An Outage at Netflix

Posted on August 18, 2008 | Filed Under Value | 2 Comments

A lovely (to us, not so much to Netflix) example of how to make a value argument in sales arose after a recent Netflix technical problem caused their web site to go down, and shipments of movies to stop for days.

The unknown technical issue was rumored to be internal to a proprietary software solution Netflix uses to manage their movie reservation/shipping/check-in/check-out processes.   The head of Netflix operations actually posted some status on their blog on Tuesday, apologizing for the problem.  He posted again on Wednesday, then two more times on Thursday. All shipping function was not yet restored when we started this article.

How does this relate to value and sales? The best sales arguments compel action based on a reward if you take action (buy) or a risk if you don’t. If you read the various articles about the outage, a relevant set of facts can be easily found, and those facts provide the base not only to make such an argument, but to put a number on it (quantify it).

Some key info:

First, as a seller, you need to have a solution. In this case, it might be a services offering that more rapidly fixes the problem, or (the option we will go with) a new software system to manage their distribution and reservations.   Suspend disbelief for a few moments, since we don’t really know what the problem is or what caused it, and imagine further that Netflix is soliciting replacement solutions for their software systems.

Here’s your argument: “Our new distribution and reservation software provides you with the functions that you told us you needed at a price of only $2.3M – and it NEVER FAILS!   Your most recent outage using your proprietary system cost you $4.7M.  All of that was profit, which was brought up by shareholders at your annual meeting.   Similar outages are happening at the rate of 2 per year.  The ROI for your investment in our product is ½ an outage.  Please sign here.”

Now, there are issues with the argument. You wouldn’t want to poke them in the eye quite so much and cause resentment.   You would have to address a comparison to the costs of an internal solution, which are likely to be less than a total replacement (if technically feasible – you should try to find out).   You would have to address the other competitive alternatives, if there were any.  They are likely to ask for guarantees.  And (this is a good one) if your argument is true, you might not be charging enough for your solution – the payback is too good.  You might be able to match the price and value more closely (by which we mean, raise your price).

However, issues aside, this fundamental method of making the argument is a good one. You know the specific, quantified value of your solution, and you use this information in your sales argument. In our experience, most sellers fail in this step. They assume the buyer knows the value, don’t do their homework, and end up with a sales proposal that is significantly weaker than it could be.

You’ll raise your odds of closing the deal, and it will close sooner. (td)

Oh No Mr. Bill! (Part 2) Patents at Qualcomm and Nokia

Posted on August 14, 2008 | Filed Under Leverage | Leave a Comment

In our preceding article we applied the principle of Negotiation Leverage to a sales argument for replacement software.  The case we looked at used an overstated fear of the risks of lack of support to attempt to drive a client to buy a replacement.  We called it the “Oh No Mr. Bill!”[1] argument, because it relied on using the fear of catastrophe to motivate the buyer.  For the most part, it is an ineffective argument.

Let’s look at another “Oh No Mr. Bill!” argument, this time for patents.

In 2005, a string of lawsuits began between Qualcomm and Nokia, after Nokia’s license to use Qualcomm patents had expired.  It is a certainty that Qualcomm, in advance of that expiration, warned (or “threatened” – take your pick) Nokia that failure to renew would cause any number of catastrophes for Nokia, up to and including a complete inability to ship their products because of injunctions Qualcomm would win in court.  If they were smart (see our “Value” articles), Qualcomm quantified the revenue impact that this would have on Nokia, and the subsequent stock losses.  Oh No, Mr. Bill!

As K&R would predict, these arguments failed to motivate Nokia to act before the expiration of the agreement.  Instead, there have been 3 years of lawsuits and countersuits, including a complaint from Nokia to the EOC about Qualcomm’s behavior.

Yet recently, they settled.  Why?  Several factors combined to ratchet up the Negotiation Leverage that could be brought to bear. No single article we read had all the factors in it.

First, one of the reported key technology patents that Qualcomm owns is related to Long-Term-Evolution (LTE).  LTE is a technology that most cell service providers plan to deploy in 2010.  This creates a negotiation “timestamp” which is outside of Nokia’s control, but which is critical to their ability to remain competitive in selling phones to their clients.  Given the likely development timeline for phones, Nokia had to either settle soon or find an alternative technology.  Without one or the other, the risk to their revenue becomes real. The approach of that timestamp creates leverage for Qualcomm. Nokia could counter only it if they had a real technical alternative or if they settled.

Second, the actual patent infringement case was about to begin.  The settlement came on the same day that the case was scheduled to start.  The start of the trial was actually delayed one day to allow the settlement conversations to continue.  The start date probably created leverage on both parties, but to a greater degree on Nokia.  Court costs are not insubstantial, so Qualcomm cares about that.  However, there are both court costs and the risk of an injunction affecting Nokia.  The greater leverage probably bears on Nokia, and accrues to Qualcomm.

Third, the settlement also came one day after a German court invalidated a key Qualcomm GSM patent.  This raises the risk of additional invalidations, and decreases the certainty of a licensing payout from Nokia to Qualcomm, adding leverage for Nokia.

This Qualcomm/Nokia story shows another example the big difference between the threat of catastrophe and its reality.  The threat sounded imminent, but in reality, it was 3 years away.

Don’t make this mistake when you negotiate.  Understand your real Negotiation Leverage position.  When you are negotiating, think about what is causing leverage – on you, and on the other side.  Don’t fall for the “Oh No Mr. Bill!” argument.  Make sure your logic is sound, and based on real risks and rewards.

Oh, one last thing.  Qualcomm and Nokia signed a 15-year agreement.  We’ll check back in 2023, when the leverage starts building up to interesting levels again.  (td)

[1] Mr. Bill is the clay figurine star of a series of short subjects shown from 1976 to 1980 on Saturday Night Live (SNL). The “Mr. Bill Show” was a parody of children’s shows.

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