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 19^th 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.

International Protection for Broadcasts Gaining New Momentum

The proposed international treaty on the protection of broadcasters is inching forward after nearly 10 years of consideration and member states of the World Intellectual Property Organization and other stakeholders are moving toward consensus on the central elements of what it is to do and what is the object of the protection.

Much of the rhetoric of stakeholders—particularly pay TV channels and sports rights organisations—has led many to believe it is about protecting their business models and revenue. They have done the proposed treaty a disservice.

It is about protecting the value creating activities of broadcasters in content selection, packaging and distribution—something that is not protected by copyrights, but can be protected with a neighboring right. What the treaty is intent on doing is protecting the broadcast—in a signal and derivative of the signal—which embodies the broadcasters value creation activities and is the object of the proposed protection.

The result may assist revenue generation and strengthen the business model of rights holders, licensers, and broadcasters, but it does not directly protect those.

What it will do is provide a streamlined mechanism for broadcasters to enforce their rights internationally when unauthorised reception, decryption, and retransmission and rebroadcast of their signals are done by other broadcasters and cablecasters. Such practices regularly occur in some countries and sometimes involve the second broadcaster substituting their own advertising and charging fees to obtain the broadcast.

The treaty essentially gives broadcasters the right to license other uses of their broadcasts and halt uses they have not licensed, but does not give them rights to the content in the broadcasts that they do not own.

The proposed treaty includes some protection of public interests, by permitting national limitations and exceptions for clearly public purposes such as education, service to visually or hearing impaired persons, etc.

Some scepticism about the proposals exists in developing nations, because most of the benefits will occur to broadcasters in high income and upper middle income nations and only limited benefits will occur in other states.

The thorns on the rose bush, however, involve the fact that many of the nations where egregious reuses of broadcasts have occurred have never well enforced copyright, so one must be highly optimistic to believe that passage of the treaty will solve the problem.

Getting It Wrong: The FTC and Policies for the Future of Journalism

Following hearings on the state of newspapers this past year, the U.S. Federal Trade Commission staff has now prepared a discussion paper of potential policy recommendations to support the reinvention of journalism.

It is a classic example of policy-making folly that starts from the premise that the government can solve any problem—even one created by consumer choices and an inefficient, poorly managed industry. Most of the proposals are based in the idea of using government mechanisms to protect newspapers against competitors and to create markets for newspapers offline and online.

The FTC’s staff ignores the fact that most newspapers are profitable (the average operating profit in 2009 was 12%), but that their corporate parents are unprofitable because of high overhead costs and ill-advised debt loads taken on when advertising revenues were peaked at all time highs. It also fails to make adequate distinction between longer term trends affecting newspapers and the effects of the current recession. The staff thus blends the two together to give a skewed picture of the mid- to long-term health of the industry.

Policy alternatives suggested by the staff for consideration include:

• Limiting fair use provisions of copyright and providing new protection for “hot news,” which would give first news organizations to distribute a story a proprietary right to the facts in their article
• Providing a variety of types of subsidies for news providers
• Changing tax exempt status laws to make it easier to obtain not-for-profit status and funds from charitable donors
• Taxing advertising, spectrum, internet service provision, consumer electronics, and cell phones to provide funds for news organizations
• Creating new antitrust exemptions allowing price collusion and market division

It is hard to ignore the irony and incongruities of a government agency whose purpose is to protect competition and effective markets suggesting anti-competitive practices and taxes that will have negative effects on consumers, competitors, and other companies. Setting those aside, however, none of the suggestions deal with the real underlying economic and financial problems of the news industry: that fact that many consumers are unwilling to pay for the kinds of news provided today and that news organizations need to radically change their management practices and begin reducing organizational inefficiencies.

If commercial news enterprises can’t effectively manage themselves, compete in markets for their products and services, or find effective business models for themselves, why does anyone think that bureaucrats in the government have any ability to solve those problems for the news industry?

RECORD COMPANIES, DIGITAL DOWNLOADS AND ARTISTS RIGHTS

Pink Floyd was always a unique rock group and understood its music as a form of artistic expression. It evolved from psychedelic music in the 1960s to progressive rock known for rock instrumental and acoustic effects in the 1970s. The group often saw their albums as integrated works of art in which subsequent tracks built upon earlier ones. They considered their entire recording to be art; that the ordering of tracks was part of the expression and should not be altered, and that the album should be enjoyed as a whole not merely as a collection of individual songs. Even the album covers got special artistic attention reflecting their content and experiences.

The band felt so strongly about the art of its music that it negotiated a contract with EMI that included a provision to “preserve the artistic integrity of the albums.”

Consumers obviously thought Pink Floyd got the art right, helping the group achieve 16 gold, 13 platinum, and 10 multi-platinum albums. Two of its albums sold more than 10 million copies. The group’s recordings are second only to the Beatles recordings in terms of their value, something not missed by the group’s label EMI.

