Mapping Strategy

Core vs. Context: CBS Talks to CNN

This from today's NY Times [emphasis added]:

CBS... has been in discussions with Time Warner about a deal to outsource some of its news-gathering operations to CNN... reducing CBS’s news-gathering capacity while keeping its frontline personalities, like Katie Couric, the CBS Evening News anchor, and paying a fee to CNN to buy the cable network’s news feeds.

 

For CNN, a deal with a broadcast network would mean a new revenue stream without having to add much in costs. For CBS, an arrangement with a cable channel would allow it to cut costs while maintaining the CBS News brand...

Structural change. In any industry, it can be a long time coming. But then, when it does, it's seemingly so sudden and so obvious in hindsight, leaving many to wonder what took so long and what all the fuss was about. Acknowledging that every industry is different and that this particular deal may have at least as much to do with tactical stumbles on CBS's part as it does any notion of industry grand-strategy, please allow me a quick diversion into another industry to illustrate the point.

Once upon a time, the computer industry was vertically integrated: chips, disk drives, monitors, software, printers and even keyboards were all manufactured--quite literally--by the same company that sold them under its own brand. Digital, Wang, Prime, Data General, IBM, Hewlett Packard, Unisys (and others more easily forgotten) asked customers to settle for second- (or third-) rate components in one area in order to get the pieces they had to have and ensure it all worked together properly. (I had the privilege of consulting to all of these folks between 1988 and the mid '90s, and while I had a ringside seat for only some, I was in the tent with a clear view for all.)

Then suddenly (it seemed, but not really) along came Intel and Microsoft and Dell and Canon (whose printers account for nearly all of what's sold under the HP brand) and people scratched their heads and wondered why they'd ever settled for less, and what on earth had sustained all these second- and third-rate products hidden inside these vertically integrated 'stacks'. (Yes, I know, what came next was not necessarily the perfect competition I'm making it out to be in every case, at every layer, but it was -- at least -- a more horizontally-oriented industry all-of-a-sudden (think pancakes) instead of a bunch of soup-to-nuts, buy-it-all-from-us-or-else brands with their own factories for everything.

Similar tales can be told about the automobile and aircraft industries (among others) however I don't have firsthand knowledge of those and so I leave such analysis to others. All are different. And yet at a very high level, all have been the same:

It becomes clear who's really really good at one particular 'horizontal' aspect of the business (e.g., working 'backwards': customer relationships, brand, distribution, manufacturing (yes, even in services), product development, R&D, etc.) and who's just pretty good. Everyone knows these things, but it's hard to tell because the pieces don't compete with each other directly ('pure plays'). Instead, they're all part of larger packages.

Everyone knows though, who's passionate and committed and has totally nailed a particular discipline and is climbing a learning curve and getting to scale faster than everyone else... and who's just in it (a particular horizontal layer) because they have to be to stay in business and pride or lack of imagination have kept them from having the hard conversation about what is core and what is context.

Internal factors play a huge role here. Pride and corporate politics can be overwhelming. Managers develop fiefdoms and want to stay attached to the mother-ship because they know also that it's cold out there and that their 'stuff' is not really competitive globally.

A quick side story on the side story:

I once consulted to a large computer company that made it's own keyboards (this was ~1991). They'd commissioned me to do a study of a) what customers liked and b) how cost-competitive they were. It was the first time they'd done either thing (telling in itself) and we cast the net very wide indeed to get it right.

Long story short: their manufacturing costs for these keyboards were roughly 8X what others were charging in bulk including shipping from faraway places with factories that had dirt floors and workers who subsisted on meager if not wholly inadequate diets.

But the clincher was this: when we did focus groups, the customers liked the cheap stuff better. It 'felt' better on their fingers. The keyboards were lighter. They could type faster. Case closed. With a vengeance. (I recall the client choking on their diet sodas behind the glass, struggling for something positive amidst the rubble of damning customer consensus... and then explaining to me why their stuff was technically much better and they had the charts to prove it. It didn't matter.)

My client had all but exited the business within a year, redeploying the capital to focus on other things they did much better (and still do).

What does any of this have to do with CBS and CNN? Why the rant?

