The idiom “Crossing the Rubicon” means to pass a point of no return, and refers to Julius Caesar’s army’s crossing of the Rubicon River (in the north of Italy) in 49 BC, which was considered an act of insurrection and treason. Julius Caesar uttered the famous phrase “alea iacta est”—the die is cast—as his army marched through the shallow river. 

– Wikipedia


Six days ago, Unilever acquired Dollar Shave Club for $1 billion.   This is a very big headline, I think, and I’ve been pondering the story for the past few days.  What follows is a distillation of what’s been on my mind:

Seth Godin has been writing of the “TV-Industrial complex” for more than a decade.  Here’s a posting from 2004.  And another.  In this link, he spells out the concept with granular precision — as he explains below:

Remember the much-maligned “military-industrial complex”? The idea behind it was simple. The government spent money on weapons. Companies received tax dollars to build weapons. These companies hired labor. They paid taxes. The taxes were used to buy more weapons. A virtuous cycle was created: The government got bigger, employment went up, and it appeared that everyone was a winner.

 

The military-industrial complex was likely responsible for many of the world’s ills, but it was undeniably a symbiotic system. As one half of it grew and prospered, so did the other.

 

Little noticed over the past fifty years was a very different symbiotic relationship, one that arguably created far more wealth (with large side effects) than the military-industrial complex did. I call it the TV-industrial complex. The reason we need to worry about it is that it’s dying. We built a huge economic engine around the idea of this system, and now it’s going away. The death of the complex is responsible for much of the turmoil at our companies today.

 

The system was simple. Find a large market niche that’s growing and not yet dominated. Build a factory. Buy a lot of TV ads. The ads will lead to retail distribution and to sales. The sales will keep the factory busy and create profits.

 

Astute businesses then used all the profits to buy more ads. This led to more distribution and more factories. Soon the virtuous cycle was in place, and a large, profitable brand was built.

 

As the brand was built, it could command a higher price, generating larger profits and leaving more money for more TV ads. Consumers were trained to believe that “as seen on TV” was proof of product quality, so they looked for products on television. Non-advertised brands lost distribution and, ultimately, profits.

 

No, it’s not rocket science, but that’s partly why it worked so well. Big marketers with guts (like Procter & Gamble) were able to dominate entire categories by using this simple idea.

 

The old system worked for Revlon. Charles Revson was one of the first big TV advertisers, and advertising grew his company dramatically. Where did he spend his profits? On more TV ads.

 

In 1962, a smart ad agency hired Jay Ward, creator of Bullwinkle, and asked him to make a commercial. He invented Cap’n Crunch and came back with an animated commercial. Then, and only after that was done, did the cereal company go about actually making a cereal. Quaker knew that if they had a commercial, they could run enough ads to imprint the Cap’n into just about every kid in America. The cereal was secondary.

 

You could never afford to introduce Cap’n Crunch today, regardless of who made your commercial. Kids won’t listen. Neither will adults.

 

Consumers were kids in the candy store; they had pockets filled with shiny money and they had a real desire to buy stuff. We shopped on TV and we shopped in stores. We were in a hurry and we wanted to fill our houses, our fridges, and our garages.

 

A quick look down this list of Procter & Gamble brands turns up significant proof of the presence of the TV-industrial complex. Is it possible to read the list without filling your head with images and jingles?

 

Bold, Bounce, Bounty, Cascade, Charmin, Cheer, Cover Girl, Crest, Dawn, Downy, Folgers, Head & Shoulders, Herbal Essences, Ivory, Max Factor, Miss Clairol, Mr. Clean, Nice ’n Easy, Noxzema, NyQuil, Oil of Olay, Old Spice, Pampers, Pepto-Bismol, Pringles, Safeguard, Scope, Secret, Tampax, Tide, Vicks, Vidal Sassoon, and Zest. Throw in particularly annoying product pitches like Wisk and Irish Spring, and the point is obvious. Advertising this stuff used to work. Really well.

 

It’s hard for me to overstate the effectiveness of this system. Every time you buy a box of breakfast cereal, you’re seeing the power of TV at work. Due to a commercial you likely saw thirty years ago, you’re spending an extra dollar or two on a box of puffed wheat or sugared corn. Over your lifetime, that’s thousands of dollars in cost premium for TV ads just for breakfast cereal.

 

Of course, it wasn’t just supermarket brands. It was John Hancock and Merrill Lynch and Prudential. Archer Daniels Midland, Jeep, and Ronald Reagan as well. Big brands, big ideas, big impacts on our lives.

 

TV commercials are the most effective selling medium ever devised. A large part of the success of the American century is due to our companies’ perfecting this medium and exploiting it to the hilt.

 

Our cars, our cigarettes, our clothes, our food— anything that was effectively advertised on TV was changed by the medium. Not only did marketers use television to promote their products, but television itself changed the way products were created and marketed. As a result, all of the marketing Ps were adjusted to take advantage of the synergies between our factories and our ability to capture the attention of the audience.

