users don’t offer much value to MoviePass as they don’t, ironically, consume enough to contribute to MoviePass’s value as a company.

The “one-size-fits-all” model that MoviePass is famous for doesn’t take into account any user behavior. Unsurprisingly, it failed.

Sinemia today announced an unlimited plan. For $30 bucks, users can get a ticket every day and advanced bookings are allowed (not possible with MoviePass). The difference obviously is a higher price tag that comes with the plan. I suspect that even at $30/month, it is still a money-losing deal for Sinemia but it is less damaging than a $10/month plan. Moreover, Sinemia has 5 different plans now. Each appeals to a different segment of users.

Sinemia

To discourage users from unsubscribing early, Sinemia enforces an initiation fee for monthly-based plans. That way, users care more about the subscription and are motivated to stay longer. If users unsubscribe, Sinemia gets more revenue in return. If users want to avoid the initiation fees, the only way is to be locked in for a yearly bill.

Even though Sinemia has multiple plans and higher pricing points, Sinemia will try to enlarge its user base and leverage it for a better deal with cinemas. What I think will be appealing to cinemas is that Sinemia can prove that it attracts moviegoers in unpopular times during a day. Movie slots are perishable. Once it goes by, there is no way to recover it. Hence, cinemas would be interested in putting butts on their seats during low-traffic hours. If Sinemia can prove that it is able to deliver that, its position will be stronger. Anyway, its business model is saner than MoviePass’.

 

Apple Event

I have always been a fan of Apple, but the admiration for the company grows every year.

The company often draws criticisms such as lack of innovation, predatory practices and pricey products. While some of their practices such as expensive accessories or making features obsolete after only 2-3 years are good points (I am on my 3rd Mac charger that costs $85 more or less each), I wouldn’t do it any differently if I were in Apple’s management team. The same goes for high prices. If my company had such a degree of inelasticity (demand isn’t much affected despite higher prices), I’d do the same. Plus, Samsung increased the price of its flagship phone to $1,000 too but it hasn’t sold as well as its Apple counterpart. Granted, Apple is rarely the first to introduce stuff. They prioritize in doing it right and I like that approach. What’s the point of introducing new stuff if it doesn’t work well? Ask Samsung 7.

Instead, innovation from Apple is the ability to deliver more performance and add more features to a small device year after year. Imagine the yearly tasks of coming up with the design of the hardware, getting it right so that customers are so happy, deciding on what features to add, manufacturing the chips, rewriting the software, integrating the hardware and software, planning the distribution, strategizing the line-up to avoid cannibalization…It sounds exceedingly complex and difficult to me. The result? They are the first American company to reach a trillion dollar market cap. Their average selling price for phones increased after the introduction of iPhone X. Revenue and profit keep rising. And customers are happy. I have a mid-2012 Mac and an iPhone 5S. They are still working well and I don’t imagine I’ll come back to Windows or Android any time soon.

This morning, Apple did it again with a plethora of updates to their Watch and iPhone. A lot of new features and performance are added to small devices. Some enhanced products come at more or less the same price as last year’s new-then arrivals. I was impressed by the Apple Watch. It is now FDA-approved and can detect irregular heartbeats, ECG as well as falls. At this rate, I’d not be surprised in a 3-4 year time that their Watches will be instrumental to people’s health tracking and safety.

I think Apple is a brilliant example of focus, product-centric design, strategy and execution.

Must-read book on business & strategy

I just finished the book “Subscribed: Why the Subscription Model Will Be Your Company’s Future – and What to Do About It”. It is a fascinating book that explains clearly and well the importance of a customer-obsessed subscription business model nowadays.

