Netflix used to have a charmed life.
This year, however, poorly thought out strategy and lurching decisions are stripping away many of its advantages and making it vulnerable to competitors.
Established in 1997, its founders saw opportunities in creating an Internet-based DVD-by-mail distribution system. It was designed to be a competitor to physical video stores, making it more attractive by offering a larger selection and using a unique IT driven distribution system that combined distribution centers across the country to serve customers within 24 hours at highly attractive prices.
The DVD-by-mail service became a hit, ultimately devastating the market of physical stores such as Blockbuster. By 2007 it had delivered more than 1 billion DVDs to customers. That same year it launched on-demand video streaming service so customers could also select a video and stream it to a PC (and later other platforms) for immediate viewing. The company allowed viewers a highly popular choice of physical DVDs or streamed video for the same price.
Effective marketing and the enviable distribution system led the company to became the largest video subscription service in the U.S., with 24 million customers
Despite--and because of the investments required for--its growth, the company was losing money on its $10 per month price for the joint service, so it suddenly increased it price to $16 dollars (a 60% increase) in July. That significant price change and the poor way it was introduced to customers—especially in the midst of poor economic times, angered customers and created price resistance that led a least a half million to drop the service.
Then, in September, the firm announced it would spin off its DVD-by-mail service and rebrand it Qwickster, leaving Netflix with the digital streaming business. Customers were furious to learn they would now have to pay separately for both services. By downplaying its DVD-by-mail business, the company hopes to reduce distirbution costs and its costs for content by moving content from a per rental basis to per subscriber basis that is more beneficial for the firm.
Netflix's decisions were not made with a customer focus, but a focus on stemming losses that worried some investors. That strategy is dubious, however, and share prices have fallen from nearly $300 per share in mid-summer to $140 per share.
The lurching changes have also made the company’s position seem vulnerable, leading to new competitors to enter the market. Dish Network, which bought Blockbuster out of bankruptcy, is now using it to introduce a competing DVD-by-mail and digital delivery services at competitive prices and Hula and Amazon are reportedly looking a ways to exploit consumer dissatisfaction.
The entire episode is a classic example of why companies should never take customers for granted and why company decisions need to be driven by creating--rather than subtracting--value for consumers.
Showing posts with label strategy. Show all posts
Showing posts with label strategy. Show all posts
What Legacy Media Can Learn from Eastman Kodak
What do you do when your industry is changing? What do you do when your innovations are fueling the changes? Those problems have plagued Eastman Kodak Co. for three decades and the company’s experience provides some lessons for those running legacy media businesses.
Eastman Kodak’s success began when it introduced the first effective camera for non-professionals in the late 19th century and in continual improvements to cameras and black and white and color films throughout the twentieth century. Its products became iconic global brands.
The company’s maintained its position through enviable research and development activities, which in 1975 created the first digital camera. Since that time it has amassed more than 1,100 patents involving electronic sensing, digital imaging, electronic photo processing, and digital printing. These developments, however, continually created innovations damaging to its core film-based business.
Digital photography created a strategic dilemma for the company. It could move into digital photography and destroy the highly profitable film-based business or it could exploit the film-based business while it slowly declined and then--when it was no longer profitable--try to leap out of the business into digital world. It was an ugly choice and the company chose the latter.
Today, the company has just 15% of the employees it once had and its stock prices are about 15% of what they were before it finally stripped out its production capacity and distribution systems. An enduring benefit of its research and development activities is that the company now owns patents on much of the underlying technology used in all digital cameras including those in mobile phones. It is building a new digital revenue stream on licenses and infringement payments for use of those technologies. Those alone now account for 10% of its turnover.
Eastman Kodak’s situation is not unlike that of legacy media firms, especially those in print, whose uses of digital technologies two decades before the arrival Internet and whose experiments with teletext and other telecommunication based information distribution systems foreshadowed the arrival of the Internet.
Today, newspapers and magazines—and increasingly broadcasters—are faced with dilemma of whether to keep exploiting their base legacy product or to dump the old business and jump fully into digital. It is as ugly a choice as that faced by Eastman Kodak in the 1980s and 1990s. So, what lessons can be learned from its experience?
1) Don’t try to fight change
You may not like its direction and may understand how it will affect your current business, but you will not be able to stop its momentum and trajectory if it is beneficial to many customers. In such conditions you can only protect your existing product by making it as productive and competitive as possible, by adjusting its strategies to better serve those who are most loyal and resist change, and by carefully monitoring the pace of change and the investments you make in the existing product. Simultaneously, existing companies that want to benefit from the change need to be creating new products for the new markets and allow them to develop and mature with the pace of change even though they may be compounding the challenges in the pre-existing product.
2) Don’t wait too long to change
Waiting to move into new markets with new products gives upstart companies and other competitors opportunities to become players with better products and larger market shares once you decide to enter. Although there are sometimes reasons not to be first movers, you should not wait too long because it is very difficult and expensive to enter and become a major player once a new market moves into its maturation phase.
3) Be willing to sacrifice some short-term profit for long-term gain and sustainability
Careful strategic consideration must be given profits during transitional periods and managers needs to make the strategy clear to the company and its investors. It may be desirable to boost research and development costs even though there is no guarantee they may produce results; it may be necessary to harm the profits of the existing product by building up its replacement and cannibalizing some of its market; it may be appropriate to make investments in the new product that may not pay off in the short-term. Whatever the strategy, it should be the result of clear and deliberate choices and managers need to ensure that investors and entire company understand the reasons for it.
4) Own the rights to technologies and services your competitors will employ
Use your R&D efforts and make strategic acquisitions to acquire the technologies and services that competitors will need to employ in the new market so they must turn to you and share the benefits of their growth. Unfortunately, few legacy media companies invested in research and development to early exploit opportunities in digital media by creating the underlying hardware and software for content control and distribution online and in phones, tablets, and computers. Thus, they own few intellectual property rights other than trademarks to their legacy media names and most are not benefiting as Eastman Kodak from patents being used by those eroding the business base. However, the new products still need content products and content management services that legacy media have long produced and companies need to be open to cooperating with the new competitors rather than giving them incentives to go elsewhere or to develop their own content capabilities.
These are turbulent times for legacy media and they require making choices and positioning firms for the future. It is no time for timidity or keeping on with business as usual.
Digital Media Require New Pricing Methods
Newspaper publishers need to explore new methods of pricing content as they expand their digital portfolios because merely transferring the methods used in print can never bring the success publishers desire.
Print newspaper publishers have traditionally tended to set prices based on production and distribution costs and not on value created. Unfortunately, this has made it impossible to possible to obtain a price premium for factors such as prestige, service, experience, and convenience.
New digital operations, however, provide significant other pricing options because they differ in terms of whether they maintain the existing content bundle, whether non-payers can be excluded from use, the types of experience they deliver and how they are used.
Digital media require significant new thinking because they tend to be joint and complementary products with print. These lend themselves to selling strategies of bundling and versioning that permit uses of bundle pricing, option pricing, multiple purchase pricing, differential access pricing, and inventory based pricing that have not typically been used in the newspaper industry.
Pricing is particularly complex in the digital environment because the number of price choices grow exponentially. In the print product managers price advertising and the circulation, but when they add an online product they have to make 8 choices because they are shifting to a multisided platform operation. If mobile, social media and other print products are added to the portfolio, one must give significant thought to the roles each plays in the portfolio and the interactions of pricing choices among them.
Although digital media use is growing significantly, companies need to be pragmatic in their investments and operations and their hopes for new revenue. Online consumption is still only about 10 percent of all media use and online advertising is still only about 13% of offline advertising. Those numbers are significant and rising so companies needs to seek and exploit opportunities in digital spaces, but managers cannot expect those to immediately replace the contributions of their legacy operations.
Print newspaper publishers have traditionally tended to set prices based on production and distribution costs and not on value created. Unfortunately, this has made it impossible to possible to obtain a price premium for factors such as prestige, service, experience, and convenience.
New digital operations, however, provide significant other pricing options because they differ in terms of whether they maintain the existing content bundle, whether non-payers can be excluded from use, the types of experience they deliver and how they are used.
Digital media require significant new thinking because they tend to be joint and complementary products with print. These lend themselves to selling strategies of bundling and versioning that permit uses of bundle pricing, option pricing, multiple purchase pricing, differential access pricing, and inventory based pricing that have not typically been used in the newspaper industry.
Pricing is particularly complex in the digital environment because the number of price choices grow exponentially. In the print product managers price advertising and the circulation, but when they add an online product they have to make 8 choices because they are shifting to a multisided platform operation. If mobile, social media and other print products are added to the portfolio, one must give significant thought to the roles each plays in the portfolio and the interactions of pricing choices among them.
Although digital media use is growing significantly, companies need to be pragmatic in their investments and operations and their hopes for new revenue. Online consumption is still only about 10 percent of all media use and online advertising is still only about 13% of offline advertising. Those numbers are significant and rising so companies needs to seek and exploit opportunities in digital spaces, but managers cannot expect those to immediately replace the contributions of their legacy operations.
Challenges of Product Choices and Prices in Multi-Sided Media Markets
Commercial media have faced product and price challenges in 2-sided markets for more than a century, but are encountering greater difficulties in getting it right as they try to effectively monetize multi-sided markets.
2-sided and multi-sided markets are ones in which more than one set of consumers must be addressed and there is an interaction between strategies and choices for each set of customers. Prices for one group of consumers affects their consumption quantity and this, in turn, affects the prices for and consumption by the other groups. Optimal revenues can only be achieved by dealing with all groups of consumers simultaneously.
Newspapers are a classic example of 2-sided platforms. The first product is the content sold to audiences and the second is access to audiences that is sold to advertisers. This has been the basis of the mass media business model since late 19th century and the strategy has been to keep circulation prices low to attract a mass audience and then to make the majority of revenue from advertiser purchases.
In this model, success in selling the newspaper product affects ability to sell advertising access because more readers makes a paper more attractive to advertisers; conversely, success in selling advertising affects ability to sell the newspaper to readers because it provides resources that improves content and make the paper more attractive.
