What the Media Industry Can Teach Us About Digital Business Models

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From The Harvard Business Review:

It has been a great 20 years for U.S. media innovators, with hundreds of billions of dollars created by companies that are helping democratize content production and distribution while developing new ways to connect advertisers and customers. Google and its disruptive advertising model leads the pack with a $370 billion market capitalization, but consider also companies like Facebook ($225 billion), LinkedIn ($25 billion), Twitter ($24 billion), TripAdvisor ($11 billion), and Yelp ($3 billion).

Of course, for most traditional publishing incumbents, “great” is not the word that springs to mind. The U.S. newspaper industry has seen widespread bankruptcies and significant job losses. Only a handful of companies that primarily focus on traditional print publications still exist, such as The New York Times Company, E.W. Scripps, McClatchy, and A.H. Belo. The combined market value of those four companies? Less than $5 billion.

Why has this been the best of times for some in media and the worst of time for others? The answer reveals the critical role business models play in determining competitive winners in times of disruptive change.

Media executive Jeffrey Zucker once famously quipped that media companies embracing online disruption faced the unappealing prospect of “trading analog dollars for digital pennies” (Zucker now says it’s closer to quarters than pennies). The basic point was that online advertising was too small, and that transaction sizes were too insignificant to be anything other than a step down for companies used to rich cash flows.

But there is nothing inherently wrong with digital pennies, if you have the right business model. After all, media disruptors have shown paths to profits by amalgamating large numbers of small transactions – from Google Adwords to Facebook’s hypertargeted ads. Zucker’s dilemma only exists if digital pennies, nickels, dimes, or quarters are running through analog business models.

And that’s the crux of the challenge that traditional media has faced: grappling with digital disruption requires reframing the challenge from a technological challenge to a business model one. Unfortunately, that makes the problem harder, not easier, as business models are often hard-wired in what our colleague Mark Johnson dubs an organization’s rules, norms, and metrics, making shifts difficult to execute.

Zooming in on the sales challenge helps to highlight the difficulty of business model innovation. Think about the highly successful model newspapers historically followed: Journalists would develop unique content to attract wide swaths of readers, and sales reps would sell advertising to people hoping to reach those readers. Those advertisements could be “display” advertisements to build a company’s brand, promote a particular product, or detail a limited-time discount, or they could be “classified” advertisements briefly describing an item for sale or an open job posting (as innocent as classified ads appear, for many newspaper companies they contributed a significant portion of profits).

Superficially, the disruptors do the exact same thing: draw users and serve advertisers. But the underlying way in which they create, deliver, and capture value is substantially different. Instead of having journalists developing content, disruptors largely feature platforms that simplify content creation and distribution. Rather than sell advertisements targeting broad groups, disruptors parlay sophisticated information about individual users into hyper-targeted promotions. Google, for example, doesn’t produce any original content. Its powerful search engine serves as a platform that instantaneously brings others’ content to users. Companies use its AdWords offering to bid for the right to tie advertisements to particular search words and pay Google based on the number of times users click on a link.

It seems logical to assume that all incumbents need to do is point their existing sales force in a disruptive direction. Unfortunately, it’s not that simple.

One complicating factor is that disruption almost always changes how to make money. 

Link to the rest at The Harvard Business Review

PG notes that, while most traditional publishers make money by providing a relatively small number of new titles and effectively limiting the number of books a single author can publish, indie authors publish many more books than almost any publisher would permit. 

Some traditional authors have done an end run around publishers’ defacto limits by writing under multiple pen names for different publishers. 

Indie authors, on the other hand, are free to publish as often as they want and generally use their own name or a single pen name in order to build brand equity around that name.

In PG’s observation, at least some indie authors regularly participate in the creation of collections of short stories or novellas in cooperation with other indie authors which each author benefitting from the brand names of the other authors in the collection.

At least some indie authors have learned they can earn more money by providing books for their fans multiple times during the year rather than pursue a model akin to traditional publishing, focused on a single blockbuster each year.

PG additionally suggests that indie authors are ideally suited to create a disruptive impact on traditional publishing by readily experimenting with a variety of business practices that don’t fit the manner in which traditional publishers make money.