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On November 21, 2015, Karthik commented on Starbucks: Coffeehouse or Tech Company? :

Thanks for the insightful post, Ximena! It is fascinating how Starbucks continue to deliver the growth year after year even after achieving so much scale – especially on the same-stores-growth front. I was unclear about how much of it was just being able the first mover with a strong brand vs. how much of it is a codified process that they can continue to replicate as they grow new stores not just in the US but globally. Reading your post makes me believe that Starbuck has codified a process that enables them to extract these attractive same store growth levels even in mature stores.

On November 21, 2015, Karthik commented on Fitbit – leveraging consumers’ obsession with data :

Thank you for the post. While I knew that Fitbit was doing quite well, I did not realize the massive scale they gained over the past 1 year and the growth they have demonstrated! The product has been able to capture the fascination of many. However, my belief in the product in its current form in not very high. One of the challenges you mentioned about user stickiness beyond 6 months is a cause of concern and brings a lot of credit to the question around “Is Fitbit a Fad”. Another concern for me is the lack of any real barriers in the product. While it does serve its purpose in a unique way at this point of time, it is unclear whether the adoption will be to the same extent if watch makers or phone makes incorporate the feature into their products. May be a small fraction of the users who want really accurate data might continue using it, the vast majority might not. Fitbit or for that matter most wearable technology have made great advances in telling us what we’re doing, but there’s yet to be a breakthrough related to what’s going on inside our bodies and that might be the differentiation needed.

On November 21, 2015, Karthik commented on Zara Leverages Data Analytics to Understand Consumer Tastes :

Thanks for the great post, Noam! I completely agree with you that Zara has grown into this huge apparel brand by leveraging data. The company has been extremely adaptive to customer tastes and this has helped them deliver the growth that they have so far. What makes me bullish on Zara going forward in a world of e-commerce is this very strength in data analytics. While traditional brick and mortal stores which have not focused till recently on digital are struggling to make a transition into the the digital space, Zara given its traditional strength in digital and data analytics will be able to counter the threat from e-commerce players. A strength which has helped them grow in the face of incumbents will not come to their rescue again when the disruptors are attacking them!

On November 1, 2015, Karthik commented on Is Crowdsourcing the Future Of Film? Not really :

Thank you for the post! Having burnt my fingers having contributed to a crowd sourced movie I can understand where you come from when you say Crowd Sourcing is not for films! Though, I disagree with the notion that crowd sourcing for movies will not be something which is sustainable going forward. In the past, crowd sourced movies haven’t worked for all the reasons you mentioned. However, the media industry is seeing a rapid change thanks to OTT and other channels taking over. The larger than life movies will continue to be driven by large production houses because of the value they bring to the table in distribution and marketing. However, the smaller movies which for example will mostly be viewed at home on your favorite OTT channel does not require the capabilities that big movie houses bring. It gives the opportunity for the crowd to back someone making a small movie exclusively for the small screen. This is where the crowd can contribute. That said the risk of a lack of diversification does exist, and the crowd needs take a similar approach and fund, say 10 movies with smaller dollar values, than 1 movie with 10x dollar value. It will be no different from picking stocks based on the public information available.

On November 1, 2015, Karthik commented on The Netflix Prize: Crowdsourcing to Improve DVD Recommendations :

Thank you for the post! I am always amused by Netflix and what’s happening to the business. They were successful in disrupting Blockbuster and a lot of credit to their business model actually lies in their superior movie recommendation algorithm. I had never realized the way they went about to refine the algorithm and make it so defensible that others could not spend the dollars to do themselves. Clearly they have demonstrated a lot of innovation in doing so! Though now going forward I am curious to see how much the algorithm can help them differentiate given that now video is now moving to a OTT model and that players like IMDB have a much larger database that Amazon Video has access to with their videos. Netflix needs to innovate again if it wants to survive and do something which other players cannot. May be the answer lies in how they can innovatively leverage the crowd again so that what they did to Blockbuster does not happen to them.

On November 1, 2015, Karthik commented on Waze: Leveraging the Crowd to Find Your Way :

Thank you for the amazing post! I agree completely that Waze has leveraged direct crowd sourcing to take on Google Maps which was primarily relying on indirect crowd. The fact that Google has paid huge dollars inspite of having a leading platform them-self points to the strengths of Waze. Waze has a better direct crowd sourcing platform while Google Maps has a better indirect crowd sourcing platform (atleast personally I feel that way when using the two products). It will be interesting to see how that changes going forward. So far, Google has kept Waze as a separate platform but given what we know about direct and indirect networks it works better for them if they can migrate all the users onto a single platform because it will add much more value to all the users. However, integrating them might not be a simple task for Google. Less from the technology point of view, but more from the customers point of view who might be put off by any significant changes as they merge the two. And more broadly it will be interesting to see how the different cultures at the firms operate if Google does integrate the product. Though it’s more a question of when they will integrate than if they will integrate (going back to the benefits from network effects)