Getting prices right in this model is crucial, but most media have traditionally been relatively unsophisticated in setting prices. Few have used demand-oriented pricing, based on what the market will bear, or target return pricing based on achieving a specific rate of return. Instead most have set prices based on what the closest competitors are doing or on industry average price. They were historically able to get away with it because elasticity and price resistance were relatively low because of the near monopolies of past in many markets.
Today, however, product and price choices are getting much more complex because of rising competition and because media are shifting from 2-sided to multi-sided platforms in which relationships among consumers are compounded. This complexity is evident in the difficulties newspapers and magazines are having figuring out effective ways to provide and sell content online.
The problem occurs because there are paying audiences and advertisers for the print edition; free audiences and paying advertisers for the online edition; and some joint audience and advertisers who use both the print and online offerings. If one alters the free price online to create a paying audience, it not only affects the willingness of online advertisers to pay, but affects the willingness of joint audiences and advertisers to pay and thus effects performance of the print sales as well.
Creating the correct combination of content available in print and online, getting the content prices right, generating audiences in both places that are right for advertisers, and properly prices advertising is no mean feat. The situation is made even more difficult as publishers add eReaders and mobile services to the mix.
Those who think they can easily monetize newspapers, magazines, or other information products online ignore the significant challenges posed by multi-sided platforms and need to carefully consider the impact that these factors have on product and price choices.
2-sided and multi-sided markets are ones in which more than one set of consumers must be addressed and there is an interaction between strategies and choices for each set of customers. Prices for one group of consumers affects their consumption quantity and this, in turn, affects the prices for and consumption by the other groups. Optimal revenues can only be achieved by dealing with all groups of consumers simultaneously.
Newspapers are a classic example of 2-sided platforms. The first product is the content sold to audiences and the second is access to audiences that is sold to advertisers. This has been the basis of the mass media business model since late 19th century and the strategy has been to keep circulation prices low to attract a mass audience and then to make the majority of revenue from advertiser purchases.
In this model, success in selling the newspaper product affects ability to sell advertising access because more readers makes a paper more attractive to advertisers; conversely, success in selling advertising affects ability to sell the newspaper to readers because it provides resources that improves content and make the paper more attractive.
Getting prices right in this model is crucial, but most media have traditionally been relatively unsophisticated in setting prices. Few have used demand-oriented pricing, based on what the market will bear, or target return pricing based on achieving a specific rate of return. Instead most have set prices based on what the closest competitors are doing or on industry average price. They were historically able to get away with it because elasticity and price resistance were relatively low because of the near monopolies of past in many markets.
Today, however, product and price choices are getting much more complex because of rising competition and because media are shifting from 2-sided to multi-sided platforms in which relationships among consumers are compounded. This complexity is evident in the difficulties newspapers and magazines are having figuring out effective ways to provide and sell content online.
The problem occurs because there are paying audiences and advertisers for the print edition; free audiences and paying advertisers for the online edition; and some joint audience and advertisers who use both the print and online offerings. If one alters the free price online to create a paying audience, it not only affects the willingness of online advertisers to pay, but affects the willingness of joint audiences and advertisers to pay and thus effects performance of the print sales as well.
Creating the correct combination of content available in print and online, getting the content prices right, generating audiences in both places that are right for advertisers, and properly prices advertising is no mean feat. The situation is made even more difficult as publishers add eReaders and mobile services to the mix.
Those who think they can easily monetize newspapers, magazines, or other information products online ignore the significant challenges posed by multi-sided platforms and need to carefully consider the impact that these factors have on product and price choices.
SEARCH FOR ALTERNATIVE MEDIA BUSINESS MODELS HAMPERED BY NARROW THINKING
Media executives around the globe are clamoring for new and alternative business models and industry associations everywhere are holding seminars and conferences on how to create and discover them. There is just one problem: They don’t know what business models are.
When you cut through the rhetoric, you find that most executives are merely interested in finding new revenue streams. Even when you consider firms touted as having best practices in that regard, none have been very successful in establishing them. The reason is simple: The dominant thought about business models is highly limited and far too narrow to solve the contemporary challenges of media industries.
Business models are not merely about the revenue streams. Instead, they establish the underlying business logic and elements. They involve the foundations upon which businesses built, such as companies’ competences, value created, products/services provided, customers served, relationships established with customers and partner firms, and the operational requirements. If you get those elements right, the revenue issues take care of themselves.
The biggest problem of media business models today is not that the revenue model is diminishing in effectiveness, but that most media companies are still trying to sell nineteenth and twentieth century products in the twenty-first century. And they are trying to do so without changing the value they provide and the relationships within which they are provided.
Because of the enormous changes in technology, economics, and lifestyle in recent decades, the needs of customers have changed, they kinds of content they want, and the ways they obtain news, information, and entertainment have been dramatically altered. If media firms do not address these changes in consumer needs and behavior, no amount of worry about revenue streams will stem the fundamental challenge that audiences are leaving traditional print and broadcast media behind for content providers and distribution platforms that better serve their needs.
The content of traditional media products were created in specific technical, economic, and information environments that no longer exist. In order to evolve and prosper media companies must revisit the foundations of their businesses, ensure they are providing the central value that customers want, and provide their products/services in a unique or different way from other media firms.
The range of technologies and distribution and interactive platforms available in the twenty-first century require that firms increasingly see their business activities as cooperative processes requiring coordination and interdependence with external firms and customers themselves. Standing isolated and alone—at arms distance from the customer—is no longer a viable option.
This is not to say that firms must make sudden and dramatic changes in their business models, but they must start revisiting all the aspects to make regular incremental improvements and changes. Questions need to be asked about what is provided, why it is provided, how it is provided, and the entire structures and operations of firms. These need to be addressed first, then the revenue models can be sorted out and improved.
When you cut through the rhetoric, you find that most executives are merely interested in finding new revenue streams. Even when you consider firms touted as having best practices in that regard, none have been very successful in establishing them. The reason is simple: The dominant thought about business models is highly limited and far too narrow to solve the contemporary challenges of media industries.
Business models are not merely about the revenue streams. Instead, they establish the underlying business logic and elements. They involve the foundations upon which businesses built, such as companies’ competences, value created, products/services provided, customers served, relationships established with customers and partner firms, and the operational requirements. If you get those elements right, the revenue issues take care of themselves.
The biggest problem of media business models today is not that the revenue model is diminishing in effectiveness, but that most media companies are still trying to sell nineteenth and twentieth century products in the twenty-first century. And they are trying to do so without changing the value they provide and the relationships within which they are provided.
Because of the enormous changes in technology, economics, and lifestyle in recent decades, the needs of customers have changed, they kinds of content they want, and the ways they obtain news, information, and entertainment have been dramatically altered. If media firms do not address these changes in consumer needs and behavior, no amount of worry about revenue streams will stem the fundamental challenge that audiences are leaving traditional print and broadcast media behind for content providers and distribution platforms that better serve their needs.
The content of traditional media products were created in specific technical, economic, and information environments that no longer exist. In order to evolve and prosper media companies must revisit the foundations of their businesses, ensure they are providing the central value that customers want, and provide their products/services in a unique or different way from other media firms.
The range of technologies and distribution and interactive platforms available in the twenty-first century require that firms increasingly see their business activities as cooperative processes requiring coordination and interdependence with external firms and customers themselves. Standing isolated and alone—at arms distance from the customer—is no longer a viable option.
This is not to say that firms must make sudden and dramatic changes in their business models, but they must start revisiting all the aspects to make regular incremental improvements and changes. Questions need to be asked about what is provided, why it is provided, how it is provided, and the entire structures and operations of firms. These need to be addressed first, then the revenue models can be sorted out and improved.
THE BATTLE TO CONTROL ONLINE PRICES
The struggle to control prices of digital content sold online continues, with producers and distributors battling over prices for downloads of books and music.
In the latest skirmish, Amazon removed Macmillan books from its website after the company protested that online retail was using monopoly power to force publishers to accept prices no higher than $9.99. Macmillan and other publishers have now signed distribution deals with Apple that allows them to price downloads at $12.99 and $14.99.
Producers, of course, want higher prices because they produce higher revenue and better profits.
The struggle to control prices is not unique to the online environment. In the offline world, producers of books, magazines, CDs, and DVDs have long struggled to gain limited shelf space because there is a large oversupply of products and retailers’ have selection preferences for popular, rapidly selling products.
Large national and retailers have also used their bargaining power to push wholesale and manufacturer suggested retail prices downwards. Wal-Mart, now the number one music retailer in the World, uses its purchasing and sales power to sell large quantities of music at the lowest price possible—the basic price/quantity model for all the products it carries.
What is new in the offline world is that the conflict does not merely involve struggles over the price and quantity strategies of retailers, but that the retailers are using the media content as a joint product with their proprietary digital hardware.
Amazon wants content prices low not merely to sell more books, but because it helps it sell Kindle, its e-book reader. To date, it has been able to do so because it was the leading seller of both products—something it learned from Apple’s strategy with i-Tunes and i-Pod.
Competition in distributing content, even just a little competition, helps shift some of the power away from the retailer and back to the producer. Apple was forced to back away from its enforced price of 89 cents for a download when recording companies made deals with other download providers and threatened to end the rights for Apple to see their popular music. Apple is now playing spoiler to Amazon in the book downloads and Amazon has agreed to carry Macmillan books again.
Newspaper publishers are now seriously testing and considering a variety of e-readers as ways to reduce production and distribution costs. As part of their strategies, however, they would do well to learn from the experience of the music and book business. They need to remember that a basic rule of business is that if you don’t control price, you don’t control your business.
In the latest skirmish, Amazon removed Macmillan books from its website after the company protested that online retail was using monopoly power to force publishers to accept prices no higher than $9.99. Macmillan and other publishers have now signed distribution deals with Apple that allows them to price downloads at $12.99 and $14.99.
Producers, of course, want higher prices because they produce higher revenue and better profits.
The struggle to control prices is not unique to the online environment. In the offline world, producers of books, magazines, CDs, and DVDs have long struggled to gain limited shelf space because there is a large oversupply of products and retailers’ have selection preferences for popular, rapidly selling products.
Large national and retailers have also used their bargaining power to push wholesale and manufacturer suggested retail prices downwards. Wal-Mart, now the number one music retailer in the World, uses its purchasing and sales power to sell large quantities of music at the lowest price possible—the basic price/quantity model for all the products it carries.