I have been to Strategy classes at universities. The classes usually involve academic lectures and outdated case studies. Although hindsights are always great and strategies can only make sense after a while, the technological advances (cloud computing, machine learning…) have changed significantly how companies interact with customers and how customers want to be served. It is of little value to analyze what companies did 15 or 20 years ago (I used to be asked to analyze Google while it was still competing with Yahoo in 2003). The principles and theories of strategy remain the same, but the landscape under the influence of technology has changed dramatically. For instance, nobody is installing software by buying a disk any more. Software is delivered over the Internet now mostly in the subscription-based model. Lectures taught by professors at Ivy League and certificates can be accessed online at MOOC. With a small fee, guys can receive shaving blades every month. The days of having to buy hardware for IT services are over. IT is now delivered over the cloud and on the pay-as-you-go basis.

This book details the underlying factors contributing to the meteoric rise of subscriptions and what it is like to be customer-obsessed. It also discusses the ramifications of adopting subscription-based model ranging from HR, Marketing, Sales and organizational structure. It is choke full of successful subscription companies. If you are interested, you can do a separate study on each one.

I believe this book should be a must-read for college students, whether you major in business or not. If you have sometime to waste, I highly recommend it.

Netflix

I am fascinated by the rise of Netflix. It’s one of the strongest performers on the stock market for the last few years. The brand is one of the few that became verbs such as Paypal or Google. The company didn’t meet the expectation from analysts the last quarter and its stock price went down significantly. Doubts were raised about the company’s outlook. I wanted to take a look to see if some of the doubts were exaggerated.

Netflix model

Netflix is booked to spend a whopping $8 billion on original content this year alone. Some may argue that it’s an incredible amount to spend on content, but it fits right in Netflix model.

Netflix model

Since Netflix originally licensed content for its catalogue, moving to production of original content was to hedge the risks of over-reliance on the legal owners of shows and movies. Apart from the less popular DVD segment, Netflix has only one primary revenue stream – subscriptions with no ads – there are two ways to increase revenue and profit:

  1. Enlarge the subscription base
  2. Increase the subscription fees

The two approaches are not mutually exclusive. In fact, Netflix has seen tremendous growth in subscriptions and increased its fees (see below). It wouldn’t make sense to expect the company to focus on the first only and to neglect the second approach. To convince people to sign up and pay more; however, Netflix has to offer sufficient values in return. It means that the user experience has to be improved constantly. There are several ways to do so:

  • Better recommendations
  • Excellent user interface
  • Network effect
  • Satisfaction with content

While the work on better algorithms, user interface, infrastructure to deliver content timely and advertising to sign up more users can result in significant investments, the majority of Netflix’s expense will go to its content library.

A war for our free time

To feel that their investment is worthwhile, my theory is that users have to spend as much time on Netflix as possible. In other words, Netflix is out to consume our free time. Let’s look at a break-down of our free time:

Time breakdown

On average, let’s say we spend 8 hours at work and the equal amount on sleep and meals every day. That leaves us with 8 hours of free time which has to accommodate all kinds of activities, including but not limited to, the list on the right hand-side. Granted, some of us may spend less time on sleep and meal or no time on work during the weekend. On the other hand, we can argue that some may have to work long hours and spend much time on meals such as executives or those in tech or Wall Street. For the simplicity’s sake, let’s assume that is on average the breakdown of a day.

For any minute of our time, it is exclusive to one activity only, in most cases. Can you read and watch Netflix at the same time? Or listen to music while watching a show? The exception is when you watch TVs or Netflix with your family/friends or while travelling.

In other words, 8 hours of our free time is a precious real estate that service providers want a piece of and as big a piece as possible. To compete for our free time, Netflix has to compete with sports, TVs, music streaming services such as Spotify or Apple Music, news, friends and family as substitutions; all of which are to some extent indispensable in our life. On top of that, the direction competition includes HBO, Amazon Prime Video, YouTube Red (or YouTube Premium), Hulu, the upcoming Disney streaming service “Disney Play”, and Apple.

A pretty tough competition. To beat the direct rivals and substitutions, Netflix must keep regularly producing hits such as House of Cards, Orange is the Black or Stranger Things. A tall order. In the meantime, competition obviously doesn’t stand still. They understand the value of quality shows and invest heavily as well.

