Volume 106: Whiffing on post-pandemic demand.

1. Whiffing on post-pandemic demand.

tl;dr: When smart people get delusionally greedy.

A couple of years ago, we were entirely in the grip of the COVID-19 pandemic. Most places were locked down, governments around the world were pumping stimulus into the financial system, and demand patterns across the economy had shifted radically–most obviously from services, which were shut, and thus unable to be purchased, to goods to make the homes we were locked down into cleaner and more comfortable.

Now, while some correctly identified this phenomenon as “demand pulled forward,” others, primarily the executive leaders of major global corporations and their advisors at McKinsey, made the mistake of viewing it as a “new normal,” which, with the clarity of 20:20 hindsight, we now know to be utter bullshit.

How do we know the new normal was not, in fact, a new normal? Well, we’re in earnings season. One of the most notable things being reported by corporations as varied as Peloton, Netflix, Walmart, Target, and Shopify is how many completely whiffed on post-pandemic demand. And when I say whiffed, I mean really and truly whiffed. (If you’re considering a new TV, now is probably a good time because Walmart and Target have loads of them)

As a few folks have pointed out, if you look at current consumer demand for goods, you see total volume looking rather similar to pre-pandemic numbers. Likewise, if you adjust the total value for inflation, you see something similar. In other words, we aren’t living in a new normal. Instead, it’s the old normal, with higher inflation and a newly endemic disease. Oh goodie.

Take Netflix. The most interesting thing about the subscriber losses that sent the stock nosediving wasn’t the decline itself but the abject failure to set expectations ahead of time. Instead of identifying pandemic-fueled demand as unsustainable and making the case that subscriber declines were likely once the world began opening up again, the executive team predicted continued super-growth, which led to an inevitable shareholder panic when subscriber numbers went in the opposite direction. This is a shame because if you control for both the super-growth and the subsequent declines, the long-term growth curve of Netlfix is pretty consistent. (Same with Shopify, btw)

Now, it’s easy for me to identify this in hindsight, but it’s also hard to imagine that this conversation wasn’t happening internally at the time. After all, it’s not like declining demand wasn’t a predictable outcome of lockdowns ending. (Granted, inflation may have been less predictable, and that is having an impact on “luxuries” like Netflix)

So, why do we think so many corporations whiffed this badly, set unattainable expectations with shareholders, and then paid dearly in rapidly declining stock prices?

Well, in two words: delusion and greed. As I’ve mentioned before, human beings are terrible at predicting the future. And when times are good, there’s a tendency for what Alan Greenspan labeled “irrational exuberance” to kick in. We’re used to seeing this in consumer markets like housing and crypto, and less so among the top echelons of corporate leadership–until now.

Here’s why I think this happened. First, a pandemic demand spike was a major contributor to unprecedented stock-price growth, leading to an untethering of market capitalization and the future performance necessary to justify it. (The poster child for this is Tesla, where market capitalization and short-term business performance have diverged to such an extent that a company with just 0.8% of new car sales globally is valued more highly than the next five largest car companies combined–and would essentially need to become the only car company on earth to justify its valuation).

With executive teams heavily incentivized to raise the share price, often by hook or by crook, this unprecedented untethering likely did three things. First, it juiced their own net worth, making these executives extremely wealthy. Second, they began to believe these rises were due to their brilliance rather than a unique moment in macroeconomic history. And third, they loved watching their net worth increase so much that they weren’t exactly willing to listen to anyone suggesting it couldn’t, or wouldn’t, last.

In sum, we entered a fantastical world among the upper echelons of business, where the desire for continued stock-price growth outweighed any suggestion of a dampening effect as pandemic lockdowns ended, government stimulus funds dried up, inflation rose, and people decided they’d rather go on vacation than buy a new TV set.

Now, it’s doubtful any of the leaders of these businesses will pay with their jobs, but this will go down in history as a poster-child example of irrational exuberance leading to a failure of strategic judgment. Unlike the surprise of the pandemic to most businesses, a dampening of post-pandemic demand, especially demand for goods and stay-at-home services, was entirely predictable as the world came back on stream.

2. “We let the work speak for itself.” Unfortunately, it has nothing to say.

tl;dr: Designers often their own worst enemies.

Catching up with a former colleague the other day led me to dig around a few design agency websites, and I have to say it was a singularly depressing experience.

