Taking Stock of Maverick Businesses

By Mac Greer
November 8, 2006

Who will be the next Steve Jobs? What's the next Google? Which cutting-edge companies of today will become the market beating stocks of tomorrow? In "Ahead of the Curve," The Motley Fool talks innovation and investing with CEOs, business leaders, and other corporate kahunas. Join us as we discuss our rapidly changing world. It's not business as usual. It's "Ahead of the Curve."

Mac Greer: Bill Taylor is co-founder and founding editor of Fast Company and is the author of the recently published book, Mavericks at Work: Why the Most Original Minds in Business Win. Bill, welcome.

Bill Taylor: Great to be here, thanks.

Mac Greer: Bill, what inspired the book?

Bill Taylor: Well, it was really the goal of ours with the book to change and reshape the conversation about business innovation and leadership. I loved the spirit of creativity, innovation, and entrepreneurship that has really come to mark America in the world economy. Obviously for those of us who love those things, the last five years have been a pretty difficult time, with an endless parade of the dot.com collapse followed by CEO scandals and Enron and WorldCom followed by mutual fund shenanigans. We have seen the face of business at its worst and it hasn't been a very pretty sight.

This book is really devoted to showcasing the power of business at its best. The proposition that you can create tremendous economic value in the marketplace by building companies, whether they are publicly traded or privately held, by building companies around a distinctive and disruptive and authentic sense of values.

Mac Greer: What was the most surprising thing you learned as you were writing this book?

Bill Taylor: The most surprising thing was in some sense how unimportant technology and money were to the success of the companies we got to know and wrote about. ... It became so clear to us that winning companies really stand for important ideas and that behind each of the companies we got to know was a distinctive and disruptive sense of purpose, a value system, and it was the companies with the clearest sense of purpose that were the ones that were winning big. In some ways it is a kind of, even though there is a lot of razzle-dazzle innovation and new approaches to leadership, it is kind of an old-fashioned method.

When I size up a company, when I meet a company for a first time, go inside, spend a day or two there, the question I am always asking is not what product and service you sell or what is your business model; it is what ideas do you stand for? What do you see about the future trajectory of your marketplace that other companies simply don't see? How are you trying to reshape the expectations of customers, investors, employees about what is possible in this business? And so to me that was the most surprising thing.

Mac Greer: You write about Netflix (Nasdaq: NFLX) CEO Reed Hastings, who has said that Netflix is trying to do for movies what Starbucks has done for coffee --- create a culture of appreciation and broaden people's tastes. What do you think is behind the success of Netflix?

Bill Taylor: Well it is funny because everybody is always eager to write off Netflix. First it was going to be Wal-Mart is going to get into the business and then Blockbuster (NYSE: BBI) is going to get into the business, and then Amazon is going to get into the business.

Mac Greer: And I am guilty of that. I was infatuated with video on demand and I thought that was going to be the Netflix killer.

Bill Taylor: When you can download it, why do you need videos through the mail? But to me there are two big points about Netflix. First of all, the magic of Netflix is not really about movie distribution: It is about movie selection, and Netflix has just been masterful at saying we have got now 5 million customers who select their movies online.

We get all of them to, when they watch a movie, rate the movie on a one-to- five scale. They get easily a million ratings per day. They have got over a billion ratings in the movie database and they have got their CineMatch technology that crunches all the data and like a lot of online sites, spits out recommendations about movies you may never have thought of seeing, but that Netflix believes you will enjoy. But they do this much better than any site I know.

I think it is something like 65% of the movies that get rented on Netflix are based on Netflix recommendations and so the key is not movie distribution: The key is movie selection, and Netflix saying to its customers, by virtue of the collective intelligence of all 5 million of you, all of you rating movies, our software putting the ratings together and finding people with similar tastes, we will allow you to discover and watch movies that you would have never discovered on your own if you were just walking into a Blockbuster retail outlet and looking up on the board or asking a 20-something clerk what looks good in the new releases this week or something like that. I think that is why people are so passionate about Netflix. It is not because the movie comes in the mail; it is because the movie that is coming in the mail is something you might not have seen otherwise.

One of the other big themes of our book is the challenge for any customer, any company, in this world of endless choice and oversupply, is to strike an emotional and psychological connection with your customers, and Netflix has discovered one way to make your customers really passionate about your product is to make them smarter as a consumer, and in this case about the movies they are renting.

