For this special business edition, WIRED goes inside three very different corporate cultures: an entertainment hit factory, a manufacturing giant and a gaming phenomenon. To introduce the section, guest writer Saul Klein examines how bold thinking can transform both upstarts and incumbents.
For large, long-established businesses with scale and assets, the digital era can seem like a terrifying unknown -- like being afraid of the dark. For years they've heard how technology-driven disruption is on its way, that big institutions are doomed if they don't adapt (and even, probably, if they do) and that a wave of agile, innovative startups are poised to eat their lunch by offering the same products and services, more efficiently, at a fraction of the price. When described in such existential terms, it's little wonder that, according to services giant KPMG, 74 percent of CEOs worry about new entrants disrupting their business model. But should they be fearful for the future?
The main reason those who run legacy businesses are worried and confused is that we have, seemingly overnight, found ourselves living in a transformed world, where -- thanks to the irresistible rise of the smartphone -- the total addressable market for products and services stands at 2.6 billion today, rising to 6.1 billion by 2020. To organisations geared to deal with smaller audiences, defined by territories, the notion of a marketplace of that scale is unsettling and disruptive.
It shouldn't be. The size of the potential audience should be viewed as liberating, particularly for those willing to adapt. The Guardian Media Group (GMG), for example, started life in 1821 as The Manchester Guardian, in the wake of the Peterloo Massacre. Initially addressing Manchester and its environs, the newspaper slowly grew its readership from regional to national and international, when in 1959 it dropped "Manchester" from its title and, soon afterwards, moved to London.
But with the internet, which The Guardian embraced relatively early, the group evolved again, rapidly transforming its outlook into one that encompassed the English-speaking world. If that consists of at least 1.5 billion people then The Guardian, which in June reported 129 million monthly unique visitors, is still only reaching a fraction of its potential audience. With an opportunity to reach at least five times its global readership, the question for The Guardian -- and other media companies -- becomes "How do you rethink editorial/creative and commercial realities as you grow?" True, the group still loses around £20 million a year, but GMG has adapted well to the -fundamental, -counter-intuitive (to traditional business thinking) rules of the networked economy: first, grow your audience; next, deepen engagement; and only then will revenues follow.
Replacing legacy business models with the principles of the networked economy requires companies to reappraise, by orders of magnitude, not only who they can serve, but the range of services and modes of delivery that are now possible. Many are baffled by the scale of businesses like Google, Facebook, Twitter and Snapchat, which have audiences measured in the hundreds of millions or billions, with levels of engagement that have people returning multiple times a day.
The fact that all of these companies built up the first two metrics (audience and engagement) before generating significant revenues doesn't make them any less confusing to a traditional business, founded on the model of restricted distribution; particularly when only a tiny faction of their audiences actually pays to use them.
For incumbents, the principal lesson from the level of success achieved by the likes of Apple, Google, Facebook, Cisco and Uber -- all of which have market caps of between $40 billion to $745 billion (£26bn to £477bn) at the time of writing -- is that you have to be prepared to embrace extraordinary risk. All of the above are venture-capital-backed businesses themselves, and adopting the model of "venture economics" is another way for large, legacy companies to navigate their fear of the dark.
Given the scale of the distribution opportunity today, as a VC you're essentially saying to almost any company you invest in: "Show me what you can do for six billion people." Uber, for example, first solved the unit economics of one city (San Francisco), followed by a second (New York) -- and from there set out to replicate the model for more than six billion smartphones globally.
In practice, for traditional firms this translates into taking the long view, and accepting that the 62 percent of the capital that they'll get no return on (because 62 percent of the most successful VC investors' capital has a 1x or below return), enables them to take a level of risk that is a fundamental requirement for creating blockbusters. Similarly, just as VCs have given startups licence to invest large amounts of capital in pursuit of longer-term goals, so incumbents must get used to the notion that building audience and engagement will necessarily incur revenue losses.
In the world of corporate innovation, there are few better examples of venture economics at work than Apple. When Steve Jobs returned to the company in 1996, Apple was on its knees, with hundreds of products in varying stages of development. He stripped away the complexity to focus on projects with breakout potential. The "Apple approach" is to allocate +/- 80 per cent of capital and resources to existing blockbusters - vital for cash flow, brand and maintaining audience -- and then assign the remainder to "moonshots", the vast majority of which won't pass the napkin-sketch phase. But that's immaterial, when your moonshots have included the iPod, iPhone, iPad and now the Apple Watch.
A closer-to-home example is British Gas and what it has achieved with Hive Active Heating. In a still fledgling market, its smart heating product, launched in 2013, is already the UK's leading connected thermostat. British Gas, whose earliest incarnation was founded in 1812, did two things to seize the opportunity. First, it partnered with a startup, AlertMe (in which I was an investor, as a then-partner at Index Ventures), later acquiring the company. Second, it created a new division called Connected Homes, housed in separate offices in the heart of Central London, and gave the team end-to-end control of technology, product and marketing, to bring Hive to market -- evidence, if it were needed, that a 200-year-old company can move at the speed of a startup.
Within the startup world, we always like to believe, hubristically, that we're smarter than legacy companies. The truth is rather different. As argued in Reverse Innovation, by Tuck School of Business academics Vijay Govindarajan and Chris Trimble, they may call innovation different things, but giants like GE, Procter & Gamble and PepsiCo know exactly how to do customer development and build minimum viable products.
When we talk about iconic disrupters today, we usually mean the likes of Apple, Google and Facebook. But those companies are less than 40 years old. By contrast, institutions like Barclays (325 years old), The Guardian (194), GSK (c170), and Marks & Spencer (131) have all faced down genuinely existential threats, including two world wars and the great depression of the 1930s, and adapted to world-changing technological breakthroughs, such as the emergence of electricity.
In our rush to laud the disrupters we have perhaps forgotten the ingenuity and innovation required to prevail across multiple generations -- while, crucially, adhering to the core values that inspired greatness in the first place. The reality is that in embracing the fundamentals of the networked economy and the rules of venture economics, truly great companies have not just been reinventing themselves throughout their existence, but protecting their futures against the darkness too.
Saul Klein is a founder (LoveFilm, Seedcamp, Kano) and entrepreneur (Skype), with over 20 years' experience starting, building, exiting and investing in businesses globally. Most recently, he was a partner at Index Ventures.
This article was originally published by WIRED UK
