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This is the essence of the Internet revolution.

Shenzhen Translation Bureau is its compilation team, focusing on technology, business, workplace, life and other fields, focusing on introducing new foreign technologies, new perspectives and new trends.

Editor’s note: From the Herfindahl-Hirschman index, to the law of conservation of high profits, to the analysis of CPG’s value chain … The article by well-known technology blogger Ben Thompson is as usual. But after a round, you will understand why 90 million email addresses are more valuable than a shaver brand, and why the real economy can’t play the virtual economy. The original title is: Email Addresses and Razor Blades

Edgewell Personal Care Co., the maker of Comfort, initiated a takeover bid to (now withdrawn) Harry’s Razors, and Intuit announced the acquisition of Credit Karma. At first glance, these two things seem to have nothing in common point. But they have a common thread: digital advertising, and the dominance of Facebook and Google.

FTC prevents acquisition of Harry ’s

Let ’s start with Harry ’s: The acquisition announced last May was no longer considered by the acquirer after the US Federal Trade Commission (FTC) filed a lawsuit. Interestingly, despite the fact that Harry’s is actually a direct-to-consumer (DTC) brand, the reason the FTC puts it is that Harry’s presence in physical retail. Complaint from FTC:

Harry’s and Dollar Shave Club quickly gained success in the previously untapped online market and basically dominated this market. However, the successful addition of Harry’s and Dollar Shave Club online (“DTC”) models has not prevented P & G and Edgewell from raising prices, and the latter two companies mainly sell products through physical retail.

When Harry’s succeeded for the first time (and only so far) from online DTCWhen the platform was engaged in physical retail, the situation changed significantly. In August 2016, Harry launched offline products exclusively at Target. Its suggested retail price is a few dollars lower than the most comparable comfort and Gillette products, which is a big discount. Harry ’s landing on Target has had a significant impact, stealing customers from Edgewell and P & G all at once. Edgewell described Harry’s actions as one of “[REDACTED]” and observed that Harry’S had taken “[REDACTED]”.

Harry ’s march to Target ends Gillette and Edgewell ’s long-term price increases. Shortly after Harry ’s successful landing on Target, Procter & Gamble began to implement “[remove]” price reductions on its series of shaver products, changing its previous practice of increasing prices. Edgewell also changed course and abandoned its strategy of becoming a “[[Original deletion]” of Gillette’s pricing behavior. Edgewell did not follow Gillette’s footsteps in reducing prices accordingly, but began to track the growth of Harry ’s, increasing promotional expenses (discounts and other promotional expenses) [Originally deleted]. Edgewell hopes that this work will be “[REDACTED]”, “[REDACTED]”.

FTC continues to point out:

Harry ’s aggressively enters physical retail, transforming the wet shaver market from a comfortable duopoly into a highly competitive battlefield. Edgewell, in particular, has found that Harry ’s has posed a threat to both its branded products and private labels (that is, Edgewell’s razors made for retail partners and sold under retailer brands). Consumers also benefit from the resulting price discounts and the launch of more Edgewell and private label options.

The proposed acquisition could wipe out competition between important direct competitors and cause significant damage. The proposed acquisition will also remove a particularly disruptive competitor that is expanding into other retailers, disrupting competition.

FTC concluded that the acquisition was illegal. The basis is the Herfindahl-Hirschman Index used to measure the concentration of a particular market:

According to the 2010 U.S. Department of Justice and the Federal Trade Commission’s Horizontal Mergers and Acquisitions Guidelines (“M & A Guidelines”), the post-acquisition market concentration (Herfindahl-Hirschman Index) is 2500 points or more, and the increase in HHI by more than 200 points can presumably acquire Is illegal. In highly concentrated markets (HHI is higher than 2500 points), acquisitions have caused HHI to rise aboveBeyond 100 points, serious competition concerns and scrutiny may arise. HHI refers to the sum of the squares of the total revenue or the percentage of total assets of the industry’s competitors in each market.

In the United States, the wet razor manufacturing and sales markets are highly concentrated, with HHI exceeding 3,000. The proposed acquisition will increase the concentration of this market by more than 200 points, and is therefore considered illegal … HHI changes based on current market share underestimate the competitive significance of the proposed acquisition, as Harry ’s is continuously expanding to other physical retailers. Considering that the proposed acquisition will prevent Harry ’s independent expansion, it is appropriate to analyze the significance of Harry ’s to competition by using previous entry events to predict the future competitive significance. Moreover, as Harry ’s Flamingo products have only recently been launched, the current market share particularly underestimates the significance of Harry ’s competition in the market, including sales of female shavers.

Comfort abandoned the deal a few days after the FTC initiated the lawsuit. Unexpectedly, Harry’s didn’t ask for compensation to terminate the agreement.