There is a sentiment that the entertainment service is big enough that it doesn’t have to be a zero-sum game and that multiple players can succeed. The issue; however, is that there is a limitation on free time and disposable income on subscriptions from the user perspective. If you can only afford $30-40 a month for subscription services while there are so many options such as news (WSJ, Economist…), music, food, TV and content streaming, will you pay for two streaming services a month?

Average spend on subscriptions

What’s next for Netflix?

The below screenshots are from the 2017 Annual Report:

Domestic report

International report

For domestic and international segments, Netflix has seen growth across the board from 2015 to 2017 in memberships, revenue, average monthly revenue per paying membership and contribution margin. It means that they didn’t expand their membership base by discount. The strategy seems to have been working for the past 3 years at least.

For the first half of 2018, revenue increased by 40% and operating income rose by 236% compared to the first half of 2017. The last two quarters also saw Netflix pay less for content than it did in the same period of 2017. Operating income as % of revenue already increased.

H12017 H12018
Cost of revenues 66% 59%
Marketing 11% 13%
Technology and development 9% 8%
General and administrative 7% 8%
Operating Income 7% 12%

The net membership additions slowed down compared to other quarters. For a subscription business such as Netflix, it’s a valid concern. However, the financials still look pretty positive and it remains to be seen whether this hiccup will be a long-term issue.

Additionally, a study by PriceIntelligently revealed that Netflix has some cushion to increase their subscription fees even more.

PriceIntelligent 1

 

PriceIntelligent 3

 

PriceIntelligent 2

Netflix could increase their top & bottom line if they wanted to either by features or by country. However, I doubt that they would prioritize doing it. Everything seems to be working well for them as you can see from the financial reports. So why would they risk losing subscriptions for short-term gains?

In terms of customer satisfaction, a study by American Customer Satisfaction Index revealed that Netflix is among the top performers in the video-streaming service bracket.

Customer satisfaction

Summary

Things are looking positive for Netflix. Customers are happy. Popular show creators were signed. Nominations are flying in. Financials have grown. Netflix also has a lot of room for growth both in terms of subscription base, especially internationally, and prices. All signs point to a recipe for continued success in the near future.

Nonetheless, I am still concerned about the growing sizeable debt and the constant pressure of delivering hits. A lot of Netflix’s future success will hinge on its ability to feed users with reasons to sign up and stay. It’s not practical that Netflix wouldn’t have any hiccup in their content selection. In the model mentioned above, there is an assumption that Netflix’s increasing investment and show creators’ willingness to work with the company will result in more quality content. What if the assumption is incorrect?

It would be interesting to see how a year or even a few months without hits would do the health of the company. Then, we would see how much resilient the company is. Moreover, I’d love to see how many users re-subscribe again after cancelling their account. Even though the company is committed to being an ads-free streaming service of shows and movies for now, who’s to say definitely that they won’t change nor add more revenue streams to the fold?

The competition is going to get more difficult and there is no guarantee how the company will be. But the recent performance and the focus make me optimistic about the company’s health.

References

https://s22.q4cdn.com/959853165/files/doc_financials/quarterly_reports/2018/q2/FINAL-Q2-18-Shareholder-Letter.pdf

https://s22.q4cdn.com/959853165/files/doc_financials/annual_reports/0001065280-18-000069.pdf

 

Thought on VMWare Strategy

I want to share my thought on VMWare’s strategy on hybrid/multi cloud. Disclaimer: I owned a tiny number of VMWare and Dell Technologies stocks personally. As a student, the investment is just the skin I put in the game. I am doing this to share my opinion and see different opinions that you may have.

Software-defined data center

Let’s think about your phone for a second. Your phone, no matter how powerful or new it is, is limited in its storage. After taking enough pictures or videos, the phone cannot store any more data. You either buy a new phone with bigger storage or move the existing data somewhere, either to a hard drive, a desktop or the cloud (like iCloud in the case of iPhones).