Just this. As it becomes easier to coordinate assembly of the 'pieces' in a particular industry -- due to better communications, global capital flows and a host of other things. I.e., when the efficiency-driven, convenience-driven reasons for being vertically integrated and settling for best-in-house instead of best-of-breed begin to fade away and Coase's Law and the theory of the firm begin to dissolve (just as he predicted seventy years ago -- he's still with us, btw), we begin to see these kinds of changes in these headlines.

An organization with kick-butt field reporting and the scale to support it far into the future beats out an organization that once used to be known for that... but no longer. And the firm with the pretty faces decides that that's not such a bad thing to be... the face to the 'customer'. The brand. It's a perfectly honorable (and sometimes even very powerful) position to be in (though my personal opinion is that CBS may eventually lose that also). But regardless, clarity is good: You do this. We'll do that. And let's do business together because we're not really competing anymore.

Firms re-invent themselves as pancakes rather than bamboo shoots... horizontally-oriented, best-bar-none specialists rather than vertically-oriented best-in-house behemoths.

Yeah, I've taken some liberties here. Coase talked about other aspects as well. And CBS may merely be in its long-awaited death throes as CNN ascends. But this is a blog post, not a masters thesis.

Here's what I find funny: the obligatory denial-of-reality that's needed to keep the staff of the doomed division from defecting en masse and decimating any negotiating leverage that may remain:

Sandy Genelius, a spokeswoman for CBS News, said, “We are extremely pleased with and proud of our news-gathering operation. No outside arrangements are being negotiated...”

Someone's got to play calming music for the passengers as the deck tilts steeper and steeper.

What if They Published a Newsmagazine and Nobody Read It?

More than any high-level statistics about the print news business, the following quote, from the bottom of an article ("What's Next for Newsmagazines") on the front page of the 'B' (Marketplace) section of today's Wall Street Journal made me sit up and take notice [emphasis added]:

At a recent speech at Columbia University, [Newsweek Editor Jon] Meacham delivered a blistering response after he asked who reads Newsweek and none of the 100-odd students in attendance raised their hands.

He can 'blister' all he wants, but I don't know of any industry in which that's proven effective as a means to enticing potential customers into buying your product. The blow-by-blow of that speech from early February is even more pitiful [emphasis added]:

After about an hour, there seemed to be no more questions for him, so Newsweek editor Jon Meacham turned to his audience—about 100 graduate students at Columbia journalism school—and said he had a question for them: Did anyone in the room read Newsweek or Time? There was a small, awkward rumbling before finally, a man shouted, "No!" ...

"Have you looked at Newsweek?" [asked Meacham]

"Sure," said the J-schooler.

"And it's not up to your standards?"

"I find [it] less useful honestly. The news? I don't get it from Newsweek..."

"Look, I need you," said Mr. Meacham... "It's an incredible frustration that I've got some of the most decent, hard-working, honest, passionate, straight-shooting, non-ideological people who just want to tell the damn truth, and how to get this past this image that we're just middlebrow, you know, a magazine that your grandparents get, or something..."

Unless I'm missing something (and there's not a whole lot more to the interaction than what I just posted) Meacham's entire argument for why people ought to read traditional news magazines rests on three things:

1. He's got 'good' people. That may be true in terms of writing skill, interpersonal integrity, reportorial drive, courage in the field and the like, but here's the bottom line: what 'good' means without reference to customers and their needs is anybody's guess. His assertion that those people are 'non-ideological' is a tip-off that he just doesn't get the blogosphere or Gen-Y, much less how mainstream media has evolved since the '70s.
2. He's frustrated. (He'd do better to have been paranoid, as Andy Grove was at Intel).
3. His business is tanking; he needs more customers. (The big three Detroit automakers circa 1980 come to mind here.)

Short take: it's an insular, supply-side argument for relevance that only a very few, slow-moving institutions (like higher education) can get away with, and even there, not for as long as they used to.

Whither Print Advertising? Whither Newspapers?

I note this new data from the Newspaper Association of America

...total print advertising revenue in 2007 plunged 9.4% to $42 billion compared to 2006 -- the most severe percent decline since the association started measuring advertising expenditures in 1950.

The drop-off points to an economic slowdown on top of the secular challenges faced by the industry. The second worst decline in advertising revenue occurred in 2001 when it fell 9.0%.

Total advertising revenue in 2007 -- including online revenue -- decreased 7.9% to $45.3 billion compared to the prior year.