 

Of course, it’s not just TV that’s fading. It’s newspapers and magazines—any form of media interrupting any form of consumer activity. Individuals and businesses have ceased to pay attention.

 

The TV-industrial complex lasted a half-century—a long time. So long that the people who devised the strategies and ads that worked so well are gone. There’s no one left at Philip Morris or General Foods who remembers what life was like before TV created the bureaucratic behemoths.

 

And that’s the problem. The TV-industrial complex is hemorrhaging, and most marketers don’t have a clue what to do about it. Every day, companies spend millions to re-create the glory days of the TV-industrial complex. And every day, they fail.

Why the extensive copy-and-pasting of Seth Godin’s now-ancient theoretic framework?  Compare to Ben Thompson’s brilliant take on what happened last week to P&G:

THE P&G FORMULA

 

No great company — and P&G is one of the greatest of all time — is built on only one competitive advantage. Rather, the seemingly unassailable profits and ceaseless growth enjoyed by P&G throughout its history — amazingly, the company basically doubled its revenue every decade from 1950 to 2010 — was driven through multiple interlocking advantages that created a whole even greater than the sum of its impressive parts.

 

Research and Development: P&G has long lived by the maxim articulated by former CEO Bob McDonald: “Promotions may win quarters, innovation wins decades.” To that end P&G has always outspent the competition when it comes to R&D: $2 billion in 2014, double Unilever, their next closest competitor, and the company employs over 1,000 Ph.D.’s and a host of ethnographic researchers. This has allowed P&G to consistently come up with new products and brand extensions and charge a premium for them.

 

Branding and Advertising: As inspiring as that McDonald quote may be, P&G also dominates advertising: in 2014 the company spent $10.1 billion in global advertising, 37% more than second-place Unilever. This is hardly a new trend: the company invented soap operas in 1933 to help hawk the cleaning products it was built on, and invented the idea of a brand manager who had a holistic view of products from research to creation to advertising to distribution.

 

Distribution and Retail: P&G’s huge collection of brands and products not only gave the company massive scale efficiencies in manufacturing, but more importantly led to a dominant position in retail. P&G built strong relationships with retailers that let them dominate finite shelf space, the scarcest resource for an industry producing relatively bulky inexpensive products.

 

P&G leveraged these resources in a simple formula that led to repeated success:

 

  • Spend significant resources on developing new products (more blades!) that can command a price premium
  • Spend even more resources on advertising the new product (mostly on TV) to create consumer awareness and demand
  • Spend yet more resources to ensure the new product is front-and-center in retail locations everywhere

The fulcrum:

Gillette’s model and P&G’s formula generally cost a lot of money: R&D cost money, TV advertising cost money, and wholesalers and retailers had to earn a margin as well, and that’s before P&G realized the return on their investment. The result was that cartridges that cost less than a quarter to manufacture and package were sold for $4 or more. That worked as long as P&G’s other advantages in technical superiority, advertising, and distribution held, but were they ever to falter, it was eminently viable to sell cartridges for less and still make a healthy margin

 

…AWS and Amazon itself, having both normalized e-commerce amongst consumers and incentivized the creation of fulfillment networks, made the creation of standalone e-commerce companies more viable than ever before. This meant that Dollar Shave Club, hosted on AWS servers, could neutralize P&G’s distribution advantage: on the Internet, shelf space is unlimited. More than that, an e-commerce model meant that Dollar Shave Club could not only be cheaper but also better: having your blades shipped to you automatically was a big advantage over going to the store.

 

That left advertising, and this is why this [shoe-string budget Youtube] video is so seminal: for basically no money Dollar Shave Club reached 20 million people. Some number of those people became customers, and through responsive customer service and an ongoing focus on social media marketing, Dollar Shave Club created an army of brand ambassadors who did for free what P&G had to pay billions for on TV: tell people that their razors were worth buying for a whole lot less money than Gillette was charging.

And the real kicker?

Perhaps the biggest of these second order effects is on value, and that’s where I come back to this purchase price: the tech community is celebrating the massive return for Dollar Shave Club’s investors, but $1 billion for a 16% unit share of a market dominated by a brand that cost $57 billion is startlingly small. Indeed, that’s why buying Dollar Shave Club was never an option for P&G: even if their model is superior P&G’s shareholders would never permit the abandonment of what made the company so successful for so long; a company so intently focused on growing revenue is incapable of slicing one of their most profitable lines by half or more.

 

For their part, Unilever is fortunate they don’t have a shaving business to protect, because being an incumbent is going to increasingly be the worst place to be. Dollar Shave Club’s motto may be “Shave Money Shave Time,” but just how many shareholders and policy makers are prepared for the shaving of value that this acquisition suggests is coming sooner rather than later?