The example shows the limitation of being coupled with hardware. Now, think about that from a corporate perspective. When a company accumulates enough data, its infrastructure will need to be upgraded and expanded. Ordinarily, new hardware has to be bought, in addition to the purchase of software licenses. However, the process of buying hardware is time-consuming and can be costly. On top of that, there will be effort spent on configuration, maintenance, patching and updates. All these mundane tasks take away attention of IT staff from developing applications and innovation. To move with speed in this age of data, corporations need to automate and rely less on hardware. Everything needs to be software-based.

Enter Software-defined data center (SDDC).

Software-defined data center is a growing trend in the technology. Simply put, it refers to  an architecture in which compute, storage and network are virtualized and delivered as a service. This video from VMWare does a good job on explaining the term.

Some of the benefits of SDDC include automation, quick provisions of resources, switch from capital expenditure to operational expenses and scalability.

Focus on hybrid & multi-cloud

For the cloud &SDDC to work, virtualization is indispensable and VMWare has been the leader in virtualization. Now that everything in a data center such as compute, storage or network is virtualized in SDDC trend, VMWare is in a perfect position to grow and dominate the market.

Each cloud provider has its own unique offerings and is suited for a particular set of workloads. There is no one-cloud-fits-all. Hence, the best cloud strategy for a corporation is to have a hybrid or multi cloud architecture, taking advantage of each cloud’s strengths. The diversity in cloud platforms may help with the workloads, but put pressure on the task of cost and operational management. It’s not easy to manage multiple platforms, especially when some of them offer complex pricing and services. Imagine that you are a purchasing manager taking care of many vendors. The diversity of vendors brings the best product/service in each category to the fold, but it also brings the headache of vendor management. The same goes with hybrid cloud and multi-cloud strategy.

Plus, security is a big issue nowadays. The hybrid/multi cloud structure requires even more focus on security than usual.

3-Set Venn Diagram-9

VMWare practically pioneered the virtualization of x86 servers. It had some success with the private cloud, but not so with the public cloud area. Realizing that it would be an uphill battle to compete with the likes of AWS, Azure or GCP, VMWare sold its vCloud (its version of public cloud) to OVH.

How has VMWare been doing? Here is a diagram that took into account their M&A and announcements in the past two years that I think are related to the hybrid/multi cloud trend

Blank Diagram (2)

By partnering with big public cloud vendors and divesting its own public offering, VMWare killed two birds with one stone. It avoided a head-on competition whose result was already predictable for VMWare. By partnering with AWS or IBM, VMWare could leverage their global footprint to sell their software. If corporations already used and loved vSphere and vSAN, why not making it easy for them to use such software on public cloud?

To make its new strategy more sticky to customers, VMWare, as the diagram shows, invests heavily into cloud management and security. I believe that it’s going to continue in the future. At VMWorld 2018, the company announced their initiative in IoT and blockchain, as well as their partnership with AWS on database. Regarding the new initiatives on IoT and blockchain, it makes sense to me. That’s where the industry is heading towards. If the foundation infrastructure is already there, the logical move is to offer companies with the tools and software to build blockchain & IoT applications to solve their business issues.

VMWare is not strong in database. Why not working with AWS’ Relational Database Service to complete the full stack?

All in all, I love what VMWare is doing strategically in terms of hybrid & multi cloud. I agree with what VMWare’s CEO said in the earnings call: “We believe no other enterprise software company is as well positioned as VMware. Customers are increasingly turning to VMware to partner with them to accelerate their digital journeys. Our interoperable cloud mobility, networking and security solutions form a powerful digital foundation for delivering the apps that drive business innovation and business success.”