On October 2, 2015, Karthik commented on Airbnb: Reinventing hospitality with network effects :

Thank you for the post, Elizabeth! It is interesting to note how Airbnb went about building their network to scale it to such mammoth levels. I am sure there is a lot more growth left in the business and Airbnb seems to be making the efforts to realize this potential. In addition to the indirect network effects that you rightly pointed out, I wanted to add that there is a small component of direct network effects. As more users are on the platform the quality of the ratings and reviews improve driving better usage patterns among users. In addition, what I really like about Airbnb is their ability to attract a much younger population and their positioning of Airbnb as more a lifestyle brand than a low cost / cheap brand. As these young customers grow over the next 5 to 10 years, they are an ideal target for the business travel customer base that Airbnb is trying so hard to break into. Airbnb will most likely be the first “hotel” a future generation will stay in. The traditional hotels, with their high cost models, will find it extremely difficult to compete with that.

Thank you for the well though out post, Allen! I completely agree with you that Venmo has done an excellent job of building a huge user base and in-turn now has a strong network effect. The fact that they are not moving fast enough to sustain this through building their indirect network effects is quite scary!

While I do believe that a business model like Venmo displays strong network effects, I don’t believe that they have a strong business proposition to protect them from competition. The few players who tried to compete with them and failed do exist, but they have not faced a stiff competition yet from competitors who already are present on users mobile phones (the way Venmo payments happen). When a PayPal or Facebook or Whatsapp, who themselves are players who display strong network effects, decide to focus on this market, the network effects cannot alone help Venmo beat competition. The network effects have so far helped them against players who did not have similar network effects (Google you can argue has network effects but that is only in the search space which happens a lot lesser on mobile).

What’s interesting for me in Venmo’s case is two-fold. Direct network effect players need to expand and build further defensible models through indirect network effects. A player like Venmo who has direct network effects can be beaten by a player who has similar direct network effects but operating in a different space – the winner will likely be determined by who provides more utility to the user.

On October 2, 2015, Karthik commented on Netflix – Getting Smarter Everyday :

Thanks for the interesting article! Netflix is definitely a great example of leveraging direct and indirect network effects to not only drive viral growth for themselves but also for shaping the OTT industry we witness now. While Netflix’s network efforts continue to benefit it while taking on competition from the traditional cable players, their ability to beat competition from some of the newer players operating under a differentiated business model is not as straight forward. The network effort they have built on both sides of the platform (user and content provider) is not as dominant when they compete with these new players. The direct and indirect network effects of the their platform has helped them to grow both their user base and the content base in parallel, an element crucial for their success. The new competitors are approaching them by having one side of this user / content in place and looking to gain traction with the other side. Along side, they are able to offer an improved offering which could likely benefit the user better.

The biggest competition comes from Amazon. They have one side of the platform in place i.e. the users. Amazon is now looking to strengthen the other side i.e. content. Thanks to Netflix’s efforts towards making content providers move to the OTT model they are now comfortable sharing their content with Amazon as it is an additional source of revenue at minimal incremental costs. The fact that Amazon has a combination of the Netflix model (monthly service fee for some content for Prime Members) and a pay-per-view model, it makes Amazon more attractive to content providers.

Similarly, the broadcasters are approaching it from the other end. They have the content in place and are acquiring customers. Netflix has made the consumer comfortable with the concept of OTT and now broadcasters are leveraging this for their OTT platforms. A wide variety of options that broadcasters have through their OTT platform and more importantly their quicker-to-consumer timelines make the broadcaster a preferred platform.

What is interesting in the Netflix case is that a business model which has been built through a combination of direct networks and indirect networks can be beaten. It requires an incumbent who has already built one side of his platform for a different business model to expand into the space.

On September 13, 2015, Karthik commented on Amazon: The One Stop Shop :

Thanks for the interesting content, Alexander! There is no doubt that Amazon has been one of the most innovative company over the last decade. While the past points to Amazon’s success in the digital arena, I struggle with how successful it will be going forward and whether we will look at Amazon as a digital success, say 10 years from now.

Amazon’s success was part fueled (atleast to a small extent) by the reluctance of the brick and mortar discount stores (like Walmart) to focus on the online space in a fear of cannibalizing their in-store sales. However, that is now changing with brick and mortar stores seeing stagnant growth and ecommerce growing at 10%+ levels even in a weak macro economic environment.

Retail companies with physical stores are now de-prioritizing stores expansion and instead pumping dollars into their online platforms. In store mobile is another big focus of players like Walmart, where they intend to leverage discounting coupons to engage consumers in their existing stores. The idea is to shift to the era of omnichannel – the biggest buzz word in retail these days. The idea is to enable consumers to access inventory, shop, have delivered goods through a combination of these channels. Retail stores are investing into delivery supply chains and have an added advantage over the pure play online retailers like Amazon. The large number of stores that Walmart already has in place will act as warehouses for Walmart’s online channel. Given the high density of Walmart stores and employees and their relative ‘closeness’ to a customer, the delivery times will be quicker.