It’s become such a boringly predictable formula. Rigidly grid out your site using the same wireframe as your competitors, show pretty pictures of your work across this rectangular grid, and…that’s about it. Occasionally, you might show something in motion to spice it up a bit. Sometimes, as a giant screw-you to the site visitor, you’ll have a seizure-inducing montage of fast cuts, motion graphics, and color that, far from being either enticing or intriguing, makes people immediately click off the site and go somewhere else.

Now, I know the justification for these generic, value-minimizing site experiences. It usually goes along the lines of “the only thing anyone cares about is the work, so we let the work speak for itself.” I suppose this would be fine, except for the sad reality that the work rarely has much to say. Especially if all you’re showing are pictures without context.

You might think I’m having a little anti-design agency rant here, but I’m not. Here’s why. While this stuff might not have mattered much over the past ten years where there’s been more work than designers to do the work, it might very well matter over the next little while, where it looks likely things will get more difficult in the new business stakes.

In crude terms, the impact of rising interest rates has shifted the world from a place where free capital drove growth to one where money is expensive; thus, the focus has shifted from growth toward profits. This, in turn, will have a big knock-on effect on the service provider ecosystem, of which design is a part because there’s less money to go around.

As a result of there being less money to go around, design firms are going to have to compete harder for attention, differentiate more effectively, and find ways of maintaining their own margins as the laws of supply and demand kick in and clients play designers off against each other to drive down prices on what they otherwise perceive to be a commodity.

As I sometimes joke, good design is $23/month. Why are you worth more?

Now, let’s, for a moment, put the pieces back together. To make websites for design agencies better means focusing on things that aren’t actually about the website itself. Like figuring out your value proposition, how you intend to position your own brand, how that differentiates you from the competition, and the kinds of work (and clients), you want to be doing more of.

Here are some tips:

First, if you’re going to show pictures of your work, adding words will help immeasurably in telling a story of value-creation in a business context. What was the problem you were solving? (Design problem and business problem) What was the before-state that wasn’t working? What drove the solution you created? Why is it differentiated/distinctive relative to the client’s competition? What commercial impact did it have?

Second, unless you exclusively sell to other designers (possible, if unlikely), don’t assume your audience knows anything about design, its role in business and consumer culture, and how it can aid their success. So you’ll need to lead them by the hand a bit in describing your approach and the kinds of problems you solve. For example, if you’re adept at using design to help brands deliver a more premium experience that helps maintain pricing power, then you need to be explicit about this. Don’t make the mistake of simply showing a picture of some premium-looking packaging and thinking someone will make the leap all by themselves. They won’t.

Third, define your points of difference. Perhaps this is your design ethos; maybe this is embedded in your process; perhaps it’s inherent in your deliverables or the tools that you create. It doesn’t really matter what your points of difference are. What matters is that you have some, that you clearly understand what they are, that you demonstrate them consistently, that they’re hard for others to replicate, and that they overlap with something clients find valuable (Points of difference that have zero bearing on client value are irrelevant).

Fourth, try not to fall into the “what have you done for me lately” trap. It’s a common refrain to think the only thing clients care about is the last job you did, but that isn’t true. Prospective clients don’t care about any of your work; they only care about which partner they believe will do the best job of solving their problem, of which your past work is simply a proxy. Every year, one or two agencies get hot because they were fortunate enough to do great work for one or two high-profile clients, but it’s rarely sustainable, and they tend to fall back to obscurity within a fairly short time. So don’t define yourself by the last job you did. Instead, define yourself by how you tackle the work, think about client problems, the nature of your creativity, or a unique approach. Design Thinking might be a swear word to many designers, but as a brand-defining method, it did more to drive the success of IDEO than any case study.

Fifth, and make of this what you will, one of the biggest gripes I have, especially with identity-focused agencies, is the deliverable theater of brand guidelines. Everyone hates them. You hate them, your client hates them, their designers hate them, and the advertising agencies don’t even bother looking at them. But, it’s an easy deliverable you can charge a lot for because it’s sizable and detailed, and it’s easily templated and churned out.

Thus, innovation becomes an opportunity. What if brand guidelines, instead of a lazy profit pool, were to become a combination of software tools, inspirational artifacts, and education, all built with that particular client’s capabilities and needs in mind? You could highlight this as a key point of difference and why you might be more expensive (higher cost being offset by greater effectiveness). This is also a metaphor for innovation in general - either in the deliverables, as above, or perhaps in your process, or wherever.