There are signs that online revenue is beginning to slow as well. Internet ad revenue in 2007 grew 18.8% to $3.2 billion compared to 2006. In 2006, online ad revenue had soared 31.4% to $2.6 billion. In 2005, it jumped 31.4% to $2 billion.

What's neglected here is the basic idea that advertising -- as it has traditionally been conceived -- is merely one of many possible direct and indirect elements in the complex and constantly changing process of convincing customers to buy what you have to sell for more than it cost you to make it.

To the degree that print advertising -- on paper, in electronic form or otherwise -- is less-than-effective compared to the alternatives (mascots, blimps, billboards, word-of-mouth, guerrilla tactics, etc.) it will fade. And as with any such sea-change transition -- long anticipated but still somehow shocking when it finally arrives -- it is much easier to say what is going away and to eulogize it than to say exactly why that is so or what (usually plural) is most likely displace it.

In a related vein, this piece, "Out of Print: The death and life of the American newspaper" in The New Yorker's March 31st edition is also worth perusing though perhaps not for those faithful stockholders with a tendency towards melancholy:

...trends in circulation and advertising––the rise of the Internet, which has made the daily newspaper look slow and unresponsive; the advent of Craigslist, which is wiping out classified advertising––have created a palpable sense of doom. Independent, publicly traded American newspapers have lost forty-two per cent of their market value in the past three years, according to the media entrepreneur Alan Mutter. Few corporations have been punished on Wall Street the way those who dare to invest in the newspaper business have. The McClatchy Company, which was the only company to bid on the Knight Ridder chain when, in 2005, it was put on the auction block, has surrendered more than eighty per cent of its stock value since making the $6.5-billion purchase. Lee Enterprises’ stock is down by three-quarters since it bought out the Pulitzer chain, the same year. America’s most prized journalistic possessions are suddenly looking like corporate millstones. Rather than compete in an era of merciless transformation, the families that owned the Los Angeles Times and the Wall Street Journal sold off the majority of their holdings. The New York Times Company has seen its stock decline by fifty-four per cent since the end of 2004, with much of the loss coming in the past year; in late February, an analyst at Deutsche Bank recommended that clients sell off their Times stock. The Washington Post Company has avoided a similar fate only by rebranding itself an “education and media company”; its testing and prep company, Kaplan, now brings in at least half the company’s revenue.

Yes, that appeared as a single paragraph in the New Yorker piece -- more than a bit ironic for a publication pontificating over the doom of its peers as a generation of multi-tasking, ADD-addled information consumers come up.

Forward Into the Past! (A Tale of How Not to Listen to Your Customers)

Jason Fry's 'Real Time' column in today's WSJ is worth checking out (subscription required).  He writes:

Earlier this month, Nielsen Soundscan released 2007 data painting yet another portrait of a music industry struggling to make the transition to a more-uncertain, less-profitable business model. For the year, overall units sold rose 14% -- and sales of digital tracks rose 45%. But not all units are created equal: Total album sales fell 15%, and that blow was softened by a 53% rise in sales of digital albums. Subtract digital-album sales, and physical-album sales declined 19%, to 450.5 million in 2007 from 555.6 million in 2006. (Dig into the numbers yourself here¹.)

Or, if you prefer, take this arresting anecdote from the Economist² (found via Nate Anderson's interesting read³, in the always-great Ars Technica): In 2006 EMI honchos invited some London teens to the label's headquarters to discuss their listening habits. By way of thanks, the kids were offered whatever they wanted from a big pile of CDs. Offered free CDs, the kids took … nothing.

[Bold added; links and italics in the original.]

And why should they take anything? The perceived price of zero isn't even the issue, as more folks fall into line and eschew P2P sharing networks in favor of obeying the law. My daughter's latest iPod is the size of a cookie (and not those super-sized ones they sell in airports, or even Oreos, but more like a thin Chips Ahoy). Continuing to sell CDs into this climate is like selling 78s when I was young.

Blind Alleys and Beating One's Head Against a Brick Wall

We'll forgive the WaPo's shameless editorializing-as-news... because they're right [emphasis added]:

As technologies evolve, old media companies tend not to be the source of the innovation that allows them to survive. Even so, new technologies don't usually kill off old media: That's the good news for the recording industry, as for the TV, movie, newspaper and magazine businesses. But for those old media to survive, they must adapt, finding new business models and new, compelling content to offer.