Also, the additional areas that Amazon is getting into currently like Video and Music are not areas where there is low competition and they will enjoy near monopoly in the market like their traditional core platform. New segments like Fashion are yet to be proven and will be more difficult than their traditional segments because of customer preferences.

Overall, I believe Amazon’s growth story has inspired the traditional retailers to invest in the ecommerce space. Amazon is definitely better prepared than other players in the ecommerce space. But that can change as brick and mortar retailers start using their traditional baggage of high fixed costs from large store presence to their advantage as they plan to expand into the online space.

On September 13, 2015, Karthik commented on Netflix in the ever changing home entertainment space :

Thank you for sharing your thoughts! While I do agree with the fact that Netflix has been extremely successful so far disrupting the DVD rental business, and also for changing how customers consume video. However, I believe that the future for Netflix will not be as smooth as it has been. There are a few reasons why I have reservations about the future trajectory of Netflix:

1. Amazon: I single out Amazon because they have undercut Netflix’s value proposition. For a yearly fee Amazon Prime subscribers get access to multiple offerings: Free delivery for Amazon products (core of Amazon), Prime Videos (equivalent to Netflix) and Prime Music (equivalent to Spotify). This competition from Amazon worries me because they can offer to a customer what Netflix offers them and in addition other services. It shouldnt be difficult for them to create content on their own given their deep pockets if that is what stops them from beating Netflix.

2. Pure Monthly Rental: Netflix continues to operate purely on the monthly subscription model (unless I am mistaken). As a consumer the additional benefit I get from an Amazon, or an Apple Store is the option of purchasing/renting certain movies. Latest movies which are not part of the ‘free’ catalog are available for purchase in Amazon while that is not an option on Netflix. As customers become platform agnostic as content tends to converge these additional offerings will be what drive customer stickiness.

3. Broadcast networks are all now moving to an OTT model. I am not sure if customers would be willing to pay for the 4 or 5 major broadcasters OTT content, or whether they will stick with one platform from where they can access content from multiple broadcasters. If the latter, the broadcasters might not be a major competitive threat though it is unclear at this stage.

On September 13, 2015, Karthik commented on Comcast: A Winner in the Media Long Game :

It is interesting to hear a view from someone who has worked in television about the future of players like Comcast, especially when the talk is focused on OTT players like you mentioned in your post. As I read your post, I agreed with most of your observations. I think you are right when you say that Comcast has been slowly moving into other areas outside video broadcasting through areas like home automation, OTT and increased focus on broadband. I also agree with your view that the video subscriber is likely going to be unprofitable one for Comcast to serve and their steps are in the right direction.

However, I am a bit skeptical in calling them a winner yet. The reason for that is two-fold. Firstly, on the new segments they are focused on, they are not the first movers and playing catch up with other players in the OTP or to an extent even home automation. This has not been their traditional strength and I would like to watch how these businesses play out before calling them a winner in those segments. Second, on the broadband/internet business, the business has strong barriers to entry and it is unlikely that any new business will be able to compete directly with Comcast. However, I have some concern around wireless data providers who can deliver broadband at cheaper prices. While this has not yet happened because the technology seems to have issues in delivering the customer experience as wired broadband, it will be interesting to see if wireless data providers can deliver broadband at speeds similar to wired broadband players and what that will mean to the economics. (For reference: In India, Reliance Jio, a company with 4G license is planning to launch wireless broadband services nationally and a big concern for broadband players is the impact that it will likely have on their economics)

Jennifer, thank you for sharing your thoughts on the post. To your point on video quality, I can imagine how it is one of the most tangible recommendations that YouTube gives their content creators. Though, I am a bit surprised that content creators are still having trouble in creating high quality videos. I remember reading about a movie maker who had shot a movie using a GoPro and similarly a lot of other short-film makers who have used the GoPro to shoot high quality videos. I would assume that the prevalence of GoPro is not high – mainly due to a lack of communication from GoPro about the strengths of their product. This should change hopefully change soon, as the company faces obstacles for growth or from a word of mouth from the existing customer base. The non-video costs could also be costs associated with content creation. I am not sure where in the evolution they are vs. the video processing technology that has come a long way over the past few years.

On the other point around whether the company has been truly successful, I used the phrase ‘under the radar’ more from the perspective of the end customer who, for example, might be using a GoPro but could likely not know about Ambarella. Again, like I had mentioned in my closing statement, it will be interesting to see how Ambarella reacts to the entry of someone like a Qualcomm wants to get aggressive in this space and how they sustain their competitive advantage.

Given the B2B nature of Ambarella where the SOCs are sold to camera makers or broadcasters, the need for high marketing is probably not an immediate need for the company which has enough white space for growth. I thought they were doing the right thing there by focusing on the R&D spend which leads to better technology which the relatively experienced business customer can appreciate inspite of a lower spend on marketing.

Thanks again for your thoughts!