Now Netflix has taken it to the next level with this Netflix prize. They have offered a prize of a million dollars to any programmer or team of programmers who can make their software matching technology, the CineMatch technology, 10% better than it is today. So they have now got programmers all around the world competing with each other to improve the technology that is at the heart of Netflix's success.

So customers make each other smarter by rating all these movies and putting in their ratings and now they are going outside the company and outside the customers so the whole world of technology is saying, OK, can you guys compete with one another to make our technology 10% better?

So they have got a database of 400,000 ratings and then they have got a database of recommendations and so on and so forth. So there is this sandbox that people are playing with to try to improve the software. Another very smart idea with respect to the logic of innovation, rather than just relying on a handful of programmers inside Netflix.

Mac Greer: And Bill, let's close with our Buy, Sell, or Hold segment, where we present you with an innovative company, an innovative person, an innovative technology and ask you if they were a stock, would you be buying, selling, or holding?

XM (Nasdaq: XMSR) and Sirius (Nasdaq: SIRI) have both seen their stocks struggle, but there is a lot of excitement about the satellite radio consumer experience. With that in mind, Bill, buy, sell, or hold the future of satellite radio?

Bill Taylor: I buy the future of satellite radio; I hold the future of those two companies. I think we have seen time and again there is a big difference between a service that everybody wants to have and needs to have, and I think satellite radio is that, and being the early companies in knowing what your financial fate would be. So satellite radio, total buy; XM and Sirius as stocks, hold at best.

Mac Greer: And do you think that ultimately they are going to need to merge?

Bill Taylor: That would seem to make a lot of sense to me.

Mac Greer: It was at one time an innovator in the way the PCs were marketed and sold, but its stock has fallen on some tough times lately as well. Buy, sell, or hold the future of Dell (Nasdaq: DELL)?

Bill Taylor: I would sell. I think the future of Dell, to me, is a lot like the future of Wal-Mart, which is for a while being incredibly low-cost. To their credit, in Dell's case -- the whole personalization and customization thing. They had one huge idea and they took it as far as anybody can take it, but ultimately what Dell has to do is rethink the original idea that made it great and you look at the power of design and innovation in the case of Apple, for example, and you see that at some point, PCs become so cheap that being another $10 cheaper just doesn't get you the same kind of goodwill it used to, so I would sell Dell until they can rethink the idea that made them great in the first place.

Mac Greer: And let's talk about Apple (Nasdaq: AAPL). Mac sales seem to be picking up steam again; the iPod of course continues to be a huge seller. Buy, sell, or hold the future of Apple?

Bill Taylor: I very much buy the future of Apple with one caveat. I love the product, I love the company. Steve Jobs may well be the Howard Hughes of our generation, and I mean that in the best sense of being someone who dreams huge dreams and has the chutzpah to pull them off. I do think, though, the Apple obsession with secrecy and closing off its systems to everybody else -- it may work for Apple. I don't think it is a model for most companies going forward, so weirdly enough, Apple makes some of the world's most exciting and cutting-edge products with what I consider a very old-fashioned and obsolete business model.

Mac Greer: Google (Nasdaq: GOOG) paid around $1.6 billion in stock for the business despite the fact that there are a lot of legal concerns. Buy, sell, or hold the Google acquisition of YouTube?

Bill Taylor: I would sell. I am not persuaded that these Web 2.0 sort of Chia Pet companies that are nothing. You sprinkle a little water on them and then suddenly, whether it is MySpace or Facebook, are here for the long term, so people are getting on Yahoo's case for not closing the deal with YouTube. They [Yahoo] may wind up having the last laugh on that one.

Mac Greer: And I read an article recently about how young people are starting to leave Facebook because it is no longer the cool place. I am just wondering, given the fickleness of human nature, how quickly that might turn with regards to YouTube?

Bill Taylor: I think that is the occupational hazard, if you will, of all the companies in this space and paying that much in stock, but nonetheless paying that much for a company that you just don't know -- I think things go from being cool to being uncool in the wink of an 18-year old kid's eyes, so who knows what the future holds.

Mac Greer: Bill Taylor is the author of Mavericks at Work: Why the Most Original Minds in Business Win. Bill, thanks for joining us.

Bill Taylor: It was great, it was a blast. Thanks, Mac.

Netflix, Starbucks, Amazon, and Yahoo! are Motley Fool Stock Advisor recommendations. Wal-Mart is an Inside Value pick, and XM Satellite is a Rule Breakers pick. Dell is recommended in both Stock Advisor and Inside Value. The Fool has a newsletter for almost every type of investor.