Digital transformation is changing every facet of the corporate world, and some legacy businesses are failing, states Jon Markman, editor of Strategic Advantage.
Disney (DIS) networks went dark Friday for 15 million cable TV subscribers nationwide. An operating partner is disputing Disney's retransmission fees. Unsurprisingly, gouging customers is a lousy business model. Longer-term investors should accumulate Walmart (WMT). Let me explain.
Legacy businesses are under siege globally. Software is allowing innovative, agile companies to quickly gain footholds and dominate. The automotive sector is being hollowed out by Tesla (TSLA). Software defines every aspect of the Austin, Tex.-based company, from design and supply chain to its advanced driver assistance systems. More importantly, these digital processes are vertically integrated with Tesla’s operating system, a software platform that governs corporate decision-making. The benefits are showing up. Volkswagen executives concluded in 2021 that Tesla manufacturing was three times more efficient than legacy firms, according to a report from Bloomberg.
Netflix (NFLX) enjoys similar advantages in media. Executives at the Los Gatos, Calif.-based company determined more than a decade ago that they could use software to develop and deliver media content across the globe. Data analytics inform what content is produced. Proprietary compression algorithms make streaming possible, even with low bandwidth. The Netflix subscription video-on-demand service that was introduced on January 16, 2007, started a cord-cutting revolution. SVOD gave consumers an on-demand alternative to cable TV at a lower price point.
Cord cutting is at the center of the Disney blackout.
Charter Communications (CHRT) is the third largest cable TV operator in the United States. Executives claim Disney is jacking up pay TV prices by forcing operators to carry ESPN and other expensive Disney-owned channels in so-called bundles. Customers want skinny, cheaper bundles. The impasse, according to a Charter press release is leading to subscriber losses.
Variety reported in May that U.S. pay TV subscriptions fell to 75.5 million in the first quarter of 2023, down 7% year-over-year to the lowest level since 1992. Analysts attributed the decline to higher costs for ESPN retransmission fees.
Price gouging has become a go-to strategy for failing legacy companies in the digital transformation era.
The Ford F-150 is the best-selling vehicle in America. The median price has risen from $49,831 in 2019, to $77,040 in 2023, according to data at US News and World Report. This is three times the rate of inflation. It is noteworthy that vehicles across the automotive sector are rising more quickly than inflation, even as sales volumes contract. The exception is Tesla, where prices are falling despite rising sales.
Leaders at legacy companies need to think more about customers.
Walmart (WMT) operates 11,500 stores under 72 banners in 28 countries. The Bentonville, Ark.-based company in 2022 had revenue of $572.8 billion. Sales in 2023 are projected to grow to $611.3 billion, an increase of 6.8%. Walmart is a legacy business, yet executives have not resorted to price gouging to win favor with investors. They answered disruption from Amazon.com (AMZN) with forward thinking, and a commitment to customers. They leveraged Walmart’s inherent strength; stores.
Ninety percent of Americans live within ten miles of a Walmart. It turns out customers like to order goods online, and then pick up the bagged items in stores. This omni-channel, click-and-collect strategy gives consumers control and lower prices.
Click and collect e-commerce orders in 2021 reached $20.4 billion. Walmart accounted for 25% of those purchases, according to Brett Briggs, chief financial officer.
Briggs has been the architect of an aggressive e-commerce acquisition strategy. Jet.com, Bonobos, Eloquii, and Modcloth were purchased for $3 billion, $310 million, $100 million, and $60 million respectively. However, a buyout occurred in 2016 when Walmart spent $16 billion for a 77% stake in Flipkart, India’s biggest e-commerce company. Execs then spent $1.4 billion in 2023 for additional Flipkart shares.
Not all legacy businesses will succeed with their digital transformations. Too often their strategies are flawed. Executives put short profits above winning customers.