Gorilla Game concepts applied to CD e-tailing.
I have been asked to repost this on this discussion group.
Comments welcome.
1. There needn't be a Gorilla for the book's arguments to apply.
The key contribution of the book is not really the concept of the
Gorilla. There doesn't have to be one to generate return. The key
concept is that Wall Street is poor at valuing hypergrowth
candidates.
For example, suppose a new market is identified that is widely
tipped as likely to grow 100-fold (not a trivial task to determine
- one of many non-trivial, non-predictive tasks in the book) and
there are four players not all of whom will perform well but who all
appear equal candidates for success. Wall Street does not value all
of these stocks at 25 times their worth based on current earnings as
it should, because this seems like a major over-valuation.
If the market grows as expected, the sum total of the return on an
equal investment in all four will reflect the degree of original
miscalculation by Wall Street.
All these competitive arguments we hear about N2K are good examples.
They apply to all of the CD e-tailers - but not all of them will
fail. Hence looked at individually, they all appear too risky to
Wall Street investors to consider valuing any at their probabilistically appropriate price.
It's possible all of them will succeed equally well, in which case
the Gorilla Game investor still wins if he or she hasn't jumped to
premature conclusions about who the Gorilla will be.
2. The beauty of hindsight
Much of the book's need for judgement is easy to satisfy in
hindsight but significantly harder in real-time. For example, how does a Gorilla Game investor know when it's time to sell the Gorilla?
Which bad news should be believed and which shouldn't? As the
authors acknowledge, there are doomsayers at the door most of the
Gorilla's life. I think a better answer to this one is, sell when
you've made a whole lot of money, and/or there is notable
deceleration in the whole domain.
Some of these judgements are just not considered in the book and
involve their own risks that should be factored into valuation of the
domain.
3. The Gorilla Game concept applied to CD e-tailing
The Gorilla Game wasn't really designed for this type of domain.
However, the key property of hypergrowth still applies.
It is not as easy to see how a Gorilla in this domain could assert
itself. Yet it is possible. Consider a successful player in this
space. It would have very high revenues - perhaps $150 million say.
Its margins would be higher than new or smaller players because it
has a larger customer base who are cheaper to service and spend
more per head. It would use a whole range of methods to keep this
installed base : frequent buyer promotions, priority delivery, lines
of credit, e-trading stamps with other e-tailers and ones that haven't
even been considered yet.
Now suppose a new small player started gaining market share through
price discounting, strong marketing campaigns or a better service.
A Gorilla could duplicate the service, buy out the competitor and/or compete far more effectively in a price war due to its larger margins
by bleeding the competitor cash-dry.
Of course, this argument does not hold so well for the large existing
brick-and-mortar retailers who have deep pockets and an established
brand, who will start to take the net seriously when they see the
credible revenues of these new online stores and decide to create an
online presence. (Some already have e.g. Tower Records) Remember
right now, e-tailing is still a small fraction of all record sales.
The issue for them is whether their existing brands will automatically
translate into online brand or whether they will need similarly
large expenditures to achieve Gorilla margins.
4. Who are the players right now?
The most notable public companies in this domain are N2K, CDNOW
and Amazon. None of these distinguish themselves as the Gorilla,
should there be one, at this point. CDNOW is taking a more cost-effective, less frills but slower approach. N2K is burning cash at
breathtaking rates but doing a fine job at building presence. Amazon
has the brand and the cash but are probably more likely to adopt a
CDNOW style marketing approach.
If I had to pick a Gorilla in this domain, I would pick N2K merely
on the basis that its revenues are likely to grow the fastest
because of all the cash its burning in marketing. N2K also has the means of increasing its gross margins that other don't and because
it is prepared for new forms of music delivery. However, I would also
consider, at this point at least, N2K as having the highest
probability of failure.
I expect that when CD e-tailing grows to a credible level to challenge the major CD retailers and distributors, you will see
stiffer competition in this domain. This could be achieved by
buying out one of the internet brands in which case Gorilla Game
investors win, or by setting up their own stores.
Unfortunately, some of these retail chains, such as Tower Records
are not public companies. I really haven't considered this far
down the track but would remark that despite the strong brand
of these chains, the online store would need to be a very
significant part of their business before they were able to compete
effectively in price wars and risk cannibalizing their existing
brick-and-mortar businesses.
5. The demise of CD e-tailing
It is hard to see what new technology might lead to the demise of
CD e-tailing. Perhaps it will be digital delivery of music. N2K's
presence already in this domain is encouraging but I don't consider
its early arrival in this domain to be a major competitive advantage
considering how low sales volume is right now. Its CD sales volume
and ability to convert CD buyers to digital music buyers is its major
competitive advantage here. The margins here would be extraordinary
and there would be a lot of space for a lot of highly profitable
players in this domain.
Rick |
