Creative Disruption

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HMV Group is one of the businesses I’m focussing on in the book. A few years ago, I thought there were destined for nothing but failure, a traditional business that had simply failed to make the leap into the 21st century.

They faced a perfect storm of Amazon; Apple; illegal downloading; and supermarkets selling books, CDs and DVDs at cheaper than cheap prices. You could forgive them for going the same way Tower Records had gone before them.

A friend in retail, however, told me when Simon Fox took over that he was a class act, and I shouldn’t dismiss them quite yet. And sure enough, he was right – to the point that Fox of course was said to be top of the list to transform that other digitally challenged UK institution: ITV. In the end, to HMV’s good fortune (and I suspect to his as well) he decided to stay.

Waterstones is still a long way from out of trouble – despite store closures and the savings from the launch of their distribution hub, like-for-likes continue to fall. But the transformation at the HMV business (where Fox is managing director in addition to his Group CEO role) is genuinely impressive.

The lesson here is that the real transformation was achieved by sorting out the core, traditional business. New mix of products (including Apple stuff and iPod accessories – Apple previously wasn’t allowed in the store, because it was seen as the enemy), and a focus on smarter promotion and presentation have all helped.

With that underway, and with financial targets being met, it allows them to expand into new areas, and develop their online business at a more reasonable pace.

The joint venture with Mama Group; the launch of digital cinemas in store in partnership with Curzon; and pushing Sony e-readers at Waterstones – all of these provide a good narrative and glimmers of future growth, but won’t be making a meaningful contribution to the bottom line in the near future.

I doubt they  not going to meaningfully challenge either Apple or Amazon in the online space. In fact, they still have their work cut out to take on Play.com, but the mix of a strong high street presence (at their core, HMV has always been a really well run retailer), a decent online offering and diversification into live music – helped by the decline of Woolworths and Zavvi is a pretty healthy platform for the future.

Today’s news that they’ve bought 50% of 7digital is another nudge in the right direction. A relatively small deal (£7.7m) that will give them a more meaningful digital footprint, and will bring some serious digital expertise into the business. The only thing I’m surprised about is that is that they’ve only bought half the business (not to mention a trading relationship with Spotify).

Why not go the whole hog, I wonder? Or was it just that the VC’s wanted out and everyone else wanted to stay in?

The heft of the still very credible HMV brand is also just what 7 needs if it wants to raise its game. Frankly, in this market, the chances of them creating a viable consumer brand is pretty minimal (they haven’t done it so far), better to team up with someone who already has one.

But, to go back to my point about the importance of the core business – this deal would be largely irrelevant if it wasn’t for the other announcement today that HMV UK like-for-like sales are up 1.7%, with total sales up 12.9% thanks to the integration of the stores they acquired from Zavvi.

They aren’t truly out of the water yet. Given the market the fact that they are high street retailers in a world that is ever faster becoming online and digital, you suspect they never really will be. The fact that their share price is down by 13% this year, despite everyone widely acknowledging that Fox has done an excellent transformation job shows the market is still luke warm about prospects for genuine growth. But, right now, things could be a lot, lot worse for them.

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Nokia is one of the businesses I’m looking at in my book. Although, the way they’re currently announcing things at the moment, I’m keep having to add bits. A deal with Microsoft here. A new netbook there – it all adds up…

The reason I’m writing about them is a bit fiddly to explain, but they have been one of the great technology companies of the last couple of decades, and now they find themselves despite being the world’s biggest provider of handsets, they are having to play catch-up in the smartphone world with the recent upstarts Apple and RIM.

Their strategy has been to transform themselves from a handset manufacturer (an increasingly commoditised game) into a software and services business – initially announced in August 2007, resulting in a major restructure six months later (here is how the Economist covered it ).

This is a massive transformation programe – it’s interesting that even now, two years after initially telling everyone the chief exec Olli-Pekka Kallasvuo, still has to stress it in an interview with the FT on Monday .

When he says: ‘It is a big change, it’s very challenging’, you guess that just scrapes the surface of it.

The problem is that while they might be talking about services being the future, they know their smart phones have a fair bit of catching up to do if they want to be in the same usability league as the iPhone, Android and Blackberry (and I speak as an E71 owner who has used all of the others).

In other words, if they want to make it to a lovely software and services future, they’re going to have to deliver some kick-ass hardware to help them get there. Because we consumers love our gadgets.

I say ‘hardware’ rather than ‘handset’ because of the launch of their booklet (see the video below, if you haven’t already). With all that moody lighting, it looks gorgeous, but I wonder if it’ll feel quite so slick up close. It looks a bit solid if you ask me – and there’s a lot of netbooks out there. A lot of cheap netbooks from good brands.

Nokia’s history is well known – in particular the decision to focus on mobile in the 80s and the way they overtook pretty much everyone to become a global leader – a combination of great timing, and 15 years of great product development and (bar one horrific glitch in 1995) industry-leading supply chain management.

But the challenge they now face is of a different kind all together. They’ve gone from being the challenger and the rising star to being the incumbent.

And it is always harder for an incumbent to transform than a new entrant to innovate and grow.

Not only are they having to refocus a massive global organisation (and the services division is the result of a blitz of acquisitions over the last few years, which brings its own challenges), but they have to make sure that any software they launch works on dozens and dozens of different handsets.

And at the same time, they have to make sure that their core business doesn’t fall too far behind.

On every level, this is an oil-tanker-like turnaround. The big lesson so far is just how long it takes.

The obvious question is whether it will succeed – and I wouldn’t be so presumptuous to think I have the answer. But they have plenty on their side – and no shortage of ambition. This month’s Fast Company, gets all enthusiastic about their potential (a little too enthusiastic – but that’s what happense when business journalists meet rock stars).

But, I suspect ’success’ in the future is going to look very different to ’success’ in the past. At best, they will be one of a leading pack rather than an outright leader. Whether that gives them the growth and margins they have known in the past is another matter.

Judging on their current share price performance – it seems the market thinks not. But hey, what does the market know?

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