With sales of digital downloads exploding (accounting for nearly $4 billion in industry sales last year), the record company saw gold in selling individual tracks from albums such as “The Dark Side of the Moon” and “The Wall”. It licensed Pink Floyd’s tracks for sale on iTunes. It was like EMI was cutting up a Kandinsky painting and selling the pieces individually.

The band wasn’t amused and headed to court. It argued that it albums were indivisible and that EMI had violated the contract with the group by splitting them up. EMI countered that it was all just a matter of the new way of doing business in the digital age and that the contemporary technology and business model made it necessary to do disaggregate the albums.

This week the court ruled in favor of Pink Floyd, awarding them $60,000 for the contract violation and $90,000 for legal costs. The court said EMI cannot distribute the group’s music "by any other means than the original album, without the consent of Pink Floyd."

The case is another in a long line of disputes over major media and online companies using content without appropriate permissions of copyright owners. These are the same companies that vigorously protect their own interests against individuals and other media companies and that regularly tell legislators they need more rights so they can protect the interests of authors, artists, and performers. The arrogance and duplicity could not be clearer.

It is also a stark reminder that most media enterprises are somewhat unhappy alliances between content creators—whether journalists, authors and writers, filmmakers or performers—and business creators who often have differing perspectives on the roles and functions that media perform for society and the individuals who use media for art and expression.

GOOGLE SETTLEMENT STEALS RIGHTS AND REWARDS APPROPRIATION

I received another letter from the Google Book Search Settlement Administrator this week informing me that my rights will be affected by the proposed settlement of the class action suit against Google for copyright infringement by scanning books and other publications. I have been a de facto part of the class action lawsuit because I am the author of numerous books, chapters, and other publications affected by Google’s decisions to scan and sell copies of materials still protected by copyright.

The settlement has been supported by the Association of American Publishers—which represents major publishers—because it protects their interests, but it is opposed by the National Writers Union and the American Society of Journalists and Authors because it seriously degrades the rights and interests of those who actually write the content. The split between publishers and authors is not surprising because anyone who has observed the uneasy relationships between musicians, authors, scriptwriters and recording, publishing, and production companies immediate recognizes they have very different and competing interests.

Under the proposed settlement, the court will take away portions of my copyrights that were created under legislation and protected by international treaties and it will give them to Google. The only way for me to protect my rights is to take deliberate affirmative action to opt out of the settlement and to seek to enforce my rights against Google individually—not a great option since its capacity to hire lawyers and stretch out litigation is far higher than mine.

The process and effects of the settlement are stunning and will dramatically alter authors’ rights. For nearly a hundred and fifty years copyright law has recognized that copyrights belong solely to the author (or persons to which the authors sell them) and that commercial uses of copyright material can only be made through negotiating terms of use and payment with the copyright owners.

The Google settlement will essentially rewrite copyright law by allowing the company to use the material without permission, without negotiating how the material will be used, and without negotiating compensation and payment provisions. It is particularly offensive because the court will be saying the government doesn’t have to protect authors’ rights, but authors’ have to protect their own rights. This is a significantly different approach from that which prosecutors and courts have taken in the cases of music, game, and software file sharers who have violated copyright on the Internet.

The settlement disassembles the basics of copyright law without legislative consideration and essentially forces the results on rights holders. Its effects are far reaching. Not only does the settlement apply to U.S. authors, but it is binding to authors worldwide even if they are not aware their rights are affected by the suit.

The settlement turns copyright upside down. Instead of protecting authors’ rights, the proposed settlement asks the court to reallocate the economic and moral rights to authors’ work, to give Google rights to use their material, and to determine the compensation authors must accept. To make matters worse, the effect of the settlement essentially gives Google a monopoly over the scanned publications and does require the company to make them available to other online services that might offer them at different prices or with different compensation for authors.

The proposed settlement is theft—pure and simple—and its proponents want to ravage and rewrite authors rights so that Google's acts will no longer be defined as larceny. The result will reward Google for illegally appropriating material, hardly a message that society should want to send to thiefs.

If the court accepts the settlement, authors will be victimized for the sake a $150 billion Internet company and the world’s biggest publishers. Where is the equity and the justice?

ONLINE AGGREGATORS AND NEWSPAPER STRATEGY

Google, MSN, and Yahoo and other aggregators are cited by newspaper executives are harming newspapers. But what have they actually done? It is important to have a realistic understanding of their effects if one is to fashion strategies for the future of newspapers and news organizations.

Aggregators carry news stories from major news services and thus make international and national public affairs, entertainment and sports news widely available. The headline news on the aggregators’ home pages is becoming the primary news provider for those less interested in news and the online sections are well-used by news consumers who want more news or more timely news than appears in their daily newspaper.