What is new in the offline world is that the conflict does not merely involve struggles over the price and quantity strategies of retailers, but that the retailers are using the media content as a joint product with their proprietary digital hardware.
Amazon wants content prices low not merely to sell more books, but because it helps it sell Kindle, its e-book reader. To date, it has been able to do so because it was the leading seller of both products—something it learned from Apple’s strategy with i-Tunes and i-Pod.
Competition in distributing content, even just a little competition, helps shift some of the power away from the retailer and back to the producer. Apple was forced to back away from its enforced price of 89 cents for a download when recording companies made deals with other download providers and threatened to end the rights for Apple to see their popular music. Apple is now playing spoiler to Amazon in the book downloads and Amazon has agreed to carry Macmillan books again.
Newspaper publishers are now seriously testing and considering a variety of e-readers as ways to reduce production and distribution costs. As part of their strategies, however, they would do well to learn from the experience of the music and book business. They need to remember that a basic rule of business is that if you don’t control price, you don’t control your business.
THE WIDENING RANGE OF REVENUE SOURCES IN NEWS ENTERPRISES
It is obvious that both the offline and online news providers are in the midst of substantial transformation and that the traditional means of funding operations are no longer as viable as in the past. This is disturbing to the industry because it has enjoyed several decades of unusual financially wealth and few in the organizations know how to find and generate new sources of revenue.
The financial uncertainty facing the industry is not unusual, however. We tend to forget that news has historically been unable to pay for itself and was subsidized by other activities. In the past newspapers and other news organizations engaged in a far larger range of commercial activities than then they do today and publishers had to be highly entrepreneurial and seek income from a wide variety of sources in order to survive.
The initial gathering and distribution of news was paid for by emperors, monarchs, and other rulers who needed information for state purposes. Later, wealthy international merchants hired correspondents to gather and relay news that might affect their businesses. When news became a commercial product, newspaper publishers subsidized the operations with profits from printing books, magazines, pamphlets, and advertising sheets, income for editors from shipping and postal employment, profits from operating book shops and travel agencies, and subsidies from communities and political and social organizations.
Today, however, news organizations are struggling to maintain themselves and develop digital operations by primarily focusing on the two revenue streams they have known in recent decades: subscriptions and advertising. Many people are being disappointed because those are failing to provide sufficient financial resources to sustain their operations.
The need to seek income from multiple sources is clear, but runs somewhat counter to the values of twentieth-century professional journalism, which denigrates commercial activity and thus engenders organizational resistance to new business initiatives. Continuing staff reductions and other budgetary cutbacks are eroding some internal opposition, but are rightfully leading to questions about how far one goes down the commercial road before news gives up its independence.
In both the online and offline news worlds, a wide variety of revenue generating activities are appearing—some based on traditional subscriber/single copy sales and advertising sales—but many others moving into new areas of monetization.
Many news organizations are increasing the range of advertising services provided to sell and create ads for their own media products, but also to provide clients services that can be used in competing products as well. New types of advertising offerings are being created to link across platforms, sponsorships of online and mobile news headlines are developing, video advertising is being offered online, and special “deals of the day” advertising spots are being offered.
Some organizations are increasing their product lines producing paid premium products and niche content for professional groups and persons with special interests; some are providing business service listings for a fee; others are creating a variety of non-news products; still others are operating additional business units creating paid events, running cafés, book and magazine shops, and providing training and education activities.
Sales of other products and services are being increasingly embraced through e-commerce (linking published reviews films, performances, and recordings to sites where customers can buy tickets, DVDs, CDs, etc.), creating and selling lists and databases of local businesses and consumers, producing special reports and books, selling photographs and photography services, and even selling items such as computers and appliances.
A growing number of news organizations are seekings subsidies though reader memberships and donations and grants from community and national foundations.
These are healthy developments because they increase the opportunities to create revenue that can fund news activities. Obviously, the abilities and willingness of different news enterprises to engage in the range activities vary widely, but the fact that they are appearing show that news organizations are beginning to adjust to the new environment and becoming more entrepreneurial than they have been for many decades.
What is needed now is not knee-jerk opposition to these efforts from news personnel, but thoughtful development of realistic principles and processes to minimize any negative effects of these new initiatives on news content so that trust and credibility are not diminished.
The financial uncertainty facing the industry is not unusual, however. We tend to forget that news has historically been unable to pay for itself and was subsidized by other activities. In the past newspapers and other news organizations engaged in a far larger range of commercial activities than then they do today and publishers had to be highly entrepreneurial and seek income from a wide variety of sources in order to survive.
The initial gathering and distribution of news was paid for by emperors, monarchs, and other rulers who needed information for state purposes. Later, wealthy international merchants hired correspondents to gather and relay news that might affect their businesses. When news became a commercial product, newspaper publishers subsidized the operations with profits from printing books, magazines, pamphlets, and advertising sheets, income for editors from shipping and postal employment, profits from operating book shops and travel agencies, and subsidies from communities and political and social organizations.
Today, however, news organizations are struggling to maintain themselves and develop digital operations by primarily focusing on the two revenue streams they have known in recent decades: subscriptions and advertising. Many people are being disappointed because those are failing to provide sufficient financial resources to sustain their operations.
The need to seek income from multiple sources is clear, but runs somewhat counter to the values of twentieth-century professional journalism, which denigrates commercial activity and thus engenders organizational resistance to new business initiatives. Continuing staff reductions and other budgetary cutbacks are eroding some internal opposition, but are rightfully leading to questions about how far one goes down the commercial road before news gives up its independence.
In both the online and offline news worlds, a wide variety of revenue generating activities are appearing—some based on traditional subscriber/single copy sales and advertising sales—but many others moving into new areas of monetization.
Many news organizations are increasing the range of advertising services provided to sell and create ads for their own media products, but also to provide clients services that can be used in competing products as well. New types of advertising offerings are being created to link across platforms, sponsorships of online and mobile news headlines are developing, video advertising is being offered online, and special “deals of the day” advertising spots are being offered.
Some organizations are increasing their product lines producing paid premium products and niche content for professional groups and persons with special interests; some are providing business service listings for a fee; others are creating a variety of non-news products; still others are operating additional business units creating paid events, running cafés, book and magazine shops, and providing training and education activities.
Sales of other products and services are being increasingly embraced through e-commerce (linking published reviews films, performances, and recordings to sites where customers can buy tickets, DVDs, CDs, etc.), creating and selling lists and databases of local businesses and consumers, producing special reports and books, selling photographs and photography services, and even selling items such as computers and appliances.
A growing number of news organizations are seekings subsidies though reader memberships and donations and grants from community and national foundations.
These are healthy developments because they increase the opportunities to create revenue that can fund news activities. Obviously, the abilities and willingness of different news enterprises to engage in the range activities vary widely, but the fact that they are appearing show that news organizations are beginning to adjust to the new environment and becoming more entrepreneurial than they have been for many decades.
What is needed now is not knee-jerk opposition to these efforts from news personnel, but thoughtful development of realistic principles and processes to minimize any negative effects of these new initiatives on news content so that trust and credibility are not diminished.
MEDIA, INNOVATION, AND THE STATE
There is a growing chorus for governments to help established media transform themselves in the digital age. From the U.S. to the Netherlands, from the U.K. to France, governments are being asked to help both print and broadcast media innovate their products and services to help make them sustainable.
State support for innovation is not a new concept. Support of cooperate research initiatives involving the state, higher education institutions, and industries has been part of national science and industrial policies for many decades. There has been significant state support for innovation of agriculture/food products, electronics, advanced military equipment, information technology, and biomedical technology and products.
State support tends to work best in developing new technologies and industries and tends to focus support on advanced basic scholarly research through science and research funding organizations, creation and support for research parks and industrial development zones for applied research, and incentives and subsidies for commercial research and development.
Many governments also support efforts to transform established industries. These are typically designed to promote productivity and competitiveness as a means of preserving employment and the tax base. In the past there has been some support for technology transfer from electronics and information technology to existing industries and for retraining, facilities reconstruction, and entering new markets.
Trying to apply those kinds of research and transformation policies in media is challenging, however, because much of media activities tend to be non-industrial and are dependent on relatively rigid organizational structures and processes that are difficult to change. These factors are complicated by the facts that media engage in negligible research and development activities, have limited experience with product change and new product development, and tend to have limited links to higher education institutions.
It is clear that a growing number of managers in media industries understand the need for innovation because of the declining sustainability of current operations and because Internet, mobile, e-reader, and on-demand technologies are providing new opportunities. The real innovation challenges in established media, however, are not perceiving the need for change or being able to get needed technology, but organizational structures, processes, culture, and ways of thinking that limit willingness and ability to innovate. This is compounded because many managers are confused by the opportunities and don’t know what to do or how pursue innovation.
Today, the innovation challenge facing media—especially newspapers--is not mere modernization, but fundamentally reestablishing their media functions and forms. What is needed is a complete rethinking of what content is offered, where, when and how it is provided, what new products and services should be provided and what existing ones dropped, how content will differ and be superior to that of other providers, how to establish new and better relationships with consumers, how the activities are organized and what processes will be employed, what relationships need to be established with partners and intermediaries, and ultimately how the activities are funded.
The state’s ability to influence media innovation of this type is highly constrained. Governments worldwide have proven themselves ineffectual in running business enterprises and they have limited abilities to affect organizational structures, processes, culture, and thinking in existing firms. What governments can do, however, is to fund research that identifies threats, opportunities and best practices, provide education and training to promote innovation and help implement change, offer incentives or subsidies to cover transformation costs and support new initiatives, and help coordinate activities across industries.
These kinds of support will be helpful, but they will not be a panacea because the greatest impetus for and implementation of change and innovation must come from within companies. The support will only be helpful if companies are actually willing to innovate and change to support that innovation. The extent they are willing to do so remains to be seen.
State support for innovation is not a new concept. Support of cooperate research initiatives involving the state, higher education institutions, and industries has been part of national science and industrial policies for many decades. There has been significant state support for innovation of agriculture/food products, electronics, advanced military equipment, information technology, and biomedical technology and products.