The RIAA's legal crusade against its customers is a classic example of an old media company clinging to a business model that has collapsed.

According to Ray Beckerman, a New York lawyer representing six clients sued by the RIAA,

Four years of a failed strategy has only "created a whole market of people who specifically look to buy independent goods so as not to deal with the big record companies... Every problem they're trying to solve is worse now than when they started."

A little over ten years ago (I can't remember the exact date but it was in the earliest days of the web) I was working for a small consulting firm leading much of the thinking in digital rights management. (Among other things, we were asked by a big-name consulting firm to train their partners in new media business models and technologies.)

A few colleagues* and I placed calls to RIAA executives, offering to share details of sophisticated and demonstrably effective technologies that could have allowed them to develop and capitalize on a vast range of new electronic business models. After some initial low-level interest, the RIAA was almost unique in not returning our calls.

*UPDATE: One of those colleagues, Bob Weber, has a similar take over at his blog.

Next They'll Ban Thinking...

I find this item in today's WSJ both puzzling and ridiculous
[emphasis added]:

Television's late-night talk-show hosts are set to return to the airwaves next week, but their jokes will pretty much have to write themselves.

After sitting out the first two months of the Hollywood writers' strike, the hosts have agreed, under pressure from their network bosses, to go back to work. But members of the Writers Guild of America -- including the folks who supply the hosts with most of their laugh lines -- are still out on picket lines this week, and no new rounds of negotiations are scheduled...

The guild's strike rules are extremely broad and vague, prohibiting the late-night talk-show hosts, most of whom are guild members, from doing anything that constitutes "writing services." That means the hosts are technically forbidden from writing and performing the traditional opening monologue, plotting out sketches in advance, or creating fictional characters that would perform on the shows...

With all due respect to writers trying to make a living (and I can empathize because, in another sphere of my life, I am one) this is silly beyond comprehension. 

In the brave new Internet world of tens of millions of bloggers toiling for free (some of them reasonably clever, informative and funny) there's little to stop a late-night host from initiating an open contest for the best monologue or character for each night's show.

If no money changes hands, is it the same as crossing the picket line and hiring 'scabs'? What if a third party did the same thing and the host just happened to browse the website? Is finding and printing a volunteer monologue the same as writing? And what is writing, anyway, if not thinking? On what basis do they propose to control that? (Much less justifying their attempts to do so.)

There's nothing like trying to restrict the fundamentally unrestrictable to show how little power the Guild -- and other fluid, information- and creativity-based enterprises -- wield in this new paradigm. The article continues:

anything traditionally written by writers -- David Letterman's "Top Ten List," for example... [would be] unacceptable...

When a rule implies that replacing "anything traditionally done by [fill-in-the-blank*] would be unacceptable", we have approached the very definition of reactionary anti-innovation.

*E.g., as a though exercise, try substituting "typists", "file clerks", "telephone switchboard operators", "blacksmiths" or "horse-and-buggy drivers". Does the following sound Orwellian to anyone else?

Since much of the "writing" on these shows consists of generating ideas for skits and segments, which are loosely scripted and then partially improvised on air, producers say it is unclear how much forethought is technically permissible. [!!]

Then again, maybe someone 'gets it' after all:

Other ideas being batted around by producers that they believe don't violate strike rules include man-on-the street and audience interviews [and] clips from YouTube and other video Web sites...

Better be careful lest the YouTube characters display written words... that would be writing.

Whither the 'Music' Business?

Check out David Byrne, making plenty of sense in the December issue of Wired:

I have seen this business from both sides. I've made money, and I've been ripped off... What is called the music business today, however, is not the business of producing music. At some point it became the business of selling CDs in plastic cases, and that business will soon be over. But that's not bad news for music, and it's certainly not bad news for musicians...

H/T: Kaushik Krishnan and Ajay Shah at the latter's blog

Reviving the Personal Touch: Netflix Bucks a Trend

Interesting piece in the NY Times yesterday about competing on personal service. Michael Osier, Netflix VP for IT, operations and customer service, observes:

Netflix’s decision to eliminate the e-mail feature was made after a great deal of research, Mr. Osier said. He looked at two other companies with reputations for superb phone-based customer service, Southwest Airlines and American Express, and saw that customers preferred human interaction over e-mail messages. “My assessment was that a world-class e-mail program was still going to be consistently lower in quality and effectiveness than a phone program,” he said...

