A post by Sarah on competition for airport shuttle service in Bloomington got me thinking about the bus service in NYC.

Cheap bus service to Boston was long provided by Chinatown for $15. Service was poor, buses were dirty, no one spoke English. Someone must have thought, “I can make money by inexpensively improving a few things on the Chinatown service. They have no idea what they are doing. Half of the employees are uneducated, illegal immigrants.”

Two players entered the market in 2008, one backed by a public company and the other owned by Grayhound Lines, the largest bus transporter in the US. Easy success, right? Shouldn’t the wealthy, business-savvy, and mature firms upset the incompetent Chinese service?

Pre-2008

Chinatown buses have long dominated the NYC-Boston bus route. Fung Wah and Lucky Star were the only two players:

• Price: $15 flat rate, first come first serve
• Service: Horrible–there are stories of bus drivers deserting the bus and chickens getting loose in the cabin. Buses are rarely clean. Drivers and employees speak broken English.
• Speed: what should take about 4 hours usually takes between 3-4 hours due to speeding.

2008- Two New Entrants

Bolt Bus

• Ownership: Grayhound Lines
• Price: Variable, $1 – $25. Book ticket for a specific route, date, and time.
• Service: incredible; friendly-drivers, clean bus. WiFi and plugs in every seat. May only book ticket online.
• Speed: 4-5 hours.

Mega Bus

• Ownership: Stagecoach Group
• Price: Variable, $1 – $25. Book ticket for a specific route, date, and time.
• Service: similar service to Bolt Bus. WiFi, plugs, and TVs. May only book ticket online.
• Speed: 4-5 hours.

Competitive Strategy

Bolt Bus and Mega Bus tried to improve on Chinatown services. It read almost like an MBA case-study. Let’s add WiFi and Plugs! Make the bus really clean! Have a fancy website! The prices were competitive, and I suspect that Mega/Bolt Bus will take a small percent of Chinatown’s market share.

Who Wins?

As cliche as it sounds, Chinatown buses, however, still outperformed the entrants in almost every operational category. Buses were actually fast. I rarely had to wait. Why?

Chinatown buses run continually. They fluctuate their bus inventory as demand increases. You don’t buy a ticket for a specific bus or time–you just show up. You wait in line until you can board a bus with capacity. This creates an incentive for Chinatown to move people as fast as possible. What does this mean? Drive faster. Do not make people wait. Order more buses when there is a spike in demand (people are queuing in line). Total travel time from NYC-Boston is about 1.5-2 hours shorter than Bolt/Mega Bus for these reasons.

Sure, people love the amenities on Bolt/Mega Bus. But we all just want to get from point A to point B as fast as possible. The new entrants missed this point: speed and waiting time is the most important thing in travel. Why would you not compete on this?

Bolt/Mega Bus chose to stick with the same principles that make traditional bus service so dismal. Scheduling buses like airlines/trains creates longer wait times, especially when there are delays. The arrogance of this choice astounds me, and I am guessing Grayhound is probably losing a ton of money from  cannabilism of their premium service.

These companies did not do their market research, and they probably thought that taking traditional bus service and lowering the price would destroy the incumbents. China, however, has won by a landslide.

In Short: If you’re going to compete in an established market, focus on getting most important thing to consumer right. Competing on other elements, such as service and technology are great, but don’t lose sight of what the consumer really cares about.

Netflix would like to improve their movie recommendation system, and they’re willing to pay $1,000,000 to anyone that can do it. Even you can participate! Here’s the details:

Cinematch
To encourage users to keep their subscriptions active, Netflix uses a movie recommendation system called Cinematch. It predicts whether someone will enjoy a movie based on how much they liked or disliked other movies. The results are displayed to users, titled “Movies You’ll Love.” Cinematch can make some impressive connections. People who enjoy The Patriot also tend to like Pearl Harbor; both are history-war-action movies. Cinematch’s suggestions drive 60% of Netflix’s rentals.

Can Cinematch work better?
Cinematch does an incredible job predicting user preferences. Netflix has improved upon the algorithms since 2000, identifying success by comparing actual user ratings to Cinematch’s predicted user ratings. But Netflix wondered if they could achieve better results. Currently, Cinematch can predict whether a user will like a movie, on a scale 1 to 5 stars, by about 1 star. But Netflix is curious if someone can think of algorithms that could beat Cinematch’s prediction accuracy–perhaps there is a new mathematical or statistical method that Netflix has not tried.