State support tends to work best in developing new technologies and industries and tends to focus support on advanced basic scholarly research through science and research funding organizations, creation and support for research parks and industrial development zones for applied research, and incentives and subsidies for commercial research and development.
Many governments also support efforts to transform established industries. These are typically designed to promote productivity and competitiveness as a means of preserving employment and the tax base. In the past there has been some support for technology transfer from electronics and information technology to existing industries and for retraining, facilities reconstruction, and entering new markets.
Trying to apply those kinds of research and transformation policies in media is challenging, however, because much of media activities tend to be non-industrial and are dependent on relatively rigid organizational structures and processes that are difficult to change. These factors are complicated by the facts that media engage in negligible research and development activities, have limited experience with product change and new product development, and tend to have limited links to higher education institutions.
It is clear that a growing number of managers in media industries understand the need for innovation because of the declining sustainability of current operations and because Internet, mobile, e-reader, and on-demand technologies are providing new opportunities. The real innovation challenges in established media, however, are not perceiving the need for change or being able to get needed technology, but organizational structures, processes, culture, and ways of thinking that limit willingness and ability to innovate. This is compounded because many managers are confused by the opportunities and don’t know what to do or how pursue innovation.
Today, the innovation challenge facing media—especially newspapers--is not mere modernization, but fundamentally reestablishing their media functions and forms. What is needed is a complete rethinking of what content is offered, where, when and how it is provided, what new products and services should be provided and what existing ones dropped, how content will differ and be superior to that of other providers, how to establish new and better relationships with consumers, how the activities are organized and what processes will be employed, what relationships need to be established with partners and intermediaries, and ultimately how the activities are funded.
The state’s ability to influence media innovation of this type is highly constrained. Governments worldwide have proven themselves ineffectual in running business enterprises and they have limited abilities to affect organizational structures, processes, culture, and thinking in existing firms. What governments can do, however, is to fund research that identifies threats, opportunities and best practices, provide education and training to promote innovation and help implement change, offer incentives or subsidies to cover transformation costs and support new initiatives, and help coordinate activities across industries.
These kinds of support will be helpful, but they will not be a panacea because the greatest impetus for and implementation of change and innovation must come from within companies. The support will only be helpful if companies are actually willing to innovate and change to support that innovation. The extent they are willing to do so remains to be seen.
FAIL OFTEN. FAIL EARLY. FAIL CHEAP.
Rapidly evolving technologies and market adjustments have thrust media into states of nearly perpetual alteration that require agile and swift responses to gain benefits and defend the firm from outside forces.
Managers who have been used to stable environments and well conceived plans are often reticent to move to seize opportunities with quick and decisive action based on incomplete information and knowledge. The turbulent contemporary environment, however, require leaders to rapidly evaluate the potential of new communication opportunities and to take risks in a highly uncertain setting.
This is disturbing to managers who are used to employing well developed and elegant strategies that require significant investment and commitment. Declining to test opportunities until a clear roadmap is produced, however, takes away flexibility and the ability to rapidly change with contemporary developments.
While preserving the core activities of media businesses, managers need to simultaneously look for emerging opportunities that can be pursued, communities that can been served, and experiences that can be delivered. It is important to get in quick and inexpensively, to build on small successes, and to abandon initiatives if success proves elusive.
It is better to fail often, fail early, and fail cheap than to avoid risky moves, lose potentially rewarding opportunities, and forgo learning from innovative initiatives.
In the current tumultuous environment, failure has become a form of research and development. Try things; drop those that don't take you somewhere interesting; document what you learn from each unsuccessful initiative; move on to something new. What you learn from unsuccessful efforts is usually more important that what you from success.
The only real failure in the rapidly changing world of media is doing nothing and hoping things will get better on their own,
Managers who have been used to stable environments and well conceived plans are often reticent to move to seize opportunities with quick and decisive action based on incomplete information and knowledge. The turbulent contemporary environment, however, require leaders to rapidly evaluate the potential of new communication opportunities and to take risks in a highly uncertain setting.
This is disturbing to managers who are used to employing well developed and elegant strategies that require significant investment and commitment. Declining to test opportunities until a clear roadmap is produced, however, takes away flexibility and the ability to rapidly change with contemporary developments.
While preserving the core activities of media businesses, managers need to simultaneously look for emerging opportunities that can be pursued, communities that can been served, and experiences that can be delivered. It is important to get in quick and inexpensively, to build on small successes, and to abandon initiatives if success proves elusive.
It is better to fail often, fail early, and fail cheap than to avoid risky moves, lose potentially rewarding opportunities, and forgo learning from innovative initiatives.
In the current tumultuous environment, failure has become a form of research and development. Try things; drop those that don't take you somewhere interesting; document what you learn from each unsuccessful initiative; move on to something new. What you learn from unsuccessful efforts is usually more important that what you from success.
The only real failure in the rapidly changing world of media is doing nothing and hoping things will get better on their own,
4 STRATEGIC PRINCIPLES FOR EVERY DIGITAL PUBLISHER
As publishers move more and more content to the Internet, mobile services, and e-readers, these digital activities change the structures and processes of underlying business operations. Many publishers, however, pay insufficient attention to the implications of these changes and thus miss out on many benefits possible with digital operations.
This occurs because publishers become focused on issues of content delivery and uncritically accept the fundamental elements of the processes involving platforms and intermediaries. In order to gain the fullest future benefits from the digital environment, however, publishers needs to strategically consider and direct activities involving the users, advertisers, prices, and purposes of their new platforms.
In creating business arrangements with platform and service providers and intermediaries, 4 fundamental strategic principles should guide your actions:
1. Control your customer lists. The most important thing you do as a publisher is to create relationships with and experiences for your customers. It is crucial to ensure that your content distribution and retail systems do not separate you from those who read, view, or listen to your content. If you do not operate your distribution or pay systems, or don’t have strong influence over their operations, this important part of the customer experience falls outside your control and— worse—you never establish direct relationships with customers that allow you to get to know them better, to create stronger bonds, to use them to improve your products, or to up-sell services. If you must use intermediaries, ensure that you have full access and rights to use e-mail, mobile, and other addresses for all your content customers and that you have some influence over the look, feel, and content of the contacts that your service providers have with your customers.
2. Control advertising in your digital space. Users see advertising placed on your website, your mobile messages, and your e-reader content as part of your product and it affects the experience you deliver to them. It is not enough to control the size and placement of ads; you also need to control the dynamic functionality, types, and content of ads. The experience your product delivers is of little interest to outside providers of digitally delivered advertising, but it must be to you. You should control your own advertising inventory and maintain approval rights and—as with audiences—you should have the ability to make direct contact with advertising customers so you can add value by working with them to achieve greater effectiveness and provide better benefits across your content platforms.
3. Control your own pricing. Do not put yourself in the position of merely accepting the ad suppliers’ price and payment for advertising appearing in your digital product. The digital space and audience contact that you provide is the product and service being purchased and some contact is more valuable than others. Know how your value compares to that of competitors and set your prices according. Don’t be a price taker, be a price maker. Digital advertising will not grow to become an important part of your business if you let the most important decision of the revenue model reside in someone who does not care about your business.
4. Drive customers to platforms most beneficial to you. Digital media give you the opportunities to serve customers where and when they want to be served, but you need to use those opportunities to drive them to your financially most important product. Internet sites, e-readers, mobile applications, and social media are highly useful for contact and interaction, but not yet very effective for revenue generation. The best effects typically result from increasing use of your offline product or driving traffic to your most finally effective digital location. Make sure that all the distribution platforms you use are configured for easy movement to other digital platforms that benefit you most, even if they don’t directly benefit your service provider.
Digital publishing can only become successful if you get the business fundamentals correct by controlling the most important commercial aspects of the operation. The value configuration created by customer interfaces and partner networks must be arranged to work in your favor and strategic thinking needs to guide how you organize and direct those activities.
This occurs because publishers become focused on issues of content delivery and uncritically accept the fundamental elements of the processes involving platforms and intermediaries. In order to gain the fullest future benefits from the digital environment, however, publishers needs to strategically consider and direct activities involving the users, advertisers, prices, and purposes of their new platforms.
In creating business arrangements with platform and service providers and intermediaries, 4 fundamental strategic principles should guide your actions:
1. Control your customer lists. The most important thing you do as a publisher is to create relationships with and experiences for your customers. It is crucial to ensure that your content distribution and retail systems do not separate you from those who read, view, or listen to your content. If you do not operate your distribution or pay systems, or don’t have strong influence over their operations, this important part of the customer experience falls outside your control and— worse—you never establish direct relationships with customers that allow you to get to know them better, to create stronger bonds, to use them to improve your products, or to up-sell services. If you must use intermediaries, ensure that you have full access and rights to use e-mail, mobile, and other addresses for all your content customers and that you have some influence over the look, feel, and content of the contacts that your service providers have with your customers.
2. Control advertising in your digital space. Users see advertising placed on your website, your mobile messages, and your e-reader content as part of your product and it affects the experience you deliver to them. It is not enough to control the size and placement of ads; you also need to control the dynamic functionality, types, and content of ads. The experience your product delivers is of little interest to outside providers of digitally delivered advertising, but it must be to you. You should control your own advertising inventory and maintain approval rights and—as with audiences—you should have the ability to make direct contact with advertising customers so you can add value by working with them to achieve greater effectiveness and provide better benefits across your content platforms.
3. Control your own pricing. Do not put yourself in the position of merely accepting the ad suppliers’ price and payment for advertising appearing in your digital product. The digital space and audience contact that you provide is the product and service being purchased and some contact is more valuable than others. Know how your value compares to that of competitors and set your prices according. Don’t be a price taker, be a price maker. Digital advertising will not grow to become an important part of your business if you let the most important decision of the revenue model reside in someone who does not care about your business.
4. Drive customers to platforms most beneficial to you. Digital media give you the opportunities to serve customers where and when they want to be served, but you need to use those opportunities to drive them to your financially most important product. Internet sites, e-readers, mobile applications, and social media are highly useful for contact and interaction, but not yet very effective for revenue generation. The best effects typically result from increasing use of your offline product or driving traffic to your most finally effective digital location. Make sure that all the distribution platforms you use are configured for easy movement to other digital platforms that benefit you most, even if they don’t directly benefit your service provider.