The company has tried to give the service representatives more discretion in deciding when to assuage disgruntled callers with bonus discs and account credits — and they are allowed to err on the side of generosity. More often than not, a month’s credit will be issued or a missing disc marked simply as lost, and the customer will not be charged. Netflix places no particular requirements on call duration, preferring that customer service representatives take the time they need to keep a customer happy and loyal.

The company is choosing to swim (smartly, in my view) against a tide of late-'90s conventional wisdom that's still surging--quite perversely and mono-maniacally--towards the fixed and narrow vision of a low-cost, homogenized, arms-length, location-agnostic world in which everyone is wired and cultural nuance, emotion, politeness and human connection don't matter in business-detectable terms. It's a perfectly appropriate vision for some kinds of organizations. It's just that I don't see any of its advocates pushing for it for their children's education, their church or their therapist.

Netflix' strategic turn is remarkable more for the clarity and swiftness with which it has been agreed and executed than for its originality. Theirs is a classic, almost textbook service differentiation strategy, necessitated by the entry of a rival (Blockbuster) with a more established brand, broader distribution channels, and greater scale economy. Pursuing this course is risky, no doubt. Delay in pursuing it could have been fatal. (Cue obligatory if overused 'deer-in-the-headlights' metaphor).

Good for them for recognizing that their primary innovation lay in the company's founding. Their future depends on clear-eyed resolve and flawless execution--with a human touch.

Recursive PMs: Using the Crowd for Cover

In the middle of May I speculated--reasoning from first principles only and with no inside information--about how prediction markets might help the book industry pick winners:

"For some types of books (and authors) prediction markets might be appropriate."

That sparked a note from a reader, tipping me off that:

"Confidentially, something's about to launch very soon in this area."

Sure enough, MediaPredict launched a week later, eliciting this highly positive piece in the 5/21 NYTimes: "Publisher to Let the Public Have a Vote on Book Projects".

Media Predict is soliciting book proposals from agents and the public, and posting pages of them on the site. Traders, who are given $5,000 in fantasy cash, can buy shares based on their guess about whether a particular book proposal is likely to get a deal, or whether Touchstone Books, an imprint of Simon & Schuster, will select it as a finalist in a contest called Project Publish. If either happens within a four-month period, the value of the shares go to $100 apiece; if not, the share price falls to zero.

The devil as they say, is in the details. Traders are voting not on how popular a work could become with the book-buying public but with the binary, intermediated and likely recursive question of whether the editors at Simon and Schuster will select it.

In other words, S&S editors are going to be breathing their own exhaust--now with more butt-covering camouflage. (Which reminds me a little of this.) It's the kind of conversation I've seen some couples get into:

Man (off-handedly and with a smile): What would you like for dinner, honey?
Woman: Oh, whatever you'd prefer is just fine with me!
Man (thinking burgers and beers with the guys): I'd prefer what pleases you, dear.
Woman: Well I don't know. What were you thinking?
Man: I was thinking I'd like to know what you're thinking.

And 'round and 'round and 'round it goes. That's an imperfect and terribly stereotyped analogy, and no, it's not my happy marriage. Well, OK sometimes maybe it is. But let's move on, shall we?   :)

The more abstract version of that analysis is this: The system S&S has set up with MediaPredict has no outside, arbitrating reference point--such as how many copies a particular book would actually sell.

Hey, now there's an idea: ask the market directly about its spending enthusiasm for a given title. (Print-on-demand technology, not to mention digital rights management, render completely moot the objection that only a few select books can be produced. The hurdle revolves around marketing and a legacy business model of annointing a few winners.)

Unfortunately, S&S's Touchstone Books does not appear to take that important dis-intermediating step. I doubt it's MediaPredict's fault. I suspect (without any proof except my experience with how Fortune 500 executives think and in particular how publishing executives think) that the use of prediction markets may have been de-clawed in this case to avoid dis-enfranchising S&S editors. Think about it:

The PM predicts Bestseller status for a book the editors decide to pass up. It gets picked up by another publisher, fulfilling the PM's expectations and making bundles of money for an S&S competitor. At that point, S&S editors not only have egg on their face, but the S&S board (and shareholders) are emboldened to ask: Tell us why exactly we need you if all you're going to do is to second-guess and stand in the way of this smart little prediction market thingy we've set up over here to perform the same function?