Acquisition and incentives

I quoted the FTC’s pleading significantly, because, frankly, the paper pleading was very convincing. The rise of Harry ’s has led to lower prices. Edgewell is almost certain that it wants to ease the pressure on price reductions mentioned above. Other more positive motives, such as the need to master new management knowledge and establish its own DTC channels, will be less urgent.

At the same time, you will also see some of the problematic motives that I discussed 2 weeks ago when blocking an acquisition. First, given that most CPG categories are dominated by a small number of companies (considering that scale advantages are needed to compete globally for shelf space), investors must be more cautious in investing in this space, as the existing precedent is the Will be ruled as anti-competitive; will the acquisition of Harry’s be the same? Much depends on whether Harry ’s is capable of meeting the FTC’s ability to become an independent competitor (I doubt it, the reason is explained later). Secondly, to a certain extent, Harry ’s efforts to expand from doing only online sales to offline sales were actually punished; as the above excerpt shows, Harry ’s success in online sales has not significantly affected the physical sales market. Will this be a lesson for other DTC companies? If you worry that acquisitions will be blocked, you can only do online sales.

This raises a bigger question: Why would Harry ’s find it necessary to expand the physical market?

Conservation of high CPG

Much of the excitement of DTC is that it does not have the charm of a middleman to make a difference. Profits for retailersRun can be used to provide better products, lower prices, and bring higher profits to brands. The problem is that the value chain is much more than that. In 2015, when I wrote the article “Conservation of High Profits” (with Netflix as the background), I wrote:

For the first time Clayton Christensen explains the law of conservation of high profit in his book “An Innovator’s Answer”:

In general, the law of high profit conservation applies to the state where modular and interactive product architectures occur simultaneously in the value chain, and also includes the state where commoditization and anti-commodification interact (the reason for its existence Perfect “product performance). The law states that, When the combined effect of modularization and commoditization makes high profits in one stage of the value chain disappear, the patented products that can gather high profits often appear in the adjacent stages. strong>.

This passage is very obscure, but the examples in the book illustrate how powerful this insight is:

If you think in the context of hardware, because the performance of the microprocessor has not been good enough in history, then its internal structure is patented and optimized, so the microprocessor must be modular, And comply with product specifications, so that engineers can use this to optimize “incomplete” product performance. But for a small handheld device like a BlackBerry, the device itself is not good enough, so a general-purpose Intel processor cannot be installed inside the BlackBerry. On the contrary, the processor itself must be modular and meet specifications, so it is used for BlackBerry The processor has only the features required by the BlackBerry, not the features it does not need. Therefore, no matter from which side (device or processor), modularization and standardization are required to optimize things that are not good enough.

Did you find it? This is Christensen, who explained why Intel lost the mobile end four years before the advent of the iPhone, and ARM had the upper hand. When the basis of competition shifts from pure processor performance to low-power systems, the chip architecture must shift from integrated (Intel) to modular (ARM). The latter created an integrated BlackBerry, and an integrated iPhone four years later.

PC is a modular system whose integrated components earn all the profits. anotherOn the one hand, BlackBerry (and later the iPhone) is an integrated system that utilizes modular components. Note, however, that this example is very simplified.

More broadly, Breaking the previous integrated system (commoditization and modularity) will destroy existing value, while allowing new entrants to integrate different parts of the value chain to obtain new value .

Commoditizing existing enterprise integrations will allow new entrants to create new integrations elsewhere in the value chain—and create profits.

This is exactly what happened to Airbnb, Uber, and Netflix.

The original value chain of CPG is like this:

CPG’s old value chain

CPG companies such as P & G have captured most of the value by integrating R & D, production, marketing and shelf space to modularize and commercialize raw materials, retail and logistics.

At the same time, DTC believes that R & D becomes unnecessary in an over-served market (as I pointed out in the context of the Dollar Shave Club, shavers are a particularly obvious over-service Example), and on the Internet, shelf space is virtually unlimited. Their goal is to integrate marketing, retail and production:

DTC theoretical value chain

However, the problem here is that Internet marketing is fundamentally different from the analog marketing that has dominated the CPG industry in the past. Good advertising (whether it’s a coupon in a Sunday newspaper or a TV commercial for evening news) depends primarily on the ability to spend money, which is itself a question of scale. However, digital marketing is not about scale, at least relative to television. In fact, digital marketing only makes sense if you can target ads to specific consumers and track their effectiveness .

On the one hand, this is another key factor in the survival of DTC companies. The advantage of targeted advertising is that compared to television, it takes far less money to attract customers who are really interested in your product; but the problem is that excelling at targeted advertising requires a lot of research and development to build that capability, and it requires Such an effort makes sense if you have inventory that covers a large enough customer base. In the end, no DTC company is really good at marketing. They outsourced the matter to Google and Facebook , both of which have inventory and the ability to spend billions of dollars developing sophisticated targeted advertising.

