Investors simply love cash-on-cash recurring revenue. Virtual products with no need to ship, install or provide long-term, meaningful support for–that’s the ideal business model. This is one of the very reasons Google has determined to move away from a hardware strategy altogether. Contrast that with the high margins gleaned from Apple upfront hardware purchases and you have two business models that work. Unfortunately, one that is wholly criticized by investors over the other because it requires a much more capital intensive approach to doing business. From Apple’s perspective, this remains an integral part of their overall strategy and one which didn’t really make sense until hardware was able to catch up with the advances software was making. Some of the vertically-integrated products and services in digital signage represent very strategic pieces to an overall complex ecosystem. Claiming that software or advertising is the bell of the ball in the industry just because the margins are 85%+ while ignoring other business components would be like a surgeon wanting to remove your gall bladder just because it doesn’t really do much most of the time so it won’t matter too much.
The Dell Debacle
The story of the rise and dip of Dell computers is a great example of focusing on profits at the expense of the business. Some have argued that Dell was plagued in part by the rise of tablets and other non-PC devices, but at its core was Dell’s focus on margin and profitability while ignoring threats from without. As Dell continued to grow, the financial analyst discovered that they could increase capital returns if they simply took manufacturing and in-house know-how of design off the company’s balance sheet. In doing so, they shifting manufacturing–and the knowledge with it–to OEMs overseas. In doing so, they did two deleterious things to the business. First, they removed the tacit knowledge that made them who they were. Second, their OEMs’ size became so large that they began to directly rival Dell itself.
Now Dell’s verbal strategy is to focus on the higher-ticket items in the enterprise computing market, allowing them to maintain the profitability that can and will sustain them as a company. To be fair to Dell, there are a number of external factors not mentioned here that all combined against the business. But the overall point remains valid: Dell eventually outsourced itself out of the market.
Many digital signage vendors may not be doing it directly, but many don’t realize that at some point both the software and hardware get commoditized, effectively driving down the price to zero. While it’s difficult to have one foot in multiple niches within a single industry, sometimes it’s necessary–especially if things remain in a state of flux. The difficulty to predict weather patterns in the market can sometimes force companies to spread their investment in a market much too thin, making them a jack of all trades and master of none. The dangers of a lack of focus approach cannot be understated, but there is an equal, if not greater danger, of focusing too much on bottom-line profitability at the expense of sustainability.
Focusing on the Enterprise
Like Dell many a digital signage hardware or software vendor has focused on the large, enterprise client. In most cases, targeting larger groups with greater willingness to pay for long-term sustainability is what is needed to keep companies afloat, particularly if they have outside financing and not-so-lean operating expenses. It is extremely difficult to target small businesses and consumers in any industry. Margins are almost always going to be less and working with them is more like herding cats than supporting customers.
The enterprise is great and often necessary, especially in the start-up phase of the business as the company many need larger clients and bigger cash infusions to sustain employees and start-up costs. Unless the business is bootstrapped, this is effectively, the way things work. In this industry, the high margin focus is typically in software (particularly SaaS and enterprise licensing) as well as advertising. That’s where the gross margin focus has historically been. Once the business can somewhat stand on its own two feet, then there is often a push to shift into different market segments. In this case, a push to move down market to the SME or across market to say content creation or digital signage installation. Hitting a different market segment is often more difficult, especially when you’ve been overly dedicated to your particular niche. Also, doing so without alienating or angering existing customers can also be very difficult.
We’re a bit different. We started from the bottom and worked our way up.
Cross-Selling & Moving Up Market
We’re in this segment of our growth cycle as a company right now. We’ve established strategic partnerships (some in hardware, some in advertising, some in installation and some in content) to help expand our product offerings across our existing customer segment: the small to medium business owner, looking for a one-stop shop in digital signage and digital menus. In addition, we’ve also begun hitting our larger, enterprise customers with more dedicated hosting and support options with the release of the complete mediaHYBRID enterprise solution. While we’ve outsourced some of this initial work, there are areas in what we’re currently doing that were outside our original wheelhouse, but we’re adapting quickly to customer needs and learning all the time. Our focus is to provide a sustainable business that not only operates on extremely high margins, but does so with the cost-consciousness of a small business owner in mind.
We’re nowhere near where we could be as a company or as an industry. Our hope is to be prepared for the shifting sand in the digital signage market in whatever way we can.