Justin Wolfers (respected PM guru at Wharton) notes the same basic flaw, though you'd have to read to the end of the article to find his critique.

[Wolfers] said that if Simon & Schuster relies on the traders' judgments to select a book, it could skew the bets themselves.

"If they say we find it really persuasive that everyone bet on book A, they're just looking at a book that everyone bet that everyone else bet that everyone else thinks is the best book," Mr. Wolfers said. "So you don't end up with the wisdom of crowds, but the infinite reflection of crowds looking at crowds."

This is at least the second time I've noticed a major media outlet burying what should have been the lead on a prediction markets story--and with it, Wolfers' critique. If I were him, I'd be a little peeved. Last fall, the Washington Post carried a piece ("The Top Pickers vs. The Pack") that completely mashed two irreconcilable ideas, as I noted in "WaPo Misguided on 'Experts' vs. The Swarm":

The article takes the academically and empirically well-proven notion of collective intelligence (aka the wisdom of crowds), and presumptively twists it into the more comforting and familiar (if statistically invalid) notion that "father-knows-best"--only we haven't done a good enough job of finding the right "father" up until now.

I don't know why the media's treatment of prediction markets is missing the mark, but they need to get smart faster. PMs are not going away. Not taking seriously the critiques of Wolfers and others isn't helping. The NYTimes digs itself further into a hole by taking a flawed comparison at face value:

Media Predict is modeled after other so-called prediction markets like the Hollywood Stock Exchange, which allows traders to bet on the four-week North American box office receipts of movies, or the Iowa Electronic Markets, which allow people to bet on election results...

The glaring difference: the HSX and the IEM ask traders to vote on highly distributed end-result questions. As I've observed many times (e.g., here, here, here and here) prediction markets--while very cool indeed, and applicable to many more things than those to which they are being applied today--are just plain lousy at calling things like Papal elections or the nomination of judges where information is closely held by a select group. I suspect it's even worse when that group has sponsored the market and each is trying to predict the actions and preferences of the other.

If the same principle were to be applied to American Idol, voters would weigh in with their opinions not on which singer(s) they liked best, but on which one(s) they thought Simon Cowell was going to like. That's not entirely without its entertainment value, but it adds little to what Mr. Cowell was going to say anyway. Simon (& Schuster) could take a lesson from what the other Simon (Cowell) lacks: humility. The crowd is often right. If they're paying, they're even more right.

As for MediaPredict itself, I'm reserving judgment. At this stage of market development, more new players trying more approaches, covering more questions and attracting more corporate attention is a good thing--and entirely expected. As the MP folks write on their blog: "Love us or hate us, we’re here…" That may be a little extreme. How about: I love that you're here.

Predictability and Social Influence

Thought-provoking piece in last Sunday's NYTimes with implications much larger than its title ("Is Justin Timberlake a Product of Cumulative Advantage?") might suggest [emphasis added]:

...people almost never make decisions independently — in part because... what we often want is not so much to experience the “best” of everything as it is to experience the same things as other people and thereby also experience the benefits of sharing.

...our mutual dependence has unexpected consequences, one of which is that if people do not make decisions independently — if even in part they like things because other people like them — then predicting hits is not only difficult but actually impossible, no matter how much you know about individual tastes.

Bottom line: social influence makes predicting winners extremely difficult, if not impossible, while exaggerating the magnitude of more popular choices (e.g., brands, artists, products, candidates). It also muddies the notion of 'quality' being an objective, independently derivable 'thing'... which is something that Robert Pirsig pretty much concluded years ago, coming at it from a completely different (abstract, philosophical) direction.

As I've said all along about prediction markets--and prediction in general--one must judge carefully whether what one is trying to predict is intrinsically predictable at all. Short take: elections good, next quarter's profits good; specifics of the next terrorist strike: probably not. The popularity of some kinds of products fall closer to the Justin Timberlake (high social influence) end of the scale while that of others (think truck parts) probbly does not. The second thing to note here is that, in an environment where pure prediction is impossible, it pays to have a flexible, scenario orientation that can anticipate a wide range of possibilities and recognize them quickly if/as they unfold.

(HT: JH)