The problem is that in the process of relying on Google and Facebook for marketing, DTC also abandoned its planned integration in the value chain and its related profits, which were transferred to Facebook and Google:

DTC’s actual value chain

The actual integration players—Google and Facebook—dominated marketing by integrating customers and R & D together; DTC may have an online retail business, but that ’s the modularization of the value chain (and therefore commoditization) (In the meantime, Amazon is integrating retail and logistics.) Last week I was at Brandless once wrote:

This is the problem DTC faces: Facebook is better at finding customers than any other company. This means that to get the best return on investment for customers, to find Facebook, DTC is competing with all other DTC companies and mobile game developers, as well as existing CPG companies and everyone else to attract users’ attention. This means that the real winner is Facebook, and DTC is slowly out of breath due to increasing customer acquisition costs. What makes this area work is Facebook, so it’s natural for Facebook to get most of its profits from the DTC value chain.

In fairness, DTC is hardly the first company to make this mistake: As early as WWW, when publishers paid attention to the Internet, they saw only their potential to attract new customers; they did n’t consider it because All other publishers around the world can now reach the same batch of customers, so the integration of their business (the integration of publishing and distribution in different geographic regions) has actually collapsed. This is a lesson worth widely learning: If some parts of the value chain become free, it means not only opportunities, but also warnings that the entire value chain is about to change.

Hard ’s hard road

This brings us back to Harry ’s, and why it expanded to physical retail. If you look at the theoretical value chain I outlined earlier (that is, DTC’s integration of marketing and retail), this choice doesn’t make much sense. However, once found that Facebook and Google squeezed much more value from online value chains than offline values, the only option left was to engage in low-end subversion in the old value chain. Or, in other words, sell it cheaper .

But this leads to two problems: First, there is no technical reason why Harry ’s shavers are cheaper than Comfort or Gillette. This means that comfort and Gillette can compete with Harry ’s price by reducing the price. Secondly, as price as the agent of consumer welfare is the most important factor in promoting regulatory review of acquisitions, Harry ’s most feasible exit channel has actually been closed. In fact, it is not surprising that large CPG companies, especially Comfort and Gillette, are better suited to compete in their dominant physical market. Although Harry ’s has a factory in Germany and an omni-channel distribution strategy, it still has a long way to go before it can truly realize its $ 1.37 billion valuation.

Credit Karma and customer acquisition

Given the news yesterday that Intuit willThe acquisition of Credit Karma for $ 7.1 billion, Harry ’s seems to have obtained unfair results. Credit Karma does not have a factory in Germany. Indeed, they did not make a penny from their customers. Instead, Credit Karma offers a free service that attracts users to its website and monetizes by directing users to credit cards and other financial products that pay membership fees.

In a way, this transaction looks a bit like Harry’s transaction: One of Credit Karma’s free products is a free tax return service; this is obviously the biggest money-making tool for Intuit TurboTax (it has a hope You’ll never find the free version) threat. The FTC may even block transactions for these reasons. However, I suspect that Credit Karma and Intuit will simply agree to split the tax return, because that is not the true value of Credit Karma.

In fact, the users of Credit Karma are really valuable-90 million users in the United States alone, 50% of which are millennials. Not only did these 90 million users directly access Credit Karma, they also shared a large amount of personal financial data and agreed to receive emails about their credit score. In other words, for a company like Intuit, this is the best channel for customer acquisition, and for all the reasons I just mentioned, customer acquisition is the most valuable part of the digital value chain. As long as there are the best channels to get the next generation of tax filers, Intuit will be happy to be hit by tax filing competitors.

This is the real common ground between Harry ’s and Credit Karma: Thanks to Facebook and Google ’s dominance in digital advertising, Harry ’s is no longer as valuable as it used to be. Credit Karma is more valuable than it seems, because it provides a way to attract customers without relying on Facebook and Google. Given that FTC has incorporated both Harry’s acquisition and possibly also the acquisition of Credit Karma, this is a particularly noteworthy insight: Without Facebook’s acquisition of Instagram and Google’s acquisition of DoubleClick , The digital advertising industry may experience greater competition. One of the potential results of increased competition may be that the DTC company ’s viability will increase, and has no direct business model, but simply aggregates audience Value will decrease .

However, I won’t let this counterfactual speculation go too far: the cost structure is drastically reducedDTC is much more meaningful. If you plan to use the Internet to transform one part of the value chain, it is also best to ensure that other parts are expected to change as well. On the other hand, in a rich world, being able to aggregate demand is more valuable than being able to create supply. 90 million e-mail addresses are more valuable than real factories, which may be offensive to our feelings for simulation, but this is the essence of the Internet’s transformation.

Translator: boxi.