Digital publishing can only become successful if you get the business fundamentals correct by controlling the most important commercial aspects of the operation. The value configuration created by customer interfaces and partner networks must be arranged to work in your favor and strategic thinking needs to guide how you organize and direct those activities.
RADIO STATIONS FACE SIGNIFICANT STRATEGIC CHALLENGES
Fundamental market changes are pushing radio stations towards an uncertain future and managers and owners need to begin developing strategic responses to developments in their industry.
The challenges are being caused by declining demand for radio offerings due to lifestyle changes, the wide availability of substitutable audio platforms, and the primary content currently being offered. Audience behavior toward radio is changing and many U.S. stations now only make money for 4 to 6 hours each day. Overall, audiences are spending less time with radio and exhibiting less station loyalty than they did in the past, and young audiences are particularly difficult to attract and serve.
A major impetus of change is that audiences for music worldwide are progressively replacing radio listening with personalized playlists they have created on their computers, MP3 players, and mobile phones and by CDs on which they burned those favorites. They select music that suits their individual tastes and many have wider repositories of music in their own libraries than are offered on broadcaster playlists. Satellite and Internet radio are compounding the problem by offering hundreds of choices of highly focused music formats. These developments are increasingly making radio a less relevant platform for music entertainment delivery than it has been.
Concurrently, a wide variety of non-music programming is being offered by Satellite and Internet stations and audiences are increasingly using these services, as well as downloading podcasts on a variety of topics of individual interest from both broadcast and non-radio sources.
These problems are compounded in the U.S. because the rise of radio groups after deregulation in the mid 1990s led to national radio programmers making selections, reducing the range of genres of music and other content on radio stations. Overall, programming has become less local and less relevant as content decisions have been made elsewhere.
Advertisers sense the problem with audiences and the share of advertising expenditures going to radio is declining. Worldwide radio advertising expenditures are about 7 percent of total expenditures, down from a height of 9 percent in 1999. In the U.S. they peaked in 2002 at nearly 13 percent and are now down to about 10 percent. This downward trend is seen among most of the traditional leaders in radio advertising expenditures –Mexico, Japan, France, UK, Spain—and only in rapidly developing countries such as Brazil and China is the share spent on radio on a clear upward trajectory.
Another indicator of the problem is seen in the considerable weakening of sales prices for radio stations in recent years.
Radio station owners and managers need to start spending a good deal of time thinking about what is happening to their industry and how they will need to change their place in the media use mix. They need to seriously consider what business they are in and what unique value they produce so they can reposition their functions for audiences and advertisers.
The structure and offerings of the radio industry have been adjusted several times during its 9-decade history, but the last time the industry needed to recreate itself so dramatically occurred with the arrival of television. The arrival of television resulted in radio shifting from a general entertainment and information medium to a music entertainment platform in many nations. In the U.S., broadcasters on A.M. radio later shifted toward a talk and sports platform after F.M. developed and music migrated to that spectrum, creating new opportunities on both bands.
Repositioning radio again will not be a simple task, but it is one the industry needs to begin undertaking now. If radio managers do not start thinking ahead about the negative trends appearing in their industry, they will soon experience the alarm and fear that is pervasive in the newspaper industry. It is better for companies and industries to act before crises develop fully because they can respond to and help direct the course of change rather than merely experience its negative effects. Whether decisive action will emerge in the radio industry before we reach that point remains to be seen.
The challenges are being caused by declining demand for radio offerings due to lifestyle changes, the wide availability of substitutable audio platforms, and the primary content currently being offered. Audience behavior toward radio is changing and many U.S. stations now only make money for 4 to 6 hours each day. Overall, audiences are spending less time with radio and exhibiting less station loyalty than they did in the past, and young audiences are particularly difficult to attract and serve.
A major impetus of change is that audiences for music worldwide are progressively replacing radio listening with personalized playlists they have created on their computers, MP3 players, and mobile phones and by CDs on which they burned those favorites. They select music that suits their individual tastes and many have wider repositories of music in their own libraries than are offered on broadcaster playlists. Satellite and Internet radio are compounding the problem by offering hundreds of choices of highly focused music formats. These developments are increasingly making radio a less relevant platform for music entertainment delivery than it has been.
Concurrently, a wide variety of non-music programming is being offered by Satellite and Internet stations and audiences are increasingly using these services, as well as downloading podcasts on a variety of topics of individual interest from both broadcast and non-radio sources.
These problems are compounded in the U.S. because the rise of radio groups after deregulation in the mid 1990s led to national radio programmers making selections, reducing the range of genres of music and other content on radio stations. Overall, programming has become less local and less relevant as content decisions have been made elsewhere.
Advertisers sense the problem with audiences and the share of advertising expenditures going to radio is declining. Worldwide radio advertising expenditures are about 7 percent of total expenditures, down from a height of 9 percent in 1999. In the U.S. they peaked in 2002 at nearly 13 percent and are now down to about 10 percent. This downward trend is seen among most of the traditional leaders in radio advertising expenditures –Mexico, Japan, France, UK, Spain—and only in rapidly developing countries such as Brazil and China is the share spent on radio on a clear upward trajectory.
Another indicator of the problem is seen in the considerable weakening of sales prices for radio stations in recent years.
Radio station owners and managers need to start spending a good deal of time thinking about what is happening to their industry and how they will need to change their place in the media use mix. They need to seriously consider what business they are in and what unique value they produce so they can reposition their functions for audiences and advertisers.
The structure and offerings of the radio industry have been adjusted several times during its 9-decade history, but the last time the industry needed to recreate itself so dramatically occurred with the arrival of television. The arrival of television resulted in radio shifting from a general entertainment and information medium to a music entertainment platform in many nations. In the U.S., broadcasters on A.M. radio later shifted toward a talk and sports platform after F.M. developed and music migrated to that spectrum, creating new opportunities on both bands.
Repositioning radio again will not be a simple task, but it is one the industry needs to begin undertaking now. If radio managers do not start thinking ahead about the negative trends appearing in their industry, they will soon experience the alarm and fear that is pervasive in the newspaper industry. It is better for companies and industries to act before crises develop fully because they can respond to and help direct the course of change rather than merely experience its negative effects. Whether decisive action will emerge in the radio industry before we reach that point remains to be seen.
THE TRANSACTION COST PROBLEM OF NEWSPAPER MICROPAYMENTS
The desire to monetize online news is leading some to enthusiastically promote micropayment systems. A number of the leading newspaper sites are leaning toward a cooperative payment system that will allow readers to use a single account to access material at the leading papers. Such a system will not be technically difficult to implement, but getting the price right will be a significant challenge because of transaction costs and significant differences in the economic value of articles.
To create the best industry wide effects, a micropayment payment system would need to include as many papers as possible (see "The Challenges of Online News Micropayments and Subscriptions" http://themediabusiness.blogspot.com/2009/05/challenges-of-online-news-micropayments.html). The fact that a consortium is currently being sought only among the major players illustrates, however, that such a system would be cost inefficient because content from smaller papers would attract fewer transactions and be more expensive to service.
A widely inclusive system would encounter the problems of small payouts that have plagued collecting rights societies for authors, composers, and performers. Those systems have found that the costs of managing transactions, accounting and auditing, and conveying funds to rights holders incur higher expenses than the payments due many rights holders and that such a system is possible only when the rights holders and content that generate the most transactions subsidize those that generate the least.
This occurs because each right must have a separate account, uses of all rights must be monitored and recorded, funds must be collected, expenses for accounting, auditing and other administrative costs paid, and funds must be transferred to recipients. These activities incur significant transaction costs.
Even a cooperative system limited to newspapers that attract the largest number of customers will encounter transaction cost challenges.
In single content sales systems, for example, the cost of making transactions takes up the bulk of the price. In the sale of mobile telephone ringtones, for example, the composer, arranger, and performer get only about 20% of the price. For digital song downloads everyone associated with the content--songwriter, arranger performers, and record company--receive less than half. This occurs because merchant and financial transaction costs are very high. The cost for using a credit card adds 5 to 7 percent to merchant costs and the expense for bank processing of each transaction is a minimum of about 25 cents. Even electronic fund transfers between bank accounts incurs about 30 cents in transaction costs.
These realities will affect the structure and pricing of newspaper article micropayment purchases. The most efficient system for users and firms will require the use of prepaid customer accounts to reduce the number of bank system transactions. This will allow users to transfer funds to their accounts and then purchase articles at pennies a piece. Funds collected would be then periodically transferred to papers. Such a system could also include the option for occasional users to make credit cards purchases of articles, but the price would have to be $2 to $10 per article to make it worth the effort.
The biggest pricing challenge, however, is that some articles will be more valuable than others and will be most sought after by consumers. This means newspapers will have to figure out BEFOREHAND which stories fall into those categories and they will have to decide what prices to charge for them. Papers will have to hire personnel to try to figure out before publication which are the most economically valuable stories--something that will be extremely hard to do--or they will have to set prices based on the costs invested in creating each story (something current newspaper accounting systems do not support). In either case, increased costs will result. The only other reasonable option is to set prices per article based on the overall average cost of producing an article or a column inch of editorial copy. This, of course, over and under prices content simultaneously.
Moving to a micropayment system is not merely a matter of starting to charge for content online, but involves changing the fundamental business model of papers. Newspapers have historically bundled all content into one product available at a single price. In retailing, bundling has always worked best for getting consumers to buy more of the product at a lower price than if bought individually. With this tactic the producer gains profit because the costs of distribution and sales are collectively lower. A second tactic involves bundling products of unequal or uneven value that are sold together to achieve a joint price that is higher than would have been obtained individually.
Newspapers have historically benefited from such bundling by filling pages with relatively inexpensive news agency and syndicated content and by including huge amounts of information culled from public sources that did not require significant investment of resources or added value. Unbundling and selling individual articles with a micropayment system will produce little consumer willingness to pay for this type of content--a significant problem because it is the bulk of editorial content in most newspapers today. Unbundling will also increase transaction costs, thus reducing profitability. This will force higher prices on consumers that will affect demand.
Disaggregating the newspaper and making more money off some individual articles will also create pressure for additional payments from journalists who write the most valuable articles. This will also increase costs of the micropayment system.
