McDonald's, with consumers increasingly seeking healthful and flexible fast-food options, has had six consecutive quarters of sales declines. Clothing chain Gap Inc., suffering from a shift in consumer preference toward discount clothing and digital entertainment, recently announced it would close nearly a quarter of its stores and eliminate 250 corporate positions. And IBM, facing declining demand for its legacy hardware and weakness in its software and services businesses, has seen its sales decline for 12 consecutive quarters.
In today's economy, rapid market change threatens even large, long-standing and financially strong companies. Whether those companies can maintain their influence in the face of market upheaval depends in large part on their ability to use their legacy status as a tool for change.
A 'Stodgy Utility' Disrupts Telecom
It is hard to overemphasize the size of Verizon. It has more than $127 billion in annual revenue. It is the largest U.S. wireless company, with more than 108 million retail connections. Its wireless network is available to more than 98 percent of the U.S. population. It is the sixth largest pay-TV operator, with 5.7 million cable customers. It has 6.7 million Internet subscribers. It serves 97 percent of Fortune 500 companies.
However, major changes in the telecommunications industry are threatening even the largest companies. The saturation of providers and lack of new markets have resulted in price-based competition and more consolidation.
Consumers have long been frustrated with paying high cable TV prices and being forced to buy packages that include many channels they don't want to watch. In response, Apple and Dish network have begun offering what are called "skinny bundles" of TV channels for prices that are lower than those of typical cable TV packages. Some consumers are dropping their cable TV subscriptions altogether in favor of streaming services like Netflix — a phenomenon known in the cable industry as going "over the top" of traditional TV. Researchers are seeing a rapid growth in the time consumers are spending with digital video — particularly on mobile devices.
Faced with these changes, Verizon has emerged from its role as a "stodgy utility" to become an aggressive force for change, as reported in a May 13 New York Times article ,"Verizon Takes to the Battlefield.".
Among Verizon's strategies is to form its own over-the-top mobile video service. It paid $1 billion for mobile rights to National Football League games and entered into an agreement with youth-oriented media company Awesomeness TV to develop original content. In May, Verizon acquired AOL for $4.4 billion, giving Verizon's customers access to an array of digital content, much of it video. Equally important, the AOL acquisition provides Verizon with a platform for digital advertising sales — a $600 billion market worldwide. This is a new revenue stream for Verizon, and it positions the company in competition with Google and Facebook.
Verizon also is shaking up the traditional economics of cable TV with the announcement that it will replace its traditional 180-channel cable packages with its own skinny bundles at $55 per month. The most disruptive element of this change is its effect on ESPN — the network with by far the highest revenue from pay-TV operators. By moving ESPN out of the core cable package and into a tier that will require an additional payment, Verizon opens the door for other cable providers to do the same.
ESPN, whose economic structure is built on reaching a large number of households, has sued Verizon, saying the existing agreement calls for ESPN to be part of the basic cable package. According to industry analysts, this change is a "crack in the dike" of traditional cable TV economics that could lead to "billions of dollars in lost revenue for Disney," ESPN's parent company, according to the April 30 Bloomberg Business article "Verizon Ushers in the Era of 'Skinny Cable.'"
Verizon says the move reflects a desire to meet consumers' changing needs. "There's been an epiphany here that we live in the age of the empowered consumer," said a Verizon spokesperson.
Lessons for Health Care Providers
The telecommunications and media industry has notable parallels with health care. In many regions, the hospital market is saturated, increasingly leading to commoditization and competition based on price. Skinny bundles are a familiar concept in health care, with payers and employers developing narrow networks of providers that are able to deliver high quality at low prices. In health care as in cable TV, consumers are showing dissatisfaction with high costs and lack of flexibility by going over the top of traditional health care organizations and accessing care from sources such as retail pharmacy clinics and telehealth companies. In fact, CVS just announced that it had surpassed 25 million visits to its in-store clinics.
Verizon's response to its environment carries lessons that are critical for legacy health care providers — in particular, seizing new business opportunities and committing to meet new consumer expectations.
Move aggressively into nontraditional areas. Verizon is aggressively expanding its expertise into new services that, while complementing its core business, show a significant departure from tradition. In health care, a changing environment brings with it a similar need to think beyond an organization's traditional role and activities. Organizations likely will need to delve into retail and virtual care. They may require new expertise in business intelligence, actuarial sciences or public health. And they may branch out into services further removed from traditional care delivery, but still part of the mission of improved health. The key is to put major organizational focus on investigation and experimentation, and to move quickly to implement the best opportunities.
Make major changes to meet consumer expectations.Verizon's strategies also demonstrate that meeting new consumer expectations is crucial to staying relevant — and that meeting those expectations requires a major organizational commitment. Verizon has demonstrated its commitment with significant investments in new business ventures and even actions that disrupt the industry's business model. In health care, although patient satisfaction has long been a measure of success, most organizations are unprepared to meet the kind of radical changes in consumer expectations arising from the Internet. For most organizations, future consumer satisfaction will require new information about consumers' health, attitudes and behaviors. It will require new capabilities in service planning, patient engagement and virtual care. And it will require a willingness to reshape services to allow people more convenience, choice and flexibility in how they access care.
Size, longevity and financial strength cannot insulate a company from changing consumer demands, innovative competitors and new technology. Legacy status also can be a drawback when a company needs to pivot quickly to address new market forces. "One of the challenges that big, incumbent companies have is inertia — the tendency to wait to be disrupted by new competitors, rather than being the disrupter," said Verizon CEO Lowell McAdam, quoted in the aforementioned New York Times article. Whether Verizon's strategies will be successful is not yet known. However, Verizon's actions show that when a strong organization recognizes a changing environment, commits itself to being a major force in that environment, and is willing to disrupt the status quo, legacy status can be a tool for continued relevance.