Tag: Flywheel

The Flywheel Is a Lie! Distinguishing Between Ecosystems, Business Models, & Network Effects and How They All Impact the Streaming Wars

(Welcome to my series on an “Intelligence Preparation of the “Streaming Wars” Battlefield”. Combining my experience as a former Army intelligence officer and streaming video strategy planner, I’m applying a military planning framework to the “streaming wars” to explain where entertainment is right now, and where I think it is going. Read the rest of the series through these links:

An Introduction
Part I – Define the Battlefield
Defining the Area of Operations, Interest and Influence in the Streaming Wars
Unrolling the Map – The Video Value Web…Explained
Aggreggedon: The Key Terrain of the Streaming Wars is Bundling

This is probably the most popular image for business school students about Amazon. Heck, anyone describing Amazon has probably used this image. 

Amazon FlywheelIf we’re supposed to be neutral observers of businesses, you can’t help but notice after a moment of reflection how insanely positive this take is. Man, Jeff Bezos can really sell his positive vision and have it repeated universally.

If you were really cynical—hey, I am—what would the pessimistic version of this flywheel look like? The “Flywheel of Evil” if you will…

Screen Shot 2020-06-24 at 9.21.08 AM

What changed? Well, first, the idea that you “sell more things” is great, but if you lose money on every transaction, that’s “sub-optimal” in business speak. Or bad in human speak. And Amazon does in many cases. 

To fund these losses, you need to start a really successful company that is totally unrelated to your retail business or its membership program, which is where Amazon Web Services comes in. There’s an alternate history where an Amazon without AWS (cloud computing) doesn’t take over retail because it doesn’t have a cash flow engine driving its growth. (In that timeline, Ebay becomes our overlords.)

Even more potent, though, is combining already low prices with Amazon’s decades long refusal to pay local taxes. Could you point to the continued imprisonment of poor Americans to online companies not paying local taxes? Maybe! (As local tax bases erode, some communities turned to police forces to extract rents, like in Ferguson, Missouri. Seem relevant to our current times?) Amazon does pay some local taxes—now—but only after it became an advantage to them in furthering their monopoly power.

Now that it has this “flywheel” rolling, Amazon uses its size to both crush new entrants who want to compete and to punish suppliers, capturing all the value from their product creations.

Which flywheel is “right”, then? Well, both actually. Both describe valuable methods for how Amazon grew to the size it did. Some of those methods were good for customers; some were bad for society. You can’t tell their story without both.

Screen Shot 2020-06-24 at 9.21.39 AMWhat’s the lesson? Flywheels are simple whereas reality is complicated. As tools, flywheels are fairly inexact. They’re not even really tools, but narrative devices we use to help make sense of a complicated world. In other words, a “heuristic”. As behavioral economists like Kahneman and Tversky taught us, heuristics are useful, but can carry pitfalls if we aren’t careful.

What’s the point for the streaming wars? Well video has become a spoke on multiple company’s supposed “flywheels”. Everyone from Disney to Amazon, but most critically Apple last fall. Whether or not these were actual flywheels was less important than merely invoking the term and using it to justify nearly any amount of spending. 

Let’s call this another key piece of “terrain” in the streaming wars. The “Forest of Flywheels” if you will. The problem is the business and entertainment press has been fairly sloppy with our language when it comes these types of endeavors. Due to this sloppiness, we’ve allowed a lot of companies to launch video because they’ll “lose money on video to make money on X”. 

Today, I’ll explain the key terms. In my next article I’ll critique deficit-financing in particular. And then I’ll finish it off with an analysis of some of these business models to show their potential strengths and weaknesses. 

Summary

– Flywheels are the most overused term in business, and it’s important to know what different terms mean.
– Ecosystem is probably the most commonly confused term with flywheel. Ecosystems are also rare.
– A true flywheel is a self-perpetuating cycle of growth that is incredibly rare in practice.
– As such, in pursuit of flywheels, we’ve seen many digital players launch money-losing video efforts. I call these “deficit-financed business units”. And they’re one of the biggest factors in the streaming wars.

Defining Traditional Business Strategy Terms

You’ve read articles bemoaning jargon in the workplace. (This New York Magazine piece is the latest in hundreds on the subject.) Even I just denigrated “sub-optimal” above, a term I really don’t like. Still, I don’t take that extreme of a position on business nomenclature. Often, jargon really does have a role in explaining new concepts.

The problem comes in overuse. That’s what is currently happening with “flywheel”. It’s almost become synonymous with “successful business”. But it’s much more specific than that.

So let’s define our terms, so we can better understand what is and is not a flywheel.

Business Model 

It turns out if you want to stymie business school students, just ask them “what is a business model?” Indeed, they’re taking classes called “Strategy and Business Models”, but answering, “What is a business model?” can stump them. I’ve seen it.

At its most basic, a business model is a plan or process to make a good or service and sell it for more than it costs to make. Make a widget for $1, market it for $1 and sell it for $3. Or replace widget with service. The model is how you make money. On a financial statement, this is usually called the income statement. When I build a “model” for this website, that’s usually what I’m building. 

How do business models relate to flywheels? Well, you can have a successful business model that isn’t a flywheel! It’s just a good business. In the olden days, you would have probably described the dividend producing stocks as just good businesses. They don’t have huge growth prospects, but they still generate a return on investment. Cable companies in the 2000s fit this bill. They had good business models, but were absolutely not flywheels.

Where it gets complicated is usually a given company is actually a collection of many business models. Arguably for every product they sell. Or you have distinct models for different business units in the same conglomerate. Which is actually a good transition to our next definition.

Business Unit

Most companies on the S&P 500 aren’t just one business, but multiple types of businesses lumped together. This is the reality for most conglomerated businesses. When analyzing a compnay, it’s key to differentiate between its overall success and the success of its various pieces.

Amazon is a perfect example here. Retail is one business unit. But then it also has media businesses from live streaming to streaming to music. Then it also sells devices like Amazon Echo. Oh, and it has Whole Foods groceries too.

And then there is the cloud computing (AWS). Which I called out above. And it’s worth noting just how distinct that wildly financially successful enterprise is from the rest of Amazon’s consumer-focused retail efforts. It’s a business-to-business service that is powered by lots of fixed capital expenditure data warehouses. It barely relates. Yet, it’s part of Amazon.

How do business units relate to flywheels? Well, flywheels often fail to take into account entire business units. Take the Amazon flywheel of success…it totally ignores AWS! For years Amazon survived because it had an incredibly high margin business in cloud computing that could provide necessary capital that enabled Amazon to continue building its retail business. This also kept Wall Street happy.

That makes the Bezos flywheel not just wrong, but almost negligently wrong. 

It’s business malpractice to point out that a flywheel helped Amazon to succeed if you don’t include AWS’s role in propping up the balance sheet!

I would add, many of the “flywheel” charts you see out there are often just describing a company with multiple business units. (I’ve seen this with Disney and Epic Games.) Every business can benefit from owning multiple business units, from lowering costs or providing learnings. That used to be called “synergy”. Now we call them “flywheels”.

Ecosystem

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