Making money from online journalism is, thus, not just a matter of saying "Let's all start charging." It will require fundamental rethinking of the value chain, what content is offered, and how it is produced. It will also require significant thought about what's in it for consumers--something that is glaringly missing from current discussions of starting online payments. The consumer challenge is especially salient because most online news readers do not currently buy newspapers. If they are not willing to pay for news in print, why will they suddenly be willing to pay for that same news online? If papers can't figure that out, no decision to implement micropayments will end happily.
To create the best industry wide effects, a micropayment payment system would need to include as many papers as possible (see "The Challenges of Online News Micropayments and Subscriptions" http://themediabusiness.blogspot.com/2009/05/challenges-of-online-news-micropayments.html). The fact that a consortium is currently being sought only among the major players illustrates, however, that such a system would be cost inefficient because content from smaller papers would attract fewer transactions and be more expensive to service.
A widely inclusive system would encounter the problems of small payouts that have plagued collecting rights societies for authors, composers, and performers. Those systems have found that the costs of managing transactions, accounting and auditing, and conveying funds to rights holders incur higher expenses than the payments due many rights holders and that such a system is possible only when the rights holders and content that generate the most transactions subsidize those that generate the least.
This occurs because each right must have a separate account, uses of all rights must be monitored and recorded, funds must be collected, expenses for accounting, auditing and other administrative costs paid, and funds must be transferred to recipients. These activities incur significant transaction costs.
Even a cooperative system limited to newspapers that attract the largest number of customers will encounter transaction cost challenges.
In single content sales systems, for example, the cost of making transactions takes up the bulk of the price. In the sale of mobile telephone ringtones, for example, the composer, arranger, and performer get only about 20% of the price. For digital song downloads everyone associated with the content--songwriter, arranger performers, and record company--receive less than half. This occurs because merchant and financial transaction costs are very high. The cost for using a credit card adds 5 to 7 percent to merchant costs and the expense for bank processing of each transaction is a minimum of about 25 cents. Even electronic fund transfers between bank accounts incurs about 30 cents in transaction costs.
These realities will affect the structure and pricing of newspaper article micropayment purchases. The most efficient system for users and firms will require the use of prepaid customer accounts to reduce the number of bank system transactions. This will allow users to transfer funds to their accounts and then purchase articles at pennies a piece. Funds collected would be then periodically transferred to papers. Such a system could also include the option for occasional users to make credit cards purchases of articles, but the price would have to be $2 to $10 per article to make it worth the effort.
The biggest pricing challenge, however, is that some articles will be more valuable than others and will be most sought after by consumers. This means newspapers will have to figure out BEFOREHAND which stories fall into those categories and they will have to decide what prices to charge for them. Papers will have to hire personnel to try to figure out before publication which are the most economically valuable stories--something that will be extremely hard to do--or they will have to set prices based on the costs invested in creating each story (something current newspaper accounting systems do not support). In either case, increased costs will result. The only other reasonable option is to set prices per article based on the overall average cost of producing an article or a column inch of editorial copy. This, of course, over and under prices content simultaneously.
Moving to a micropayment system is not merely a matter of starting to charge for content online, but involves changing the fundamental business model of papers. Newspapers have historically bundled all content into one product available at a single price. In retailing, bundling has always worked best for getting consumers to buy more of the product at a lower price than if bought individually. With this tactic the producer gains profit because the costs of distribution and sales are collectively lower. A second tactic involves bundling products of unequal or uneven value that are sold together to achieve a joint price that is higher than would have been obtained individually.
Newspapers have historically benefited from such bundling by filling pages with relatively inexpensive news agency and syndicated content and by including huge amounts of information culled from public sources that did not require significant investment of resources or added value. Unbundling and selling individual articles with a micropayment system will produce little consumer willingness to pay for this type of content--a significant problem because it is the bulk of editorial content in most newspapers today. Unbundling will also increase transaction costs, thus reducing profitability. This will force higher prices on consumers that will affect demand.
Disaggregating the newspaper and making more money off some individual articles will also create pressure for additional payments from journalists who write the most valuable articles. This will also increase costs of the micropayment system.
Making money from online journalism is, thus, not just a matter of saying "Let's all start charging." It will require fundamental rethinking of the value chain, what content is offered, and how it is produced. It will also require significant thought about what's in it for consumers--something that is glaringly missing from current discussions of starting online payments. The consumer challenge is especially salient because most online news readers do not currently buy newspapers. If they are not willing to pay for news in print, why will they suddenly be willing to pay for that same news online? If papers can't figure that out, no decision to implement micropayments will end happily.
The Challenges of Online News Micropayments and Subscriptions
The impetus toward subscriptions for access and micropayments for single use of online news is growing because online advertising alone cannot sustain the news organizations necessary to provide high quality and broad coverage.
In recent weeks Rupert Murdoch announced News Corp. will begin shifting its newspapers to an online paid model in the next 12 months, starting with Wall Street Journal and then progressively shifting papers such as the New York Post, The Times of London, the Sun and The Australian to a paid model. Dean Singleton followed by indicating MediaNews Group will begin doing the same for its papers, including Denver Post, San Jose Mercury News, Detroit News, St. Paul Pioneer Press, and Salt Lake city Tribune.
Clearly charging for online news is likely to reduce online consumption because of elasticity of demand, but—setting aside the extent to which demand for online news will fall if a price is imposed—moving to a paid model will also creates two common, industrywide challenges.
First, it forces each publisher to bear costs of setting up their own payment system. Secondly, it imposes a heavy burden on consumers. The latter burden results not from having to pay for news, but from the fact that online readers typically do not use only one online news source—unlike the market for print newspapers in which readers typically subscribe to only one paper.
It currently appears that each online newspaper or their corporate parent will set up their own payment systems. The options being most discussed are subscriptions for use or electronic wallets from which to make micropayments for occasional use.
These factors will have a particularly negative affect on the heaviest online news users—voracious and promiscuous readers who seek news from multiple news organizations. If each newspaper sets up its own payment system, for example, these readers will have to have separate payment accounts for the New York Times, Washington Post, Los Angeles Times, Wall Street Journal, The Guardian, and dozens of other publications they wish to visit.
To deal with this challenge the newspaper industry should seek to create a joint venture or cooperative to solve the problem. Companies should work together to developing a single system that is usable across sites and one that can be extended to handle payments for other types of online content. Such a system would simplify and encourage payment for content, but also develop a new revenue stream by turning the payment system from a cost center to profit center by charging companies for its use.
Free is clearly not the right price for news, but the movement to a paid model will not be as simple as transferring the existing subscription and single copy payment models for print newspapers to their online counterparts. Seeking payment online creates new challenges and opportunities that will require new thinking about how payments are made and more cooperation across the industry.
In recent weeks Rupert Murdoch announced News Corp. will begin shifting its newspapers to an online paid model in the next 12 months, starting with Wall Street Journal and then progressively shifting papers such as the New York Post, The Times of London, the Sun and The Australian to a paid model. Dean Singleton followed by indicating MediaNews Group will begin doing the same for its papers, including Denver Post, San Jose Mercury News, Detroit News, St. Paul Pioneer Press, and Salt Lake city Tribune.
Clearly charging for online news is likely to reduce online consumption because of elasticity of demand, but—setting aside the extent to which demand for online news will fall if a price is imposed—moving to a paid model will also creates two common, industrywide challenges.
First, it forces each publisher to bear costs of setting up their own payment system. Secondly, it imposes a heavy burden on consumers. The latter burden results not from having to pay for news, but from the fact that online readers typically do not use only one online news source—unlike the market for print newspapers in which readers typically subscribe to only one paper.
It currently appears that each online newspaper or their corporate parent will set up their own payment systems. The options being most discussed are subscriptions for use or electronic wallets from which to make micropayments for occasional use.
These factors will have a particularly negative affect on the heaviest online news users—voracious and promiscuous readers who seek news from multiple news organizations. If each newspaper sets up its own payment system, for example, these readers will have to have separate payment accounts for the New York Times, Washington Post, Los Angeles Times, Wall Street Journal, The Guardian, and dozens of other publications they wish to visit.
To deal with this challenge the newspaper industry should seek to create a joint venture or cooperative to solve the problem. Companies should work together to developing a single system that is usable across sites and one that can be extended to handle payments for other types of online content. Such a system would simplify and encourage payment for content, but also develop a new revenue stream by turning the payment system from a cost center to profit center by charging companies for its use.
Free is clearly not the right price for news, but the movement to a paid model will not be as simple as transferring the existing subscription and single copy payment models for print newspapers to their online counterparts. Seeking payment online creates new challenges and opportunities that will require new thinking about how payments are made and more cooperation across the industry.
Seeing through the Haze Surrounding Websites, Blogs and Social Media
Communicating regularly is hard work. It takes skill; it takes a voice; it takes having something to say; it takes time. Making money from it is even harder.
The functions provided by websites, blogs, and social media clearly make it possible for people to express themselves in ways never before imagined, to share their opinions, to express their hopes and dreams, and to share the details of their lives. Media companies are watching these developments and many are rushing to provide content on any communication technology or application the public uses.
Although large numbers of people are trying the new technologies, they are reacting to them in different ways. Some find them highly useful and satisfying; some find them worthless and disappointing; some find them a worthy pastime; others find them a waste of time. What this means is that—like all technologies—they are more important to some people than to others. Consequently, managers need to be realistic in assessing their potential, the extent to which they are being used by the public, and the extent to which they provide opportunities that media companies should pursue.
Because those promoting the technologies are self interested, uptake figures are easy to come by. Finding out who has tried the technologies, but decided they were undesirable is harder. However, research is showing some interesting results in that regard. We now know that 60 percent of the people who try Twitter stop using it within a month, that only about 5% of blogs are regularly updated, that more than 200 million blogs have been abandoned, and that about 37 million web domain names are deleted every year.
Most people and organizations who try these new communication opportunities make limited use of them or give up on them altogether because of boredom or because the opportunities don't provide sufficient results. This is not to say they are not unimportant, however. A good number of individuals and companies are using them to create new abilities and opportunities to communicate with friends, colleagues, and customers and to establish new businesses and revenue streams. Doing so, however, takes commitment that most people and firms are unwilling to make.