Cash-Money
Netflix will pay $1,000,000 to anyone who can improve Cinematch’s prediction accuracy by 10%. Essentially, Cinematch can predict a user’s movie rating within 1 star. Netflix will award $1,000,000 to anyone who can create a method that predicts ratings within 0.9 stars. The competition was announced in October 2006–so far thousands of programmers have made attempts, but no one reached 10% and claimed the prize.

Why this is brilliant
Netflix derives much of their business from the movie recommendation system. Consider their business model: users pay a fixed price ($5-$20/month) to rent movies. At first, New customers will likely rent any hit movies they have not seen, but over time their initial interest dwindles and customers may stop renting. Every month, Netflix must justify the monthly cost and direct users to new movies that they never considered watching. This is the value of Cinematch; users consume more content with the movie recommendation system. Therefore, an accurate system that correctly judges a user’s preferences will provide infinite value to Netflix. Netflix tried for years to improve Cinematch, with only incremental results. A marginal performance increase of 10% could generate revenue well in excess of the $1,000,000 prize.

How it works
Teams register on the Netflix Prize site. Contestants can then download an enormous data set of 480,000 customers that rated 18,000 movies. Teams write algorithms to predict the customer ratings, and then Netflix tests the code against a different ratings data set, which has been kept secret.

Marketing Note: high-minded marketers will likely classify the prize as “web 2.0,” “mass collaboration,” “wikinomics,” or “crowd surfing.” In reality, Netflix based the contest off of the British Longitude Prize of 1714. Eight years ago, Goldcorp also paid half a million dollars to anyone who could find gold deposits using its mining data.

Additional Reading (and references)
Writing Code and Winning the Netflix Prize
If You Like This, You’re Sure to Love That

via Mike Hudack

In my last post, I was hasty in my judgment of Twitter.

Shawn brought up a great point about my negative conclusion: many companies are successfully leveraging twitter as a customer service tool. Comcast, at comcastcares, scours Twitter for disgruntled tweets and replies accordingly. Besides the labor cost, it’s free, and very likely grosses positive revenue by calming angry customers.

GM, surprisingly, follows the Comcast model, talking to consumers–engaging them in a dialogue. Notice that most tweets are “@” users, definitely impressive from an old-world company like GM. Forrester is followed by 3,750 users. Again, posts are directed at its fans.

But not every company engages in this strategy. Every tweet from M&Ms is one-way.  This amounts to a bastardized version of email (though it is free, nonetheless).

Should Twitter be added to the laundry list of new media in which companies should be participating? Probably not. Most companies will not have users tweeting about their products (e.g., B2B). The relevance is minimal. But for those with relevance, Twitter provides a low-cost opportunity to listen to consumers.

Cuban was recently accused of Insider Trading by the SEC. Though I have full faith that Cuban will be exonerated, it reminded me of a similar story about Charles Schwab.

Schwab was the darling of the steel industry in 1921. He had just finished serving the government during WW1 after being conscipted to lead a ship building company. Schwab was endlessly praised by the press for his patriotism.

After a standard audit by the government on the ship building company, he was suddenly accused of pocketing $100,000 in business-related expenses. The accusation created a serious blot on his integrity. 80 years ago, information was not nearly as transparent as it is now, and there was little that could be done to sway immediate public opinion.

What did Schwab do? In a hearing the following day he asked someone to point out his accuser. He walked up to him and said, “I do not believe I know you and I don’t recall ever having met you. You have ruined my reputation. You have done me an irreparable injury. Why did you do it?”

Cuban may not have quite the support Schwab had, but he fired off a response to the SEC:

“I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”

Instead of this wimpy (though legally intelligent) response by Cuban, I would have hoped to have read a statement with more fire. Every supporter of Cuban is likely having a “Say it ain’t so, Joe” , and they need something grab onto. The media is targeting him from every angle. Uninformed writers are evoking his support of “short-selling” and antics with the Dallas Mavericks. They are abusing his reputation in every way.

If he does stay quiet, and if he is acquitted, shouldn’t he have every right to say to the SEC commissioner, as Schwab has 80 years ago, face-to-face, “You have ruined my reputation. You have done me an irreparable injury. Why did you do it?”