Recently I wrote about customer concentration issues and about obstacles to growth. This memo is about something often forgotten and a perfect example of it is a situation Netflix is facing.
NBCUniversal, AT&T’s Warner Media, and Disney are entering the streaming video market. Netflix has 72% of its viewers watching “library programming,” i.e. shows produced by others and whose rights Netflix buys (for a limited amount of time). The above three contribute 55% of library programming viewership and it looks like all of that will go away in the next few years.
In other words, they have vendor concentration issues. No wonder they are putting so much money into producing their own shows and movies.
I have to say in the small to lower middle-market world this is not often an issue. But when it arises, it’s a concern. I remember talking to a seafood processor and packager who got almost all his product from one fishing fleet and an assembler and packager with 80% of his primary component from one source.
A past client was burned twice by this. His top supplier, over 60%, went to in-house distribution. I helped him fix the business and 10-12 years later he called to tell me it happened again. His larger, competitor’s supplier went in-house, his supplier went to his competitor, and he was the odd man out. He sure didn’t learn from experience and it killed him (killed his business anyway). When business is good, we lose track of pitfalls like this, until they sneak up and bite us.
Concentration kills. Whether it’s with customers, employees, vendors, and, especially, the owner.
“The greatest ability in business is to get along with others and to influence their actions.” John Hancock