From the business standpoint one has to be realistic when evaluating the opportunities presented. Media executives need to ask hard questions: Do all media companies need to provide content across every available platform regardless of the cost and effort? Are all types of news and information appropriately carried on all platforms? In what ways is branding and marketing for the company actually served by these engagements? How are these monetized? What are the returns on the investments? What are the risks of not engaging these technologies?
Success is not easy in this technological environment. It requires investment, effort, regular activity, and provision of content that people want. Media managers choosing to use these new technologies must be clear-headed in their decisions and pursue well-founded strategies or they will be lost in the maze of competing and alternative opportunities.
The functions provided by websites, blogs, and social media clearly make it possible for people to express themselves in ways never before imagined, to share their opinions, to express their hopes and dreams, and to share the details of their lives. Media companies are watching these developments and many are rushing to provide content on any communication technology or application the public uses.
Although large numbers of people are trying the new technologies, they are reacting to them in different ways. Some find them highly useful and satisfying; some find them worthless and disappointing; some find them a worthy pastime; others find them a waste of time. What this means is that—like all technologies—they are more important to some people than to others. Consequently, managers need to be realistic in assessing their potential, the extent to which they are being used by the public, and the extent to which they provide opportunities that media companies should pursue.
Because those promoting the technologies are self interested, uptake figures are easy to come by. Finding out who has tried the technologies, but decided they were undesirable is harder. However, research is showing some interesting results in that regard. We now know that 60 percent of the people who try Twitter stop using it within a month, that only about 5% of blogs are regularly updated, that more than 200 million blogs have been abandoned, and that about 37 million web domain names are deleted every year.
Most people and organizations who try these new communication opportunities make limited use of them or give up on them altogether because of boredom or because the opportunities don't provide sufficient results. This is not to say they are not unimportant, however. A good number of individuals and companies are using them to create new abilities and opportunities to communicate with friends, colleagues, and customers and to establish new businesses and revenue streams. Doing so, however, takes commitment that most people and firms are unwilling to make.
From the business standpoint one has to be realistic when evaluating the opportunities presented. Media executives need to ask hard questions: Do all media companies need to provide content across every available platform regardless of the cost and effort? Are all types of news and information appropriately carried on all platforms? In what ways is branding and marketing for the company actually served by these engagements? How are these monetized? What are the returns on the investments? What are the risks of not engaging these technologies?
Success is not easy in this technological environment. It requires investment, effort, regular activity, and provision of content that people want. Media managers choosing to use these new technologies must be clear-headed in their decisions and pursue well-founded strategies or they will be lost in the maze of competing and alternative opportunities.
ASK DEEPER QUESTIONS ABOUT FINANCIAL CONDITIONS
Many observers tend to conceive any changes in media businesses as trends that are irreversible or to combine them with other changes to make sweeping generalizations about industry conditions. The results are often wrong and distract observers from asking deeper more appropriate questions about longer-term developments and how media companies use the resources they have.
To understand changes one needs to consider developments separately to determine their origin and expected duration. This allows one to determine what are the result of external trends and what are the result of company choices. Only then can one begin combining them with other observations.
Thus, one needs to consider whether the ratings increase for AMC is due to people spending more watching cable channels or an effect of the AMC's investments in quality programming and the popularity of programs such as Mad Men? If it is the former, one can enjoy benefits with little effort or extra investment; if it is the latter, the company will want to consider additional investments in other programming.
Is the decline in broadcast television advertising in the first half of 2008 a harbinger of a advertisers moving expenditures out of broadcasting or a reflection of the current economy and the condition of the automobile industry and its declining ad budget? If it is the first, long-term trouble is brewing and companies will need to give significant thought to their business models and cost structures. If it is the latter, the financial difficulties caused by the reduction may be short- to mid-term and will merely have to be endured until conditions improve.
Is the decline the in national newspaper advertising the result of reduced spending by advertisers or because of changes in the number of national advertisers and the ways they allocate their budgets. The latter requires rethinking income potential and expenditures for selling national advertising, whereas the former will create less longer-term trauma.
Many observers also seem to think that budgets cuts are necessarily bad and unusual for companies, but they are normal occurrences because of the cyclical nature of advertising expenditures. When ad dollars are flowing vigorously, media companies expand their budgets; when that flow lessens, companies reduce their budgets.
What is important about budget cuts is that they be instituted in strategic way to leave the core capabilities of the firm intact so the firm can benefit when conditions change and not miss critical time and financial benefits by having to rebuild those capabilities when better times occur.
It is alo important that budget cuts not be made equally and across the board, but that they be made by clearly analyzing the necessity of existing cost structures and operations. The challenge for many traditional media is that they are labor intensive and labor costs often are the one of the leading portions of their expenses. If one must cut labor, it should be done considering which employees can easily be replaced later, whether all operations, products, and services need to be maintained, and whether outsourcing some functions is an option.
Many companies also forget to look at the top as well as the bottom of their operations when cost cutting occurs. Today, for example, many newspaper companies need to be asking whether expensive corporate offices, private jets, and high corporate salaries and perks are warranted and necessary or if they should cut those corporate expenditures and the management fees they lay on local newspapers to pay for them.
In times of change, one needs clear vision of what is happening to an industry and company and to ask broader questions than are typically asked in firms and by industry observers. Those who do so benefit; those who don't pay a price.
To understand changes one needs to consider developments separately to determine their origin and expected duration. This allows one to determine what are the result of external trends and what are the result of company choices. Only then can one begin combining them with other observations.
Thus, one needs to consider whether the ratings increase for AMC is due to people spending more watching cable channels or an effect of the AMC's investments in quality programming and the popularity of programs such as Mad Men? If it is the former, one can enjoy benefits with little effort or extra investment; if it is the latter, the company will want to consider additional investments in other programming.
Is the decline in broadcast television advertising in the first half of 2008 a harbinger of a advertisers moving expenditures out of broadcasting or a reflection of the current economy and the condition of the automobile industry and its declining ad budget? If it is the first, long-term trouble is brewing and companies will need to give significant thought to their business models and cost structures. If it is the latter, the financial difficulties caused by the reduction may be short- to mid-term and will merely have to be endured until conditions improve.
Is the decline the in national newspaper advertising the result of reduced spending by advertisers or because of changes in the number of national advertisers and the ways they allocate their budgets. The latter requires rethinking income potential and expenditures for selling national advertising, whereas the former will create less longer-term trauma.
Many observers also seem to think that budgets cuts are necessarily bad and unusual for companies, but they are normal occurrences because of the cyclical nature of advertising expenditures. When ad dollars are flowing vigorously, media companies expand their budgets; when that flow lessens, companies reduce their budgets.
What is important about budget cuts is that they be instituted in strategic way to leave the core capabilities of the firm intact so the firm can benefit when conditions change and not miss critical time and financial benefits by having to rebuild those capabilities when better times occur.
It is alo important that budget cuts not be made equally and across the board, but that they be made by clearly analyzing the necessity of existing cost structures and operations. The challenge for many traditional media is that they are labor intensive and labor costs often are the one of the leading portions of their expenses. If one must cut labor, it should be done considering which employees can easily be replaced later, whether all operations, products, and services need to be maintained, and whether outsourcing some functions is an option.
Many companies also forget to look at the top as well as the bottom of their operations when cost cutting occurs. Today, for example, many newspaper companies need to be asking whether expensive corporate offices, private jets, and high corporate salaries and perks are warranted and necessary or if they should cut those corporate expenditures and the management fees they lay on local newspapers to pay for them.
In times of change, one needs clear vision of what is happening to an industry and company and to ask broader questions than are typically asked in firms and by industry observers. Those who do so benefit; those who don't pay a price.
THE FAILING STRATEGIES FOR DRAMA ON NETWORK TELEVISION
The announcement of the finalists for the 2008 Emmy drama nominations shows how weak major television networks have become and the feeble program strategies they are now employing. AMC’s “Mad Men” and FX’s “Damages” became the first series ever produced by basic tier cable channels to become finalists for best series and they were joined in the 6 nominee list by Showtime for “Dexter”.
The results were even worse for networks in the major acting categories: Only 1 of the five Emmy nominees for lead actor and 2 of the five for lead actress went to network programs.
Overall, 24 cable network programs received nominations and 7 cable channels received 10 or more nominations. HBO received 85 nominations—beating out all the broadcast networks, Showtime received 20 nominations, and AMC received 20 nominations.
Drama is a bellwether of the health of television programming and networks continue to fair poorly. It is a particularly important genre, socially and culturally, because it allows explorations of beliefs, attitudes, norms, aspirations, and fears better than other program types. However, success is unpredictable and good drama is expensive to produce. Historically it was the province of the well funded dominant networks, but that has now changed.
The decline of quality in network television programming is directly related to the increasing number of channels available in households. As the number of channels increases, the average number of viewers declines, producing declining advertising support, and thus reducing resources available for program investments. The responses of networks have been predictable. They offer more game shows and reality programs that are less expensive to produce, avoid productions that are edgy and innovative, and rerun programs as much as possible.
Network prime time filled with shows such as “I survived a Japanese Game Show”, “Wife Swap”, “Nashville Star,” and The Bachelorette” and the networks wonder why they have trouble capturing audiences and gaining financial resources. When they do provide drama it is all too often formulaic and a spin off from an already successful series. There are strong tendencies for network drama to have a criminal or legal practice oriented or take a prime time soap opera approach, such as “CSI”, “Law & Order”, “Desperate Housewives”, and “Grey’s Anatomy”.
The program challenge has been growing worse year after year since the development of cable television channels in the 1970s. I don’t want to be interpreted as saying the networks have produced no fine drama, but the amount has declined precipitously.
This raises the question of why cable channels are able to follow an opposite path, increasing their production of drama and gaining more acclaim for their work. The simple answer is money. Having additional sources of income other than advertising frees programs from the necessity of seeking audiences linked to interests of advertisers and from the content influence of advertisers. It allows producers, writers, and directors to employ greater creativity, to address controversial subjects, and to take the time to ensure quality in the production.