Aggregators and others sites carrying content from news services are now contributing about 20 percent of the revenue of Associated Press, for example, taking some financial pressure off newspapers to fund the cooperative on their own. Other news services are also gaining income from online operators, thus helping them keep prices lower for newspapers as well.

So how do aggregators news harm newspapers? They harms papers to the extent that some less committed newspaper readers are willing to substitute their local paper with a news sources that don’t cover their cities. Some are willing to do so and this is taking some subscribers and single copy purchasers away from newspapers. U.S. newspapers have lost approximately 6 million circulation since 2000, but about half of that was circulation of the 70 competing newspapers or second editions papers that have been closed since the millennium. So one can thus say that at least 3 million people have decided to use other news sources.

Aggregators are also accused of STEALING value through their search functions and links to newspaper sites. Certainly the aggregators are CREATING value with the technique but are they taking value in violation of copyright or norms of content use? The answer is “no” because they do not represent the material as their own and direct those searching to the newspapers own sites, where they are exposed to advertising sold by the online newspapers.

Newspapers are now getting between 7-10 readers online for every reader they have in print. This plays an important role in making their sites attractive to advertisers, a development that generated the $3.2 billion in online advertising revenue that newspapers received in 2008.

Newspapers, of course, could stop the aggregators from linking to their content by putting it behind walls and charging for its use. If they did so, the aggregators could not link to it legally or technically without users encountering a pay or registration wall. So why haven’t newspapers done this until now? Frankly, because they get more readers and more advertising income by offering the material free.

Publishers are increasingly arguing that they should turn newspaper sites into paying sites and they have been holding joint discussion about how that might happen and whether it would be beneficial to do so simultaneously. This has raised some antitrust concern, but it raises real and significant questions of what such a strategy would accomplish.

In my estimation it is not as easy answer to the challenges newspapers face and has some elements that put its effectiveness in doubt. This is primarily because it is uncertain what existing readers will do. Will they subscribe to print AND online? Will they stay with print only? Or will they drop print?

The first option would be financially beneficial, but is likely to attract a limited number of readers unless the joint pricing is so attractive that it produces little new income for the newspaper firm. If that is the case the benefit of the strategy is reduced. The latter option would be very damaging to papers because print advertising creates more value than online advertising and prices for print ads would decline more than would be gained online.

It also needs to be recognized that people who do not currently buying newspapers are unlikely to buy subscriptions to online news sites. Thus, creating a paid model will likely reduce the boosted audience that free online news currently provides. This would have a negative effect on online audience and the increasing revenue that is being obtained from online advertising.

But what of heavy news users? As I have written in other entries in this blog, heavy users tend to be promiscuous and move between many online news sites. A commonly used system for micropayments would be necessary or these heavy users will reduce their use of multiple sites if each requires separate payment registration. Even with such a system in place, it is unlikely that more than 5-10 percent of the newspaper purchasing population would regularly use such a system.

Moving to a paid online model will not be as easy as agreeing that everyone should switch to paid on January 1 next year. It will require considerable strategic thinking and providing new types of value for consumers if it is to be successful. Even then, the benefits for newspapers will vary significantly depending upon the size, location, and competitive situation of individual newspapers.

MEDIA FIRMS INCREASINGLY CHARGED WITH COPYRIGHT VIOLATIONS

First it was record companies suing Napster and peer-to-peer file sharers, and then it was media companies such as Viacom, Universal Music Group, and Agence France Presse suiting Google, YouTube, and Facebook for distributing content whose rights they owned. Now GateHouse Media has filed suit against another newspaper firm, the New York Times Co., for publishing content from its websites and papers on Boston.com.

That media companies are suing each other is a sure sign of the maturation of online distribution and that money is starting to flow—albeit slowly and at levels far below that of traditional media, which still account for more than two-thirds of all consumer and advertiser expenditures

But the lawsuits really point out the weakness of revenue distribution for use of intellectual property online. In publishing, well-developed systems for trading rights and collecting payments exist. In radio, systems for tracking songs played and ensuring artists, composers, arrangers, and music publishers are compensated are in place and working well. The trading of rights for television broadcasts and mechanisms for payments to owners of the IPRs are well established.

However, effective systems are absent in online distribution and the industry needs to move rapidly to establish them. If the industry can not create such a system on their own, more money will go to lawyers and the rules and systems for online payments will ultimately be imposed by courts or legislators who tire of the governmental costs for solving disputes and enforcing the rights.

Organizations representing print and audio-visual media need to sit down with their major counterparts in online distribution to create a reasonable mechanism by which rights are traded and revenues shared, otherwise they risk imposition of a government imposed compulsory license scheme that will be less desirable to the industry.

Companies that continually argue there should be less government regulation of media operations can’t increasingly go to government to solve their disputes without expecting it to produce more regulation.