Anyway. Many will fail to get this right. Many will continue churning out their bland, generic Helvetica in Pastels crap, neatly lined up on a precisely gridded website. They’ll fail to understand that good design is the new bad design (yours for just $23/month, remember) and think they can get by with pretty little photoshopped pictures of their boring work on Times Square billboards their clients will never buy. And that’s great because you’ll be right there to pick up the business when those others fail to adapt.

——————————

Oh, before anyone comes back at me and says the Invencion website is crap. I know. I need to take my own advice and do something about it.

3. Losing a billion on Bitcoin.

tl;dr: A bizarre tale of Microstrategy deja-vu.

Until this week, I can honestly say I’d never heard of a company called Microstrategy. But after reporting a billion-dollar accounting loss on its Bitcoin holdings, I decided to do a little digging, and what I found is, well, more than a little bizarre.

Let’s bring you up to speed. Nominally, Microstrategy is a business intelligence firm founded in 1989 by two MIT grads named Michael Saylor (more on him in a second) and Sanju Bansal. It went public in 1998, saw a meteoric rise in value in 1999 to $3,300 p/share in early 2000, before immediately plunging to just $4 after announcing that revenues were considerably lower than previously reported, and the profits from 1999 were actually a loss. Oops.

Now, before we move on, please note the timing. 1998/99 was the height of the dot-com boom, a time of great hyperbole, much corporate hot-air, and a seemingly endless bull market run. The collapse of Microstrategy stock in 2000 was thus at the forefront of the dot-com crash. A bit like…oh wait a minute.

Anyway, after the lightest of slaps on the wrist from the SEC, the market value of Microstrategy stayed resolutely, boringly, consistent from 2000 to 2020, as what seems to be a resolutely, boringly, consistent business went about its business. And then, in 2020, in the face of declining revenues, founder and CEO Michael Saylor announced an intention to shift treasury holdings from cash to…Bitcoin. This then became a broader strategy, where the company was not only putting spare cash into Bitcoin but borrowing money to buy more.

Everything looked rosy. The stock price spiked in a way it hadn’t since that fateful period 20 years earlier. (Hey, why grow the stock price the hard way when you can spike it with Bitcoin speculation instead) And through a combination of cash created by the business and loans, Microstrategy now has around 120,000 Bitcoins on the balance sheet. Then the price of Bitcoin collapsed, causing a threatened margin call in May, and then last week, the company announced a loss of $917m on revenues of $122m, primarily from the decline in Bitcoin value.

This precipitated Mr. Saylor announcing that he’d be stepping down as CEO to take on a new role as Executive Chairman, with company President Phong Le taking on the CEO mantle.

In any normal company, a shift from CEO to Executive Chairman means said CEO is out; they just need to save face first. But, no. Not in the case of Microstrategy, where Saylor remains the controlling shareholder. He says his focus will now be 100% on the Bitcoin strategy while somebody else runs the business.

Aside from the potential risk of continued declines in Bitcoin value, here’s where this will probably go pear-shaped. On the one hand, you have a new CEO at a company that’s taken its eye off the ball of its (nominally) core business over the past two years, which was already seeing declining revenues, has now missed earnings expectations, and needs to find a way to turn an operating loss into a profit. On the other, you have an Executive Chairman and controlling stockholder who’s focusing all of his energy on crypto speculation. So, what happens if the CEO requires financial resources to invest in righting the ship? Or what happens if operating losses continue and Bitcoin holdings need to be liquidated to cover the losses?

Oh, I really don’t want to be in the room for those meetings. They’re going to be ug-ly.

And what on earth are customers of the business intelligence business thinking amidst all this? I know I’d be looking for a different partner because in that business, being resolutely, boringly, consistent is a major part of why people want to do business with you in the first place, and being exposed to crypto-risk is far from that.

And considering that business intelligence only reflects around 20% of the company's total value (80% tied up in Bitcoin), you’d be forgiven for thinking you’re not a priority. Because you’re not. You’re simply a cash pool waiting to be converted into BTC.

Anyway, who knows where it’ll net out? Maybe Bitcoin will boom again, and maybe it’ll crash. But I will say that I doubt the business intelligence business of Microstrategy will be in very good shape for a long time, if ever. And I certainly don’t think it’ll have the funds to replace that godawful logo anytime soon unless, maybe, there’s a designer that’ll take Bitcoin.