 

My take on the Managed Service Provider business

I have been working for a year in a Managed Service Provider (MSP) in the Midwest. In addition to having had to read constantly on existing and new technologies from a water hose as a newbie to the industry, I have been looking for ways to help the company strategically. Below is my understanding of the industry so far, for those who are interested. Of course, the whole industry is a lot more complex than what I can describe. I am simplifying it so that one can get an overview of the industry

Stakeholders of the industry

Below are the three main stakeholders:

Technology Vendors

You must hear of these companies before. They are some of the biggest corporations in the world such as Microsoft, Amazon, Google, VMWare, Dell EMC, Oracle, etc…These companies operate at a ridiculously big scale and own proprietary technologies. Take for example Microsoft with Office365 or Oracle with SQL database. Players such as Azure or AWS also have vibrant marketplaces featuring third party services or solutions. In addition to the ability to offer a wide breadth of services and a low price thanks to their scale, these companies also have an army of marketing, sales, engineers and engineer staff, an important factor in closing deals.

The technology vendors strive to be a one-stop shop for IT needs. The presentation of information on their websites is complex and usually requires time-consuming investigation. Their support plan can range from the basic free tier to a high-end tier worth $15,000 per month. So if you want customized services or personal touch, it comes at a cost.

It is not a surprise that these technology vendors often close deals with big corporations as customers. Who could compete with their scale, ability to discount, marketing prowess and a wide variety of services? Of course, it would be naïve to think that these companies want to ignore the rest of the market. With limited time in a day; however, it makes sense that they focus on landing lucrative deals with the likes of Fortune 500 or 1000 companies, instead of smaller deals with SMBs or startups.

MSP

Consider MSPs as an extended IT team that is not on your payroll. These entities invest in hardware, software and IT talent so that they can rent them out to companies in need for IT services or expertise. MSPs partner with technology vendors for technologies, of course, and as a reseller. The vendors need MSPs to help distribute their products to smaller markets and generate more revenue. Even though tech giants have a powerful marketing and sales team, it wouldn’t hurt to leverage MSPs to distribute their products more. Additionally, I have seen vendors refer small deals to MSPs because the deals are too small for the vendors to care about or waste valuable time on.

Why do customers need MSPs? Lack of internal capabilities and streamlined IT vendor management.

Lack of internal capabilities

The lack of internal capabilities can come from lack of staff or staff not having the right expertise. Take mainframe staff for instance. COBOL engineers are retiring and the young generations tend to prefer learning newer languages to the old COBOL. The lack of mainframe engineers makes it very difficult for corporations to maintain and manage mainframes. It’s understandable that such corporations will reach out to external vendors for help.

Another example is “AWS managed service”. Do a quick Google search with keyword “AWS managed service” and you’ll see that a lot of MSPs offer this service to help customers get onboard with AWS. Why do customers need this service?

  • Their internal staff doesn’t know how to do it
  • They don’t have enough staff to migrate data to AWS

Support and recommendations on migration are significant in a decision to move to the cloud. MSPs offer a far more customized and personal service than technology vendors do. This is why customers need MSPs. Additional benefits can include discounts from MSPs due to their high status with tech vendors.

Streamlined IT vendor management

You need different vendors for different technologies. Managing 3-4 vendors may be bearable, but as the number of vendors increases, it will be a hassle in terms of procurement and vendor communication. Working with an MSP can help streamline vendor management. CIOs or IT team can now talk to only one account manager, instead of 4 or 5.

Customers

These are companies that need IT services to solve business problems. They can be startups, SMBs or top tier corporations from various industries such as education, healthcare, financials, manufacturing or media, just to name a few. Under each industry, there are different segments. Take healthcare for instance. Under it, there are hospitals, healthcare insurers, genome sequencings, SaaS startups, etc…Each segment has different business problems leading to different IT needs.

What influences an IT outsourcing decision?

Technology

Obviously, a customer can only buy from vendors that offer what it is looking for. For instance, if a customer is looking to renew IBM software, it will only be interested in vendors that can offer the renewal licenses.