Subscriber-supported HBO has the longest and most distinguished record in producing original drama with highly rated and acclaimed series such as “The Sopranos”, “Angels in America”, “Six Feet Under”, “Deadwood”, “Band of Brothers”, and “Sex and the City”. HBO is premium channel financed by subscriptions from about one third of American households, a clear example that many viewers want and are willing to pay for innovative, quality programming.
In recent years there has also been significant growth of drama from cable channels receiving both subscriber and advertising revenue, thus giving us programming such as USA network’s “Monk” and TNT’s “The Closer”. Original television drama is now being produced by other channels, such as AMC, Lifetime, and Showtime, as well.
One of the side effects of the increased production of drama by cable channels is that they are now playing significant export roles and their programming is regularly appearing in prime time on national channels, especially public service channels, in Europe and elsewhere.
Network executives need to seriously reconsider their programming strategies, particularly where drama is concerned, or they risk become secondary channels in the years to come. Unless they find ways to develop and support quality drama, it will increasingly become the trophy programming of cable channels in the years to come.
The results were even worse for networks in the major acting categories: Only 1 of the five Emmy nominees for lead actor and 2 of the five for lead actress went to network programs.
Overall, 24 cable network programs received nominations and 7 cable channels received 10 or more nominations. HBO received 85 nominations—beating out all the broadcast networks, Showtime received 20 nominations, and AMC received 20 nominations.
Drama is a bellwether of the health of television programming and networks continue to fair poorly. It is a particularly important genre, socially and culturally, because it allows explorations of beliefs, attitudes, norms, aspirations, and fears better than other program types. However, success is unpredictable and good drama is expensive to produce. Historically it was the province of the well funded dominant networks, but that has now changed.
The decline of quality in network television programming is directly related to the increasing number of channels available in households. As the number of channels increases, the average number of viewers declines, producing declining advertising support, and thus reducing resources available for program investments. The responses of networks have been predictable. They offer more game shows and reality programs that are less expensive to produce, avoid productions that are edgy and innovative, and rerun programs as much as possible.
Network prime time filled with shows such as “I survived a Japanese Game Show”, “Wife Swap”, “Nashville Star,” and The Bachelorette” and the networks wonder why they have trouble capturing audiences and gaining financial resources. When they do provide drama it is all too often formulaic and a spin off from an already successful series. There are strong tendencies for network drama to have a criminal or legal practice oriented or take a prime time soap opera approach, such as “CSI”, “Law & Order”, “Desperate Housewives”, and “Grey’s Anatomy”.
The program challenge has been growing worse year after year since the development of cable television channels in the 1970s. I don’t want to be interpreted as saying the networks have produced no fine drama, but the amount has declined precipitously.
This raises the question of why cable channels are able to follow an opposite path, increasing their production of drama and gaining more acclaim for their work. The simple answer is money. Having additional sources of income other than advertising frees programs from the necessity of seeking audiences linked to interests of advertisers and from the content influence of advertisers. It allows producers, writers, and directors to employ greater creativity, to address controversial subjects, and to take the time to ensure quality in the production.
Subscriber-supported HBO has the longest and most distinguished record in producing original drama with highly rated and acclaimed series such as “The Sopranos”, “Angels in America”, “Six Feet Under”, “Deadwood”, “Band of Brothers”, and “Sex and the City”. HBO is premium channel financed by subscriptions from about one third of American households, a clear example that many viewers want and are willing to pay for innovative, quality programming.
In recent years there has also been significant growth of drama from cable channels receiving both subscriber and advertising revenue, thus giving us programming such as USA network’s “Monk” and TNT’s “The Closer”. Original television drama is now being produced by other channels, such as AMC, Lifetime, and Showtime, as well.
One of the side effects of the increased production of drama by cable channels is that they are now playing significant export roles and their programming is regularly appearing in prime time on national channels, especially public service channels, in Europe and elsewhere.
Network executives need to seriously reconsider their programming strategies, particularly where drama is concerned, or they risk become secondary channels in the years to come. Unless they find ways to develop and support quality drama, it will increasingly become the trophy programming of cable channels in the years to come.
DRIVERS OF CHANGE IN THE MEDIA ENVIRONMENT
Five decisive trends are driving changes in the media environment and forcing media companies to change their thinking and operations: media abundance, audience fragmentation and polarization, product portfolio development, the eroding strength of media companies, and a overall power shift in the communications process.
Abundance is seen in the dramatic rise in media types and units of media. The growth of media supply is far exceeding the growth of consumption in both temporal and monetary terms. The average number of pages in newspapers tripled in the twentieth century; the number of over-the-air television channels quadrupled since 1960s--supplemented by an average of about fifty-six cable channels in the average home; there are four times as many magazines available as in 1970s; 1.5 million new web pages are created daily, and created and stored knowledge (as measured by information scientists) is growing at a rate of 30 percent a year. We used to think of competition among newspapers or competition among television channels, but this media abundance has created competition not only among media but also competition between media and other leisure time activities such as sports, concerts, and socializing at cafes and bars.
The abundance has created fragmentation and polarization of the audience because people are spreading their media use across more channels, books, magazines, and websites. This produces extremes of use and nonuse among available channels and titles. In television, for example, there is a tendency for individuals to focus most use on three or four channels. Increasing channel availability does not create an equal amount of increased use. For example, if twenty channels are received in a household, the average viewed is five. When fifty channels are received, the average rises to twelve, and if one hundred channels are received, the average viewed by all members of the household is only sixteen. Advertisers understand this development and have responded by spreading their expenditures and paying less for smaller audiences. The audience-use changes mean that competition is no longer institutionally and structurally defined but is being defined by the time and money audiences/consumers spend with media, and the competitive focus is now on the attention economy and the experience economy.
The difficulties faced by individual units of media have led media companies to create and operate portfolios of media products. This response occurs because declining average return per unit makes owning a single media product problematic. The portfolios are efforts to reduce risk and obtain economies of scale and scope. These portfolios can increase return if they involve efficient operations and joint cost savings.
Despite the growth of portfolios and large media companies, the strength of the companies is eroding. Today no basic media content companies are in the top one hundred companies in the United States or in the top five hundred worldwide. Moreover, the reach of media companies is declining, even though they have grown bigger. Each has less of the viewers’, readers’, and listeners’ attention than in the past, and their difficult strategic position concerns many investors. As a result, media companies are struggling with their major investors, and all major media companies fear they may become takeover targets.
Underscoring all of this is a fundamental power shift in communications. The media space was previously controlled by media companies; today, however, consumers are gaining control of what has now become a demand rather than supply market. And media consumers are not merely content to be passive receivers any longer, many are now participating in production through the variety of forms of interactive and user generated content. This shift is apparent in the financing of contemporary initiatives in cable and satellite, TV and radio, audio and video downloading, digital television, and mobile media, which is based on a consumer payment model. Today, for every dollar spent on media worldwide by advertisers, consumers spend three. In the U.S., that ratin is 1 to 7.
Media companies worldwide are struggling to understand and adjust to wide-ranging external and internal changes that are altering modes of production, rapidly increasing competition, eroding their traditional audience and advertiser bases, altering established market dominance patterns, and changing the potential of the firms. The need for media managers to perceive, understand, and adjust to the new conditions increases daily because such changes can lead to failure of both existing and new products and, ultimately, lead to the loss of value or collapse of firms.
Abundance is seen in the dramatic rise in media types and units of media. The growth of media supply is far exceeding the growth of consumption in both temporal and monetary terms. The average number of pages in newspapers tripled in the twentieth century; the number of over-the-air television channels quadrupled since 1960s--supplemented by an average of about fifty-six cable channels in the average home; there are four times as many magazines available as in 1970s; 1.5 million new web pages are created daily, and created and stored knowledge (as measured by information scientists) is growing at a rate of 30 percent a year. We used to think of competition among newspapers or competition among television channels, but this media abundance has created competition not only among media but also competition between media and other leisure time activities such as sports, concerts, and socializing at cafes and bars.
The abundance has created fragmentation and polarization of the audience because people are spreading their media use across more channels, books, magazines, and websites. This produces extremes of use and nonuse among available channels and titles. In television, for example, there is a tendency for individuals to focus most use on three or four channels. Increasing channel availability does not create an equal amount of increased use. For example, if twenty channels are received in a household, the average viewed is five. When fifty channels are received, the average rises to twelve, and if one hundred channels are received, the average viewed by all members of the household is only sixteen. Advertisers understand this development and have responded by spreading their expenditures and paying less for smaller audiences. The audience-use changes mean that competition is no longer institutionally and structurally defined but is being defined by the time and money audiences/consumers spend with media, and the competitive focus is now on the attention economy and the experience economy.
The difficulties faced by individual units of media have led media companies to create and operate portfolios of media products. This response occurs because declining average return per unit makes owning a single media product problematic. The portfolios are efforts to reduce risk and obtain economies of scale and scope. These portfolios can increase return if they involve efficient operations and joint cost savings.
Despite the growth of portfolios and large media companies, the strength of the companies is eroding. Today no basic media content companies are in the top one hundred companies in the United States or in the top five hundred worldwide. Moreover, the reach of media companies is declining, even though they have grown bigger. Each has less of the viewers’, readers’, and listeners’ attention than in the past, and their difficult strategic position concerns many investors. As a result, media companies are struggling with their major investors, and all major media companies fear they may become takeover targets.
Underscoring all of this is a fundamental power shift in communications. The media space was previously controlled by media companies; today, however, consumers are gaining control of what has now become a demand rather than supply market. And media consumers are not merely content to be passive receivers any longer, many are now participating in production through the variety of forms of interactive and user generated content. This shift is apparent in the financing of contemporary initiatives in cable and satellite, TV and radio, audio and video downloading, digital television, and mobile media, which is based on a consumer payment model. Today, for every dollar spent on media worldwide by advertisers, consumers spend three. In the U.S., that ratin is 1 to 7.
Media companies worldwide are struggling to understand and adjust to wide-ranging external and internal changes that are altering modes of production, rapidly increasing competition, eroding their traditional audience and advertiser bases, altering established market dominance patterns, and changing the potential of the firms. The need for media managers to perceive, understand, and adjust to the new conditions increases daily because such changes can lead to failure of both existing and new products and, ultimately, lead to the loss of value or collapse of firms.
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