Prices

If a product or service is significantly out of reach financially for a company, it just won’t be able to use it, no matter how much trustworthy the seller is or how badly a technology is wanted. There is no way that a luxury car dealer can sell a Ferrari to me simply because I don’t have even close to enough capital to buy one.

Firstly, a price war is slippery slope that usually leads to losses for every seller. A private and small MSP can lower prices to a certain extent. Bills need to be paid. Staff needs to be compensated and nobody is in business to make losses. Second of all, many MSPs don’t publish prices for a variety of reasons, making it difficult for a buyer to know if the quoted prices are cheap or not.

Trust

After technology and prices, trust is the other influencing factor. Every business transaction involves trust. A business chooses an MSP because it trusts the MSP with IT and business problems. So what constitutes trust?

Branding

People buy from whom they know. It’s just what it is. If you want to buy a car, your propensity is to look at the known car dealers first. It’s the same in IT. Buyers look for vendors that they know from PR, search engines, webinars, newsletters or whatever medium is involved. Buyers also look at signals of quality such as awards or certifications. Granted, the more known a certification or aware is, the more difficult it is for an MSP to get. It usually involves a required level of revenue and customer testimonials. As a result, there is so much that an MSP can invest in branding.

Referrals

If an IT decision-maker is referred to a vendor by his close circle or business peers, that vendor will obviously see its chance of landing a business rise significantly. The implication is that MSPs have to deliver what they promise to every single customer, hoping that happy customers can bring in more businesses in the future.

Direct experience

Obviously, what can beat your own experience with a vendor? A $50,000 project can lay the trust foundation for bigger projects. So, if you have existing clients, hold on to them as long as possible!

How can an MSP compete?

If you look at technological offerings, prices and trust, big companies technology vendors mentioned above obviously have an edge over the rest. It is particularly more overwhelming in lucrative contracts. Who can compete with AWS for a $10 billion federal contract? Who can compete with them for contracts worth millions of dollars with Fortune 500 companies? Which MSP can compete with AWS for hosting contracts with the likes of Netflix or Spotify, which run global operations?

From my perspective, in addition to smaller referral deals from technology vendors, MSPs can generate revenue in the market for small and medium-sized businesses. That’s where personal touch and customized services carry much more weight. The key is that MSPs should not position themselves as a direct alternative to big technology giants. The narrative won’t be reliable and connecting with customers as it is virtually impossible for an MSP to be on the same level as AWS or Azure. By positioning themselves as a supporting cast that offers value-added services, MSPs can win deals in smaller markets and avoid going head-on with big technology behemoths.

Every MSP should know that and now, the question becomes: “how can one MSP compete against its peers in smaller markets?”. Let’s look at three main competitive strategies proposed by Porter

Porter

As mentioned above, cost leadership may work for a few select MSPs, but overall it is not a sustainable strategy for an average MSP. In terms of differentiation, since every MSP has arguably the same access to technology vendors through partnerships, the technical differentiations may not be significant. Unless one vendor can control a majority of engineers with special skillsets such as COBOL professionals, technical differentiation is almost out of question in the long run.

The other option is Focus. I believe that an MSP needs to be focused on a select segment where it can use its strengths the most. For survival and growth. By focusing on one particular segment with specific strengths, it will be much easier to sign clients in that segment. Once it establishes its credibility and trust, the snowballing effect will allow it to approach dominance in that segment. The dominance will offer the MSP the foundation financially needed to branch out to other markets. Remember the 80/20 rule? An MSP can get 80% of its clientele from its focus segments and 80% of its profit from the other 20% of its clientele, from other segments.

In summary, I believe that an MSP should adopt the Focus strategy to be competitive and to grow. Avoiding an “Us vs Them” narrative against the giant technology vendors is important. I hope that by now, I should give you a quick overview of the industry with my current understanding. Of course, it is more complex with a lot of nuances. I think it is an interesting industry worth studying with a lot of growth in the future as businesses rely more on IT to generate competitive advantages.