Tuesday, August 08, 2006

En garde, Old Guard

I don’t know if the New AOL will fare any better than the New Coke, but you have to give Time Warner credit for the guts and objectivity to turn its doddering dot-com into the oldest, fattest start-up you ever saw.

AOL’s bold, if tardy, move is a major lesson for the traditional media companies, which continue to be strategically inattentive to the profound changes affecting the way people get and, increasingly give, news, information and entertainment.

Change at the Old Guard media companies remains grudging, glacial and glaringly incremental, because innovation runs against the grain of their conservative, tradition-bound and extensively defensive cultures.

The general lack of entrepreneurial instinct among the media incumbents is no benign quirk. It could prove to be their undoing in an era when rapid-fire technological developments are driving radical changes in the delivery of all media. The relentless changes will restructure the economics of every business from movies to newspapers and radio broadcasting to book publishing.

The Old Guard companies need to get cracking, if they mean to save themselves. With competing technology and new media alternatives gaining rapidly on once-secure realms, the half-lives of the legacy franchises are deteriorating at a quickening pace. While they dither, the time to fix them is shrinking exponentially.

Knight Ridder, one canary in the coalmine, was sold earlier this year for approximately 9.5x its profits vs. the 13.5x that the Pulitzer newspaper chain fetched a year ago. Had KRI sold for the same multiple as Lee, its shareholders would have gotten 30% more than they pocketed. In the magazine world, some analysts now think Ziff-Davis may be sold for less than half the $789 million its owners paid in 2000.

Big markdowns have yet to come for TV broadcasters. But they likely are on the way, owing to the proliferation of broadband connectivity; the growing availability of online video, and the pending emergence of home entertainment systems capable of magically transporting digitized content from your computer to the JumboTron in the living room.

Because AOL was a technology-dependent media company – or is it the other way around? – an abrupt technological disruption devoured its business much faster than tech-driven changes have affected most traditional print and broadcast companies.

But don’t think AOL is an aberration. Although audience and ad share are eroding more gradually for most traditional media companies than they did at AOL, the difference is merely in the velocity, not the nature, of the disruption. Let’s recap briefly what happened to AOL:

As happens just about every day in the technology industry – even big names like Netscape, Silicon Graphics, Xerox, IBM, DEC, Intel, Sun and Cisco are not immune – a major advance in technology blows up someone’s business. At AOL, the dial-up business that made the company wealthy and powerful enough to buy Time Warner five years ago was destroyed in a like number of years by faster, cheaper and better ways to connect to the Internet.

Faster: DSL is 25x quicker than a dial-up connection and a cable modem is faster than that. Better: DSL and cable don’t tie up your phone line and are always on, or supposed to be. Cheaper: Wireless DSL in some markets is half the $27 that AOL was charging for its slower, less convenient dial-up service.

Facing an inexorable and accelerating decline in subscribers, AOL had no choice but to substantially abandon its $8 billion dial-up business in hopes of morphing itself into an advertising-supported web destination akin to Yahoo, Google or the Xbox360 blog.

Unlike the New AOL, whose mandate for change was forced vigorously upon it, the Old Guard media companies are suffering from a more subtle, but equally insidious, form of creeping market disintermediation. Accordingly, they have been slow to grasp the need for change and even slower to embrace it.

Ziff-Davis for a time did so well at publishing technology magazines that it didn’t see its readers were the people who were going to migrate firstest and fastest to the digital media. The company failed to create the online products its customers and advertisers wanted. Plenty of low-overhead interlopers happily took up the slack.

Publishers have drastically cut headcount in their newsrooms to slightly improve profitability, cannibalizing the very departments that create the valuable content that distinguishes them from their computer-authored digital competitors. Some TV stations have gone so far as to eliminate newscasts entirely – oddly forsaking a major point of differentiation at the moment their once-exclusive programs will soon be spread willy-nilly over the Internet at prices ranging from $2 to free.

When big media companies try something that, by their lights, is relatively radical, they do so in half-measures. Even though most investors have been getting stock prices off the Internet for a decade, it was only this year that many newspapers finally decided to stop publishing four expensive pages of agate listings per day.

Had publishers recognized the change in consumer behavior 9½ years ago, they could have been the ones generating the page views and ad revenues that today go to Yahoo Finance and Market Watch. Instead of having the good sense to start MarketWatch itself, Dow Jones waited until 2005 to buy the company for a half-billion dollars. A year later, the Wall Street Journal continues to publish more pages of stock listings than anyone else.

Because disintermediation is nibbling at their long-standing franchises in comparatively slow motion, most legacy media companies fortunately have the time and remaining resources to turn their desultory bureaucracies into nimble entrepreneurial juggernauts. To do so, however, they need to make some fundamental changes.

First, they need to objectively assess and understand the needs of their customers – including the ones they have, the ones they want and, most significantly, the ones they have lost.

Next, they need to turn those insights into innovative products or services that can be tested empirically with the intended audience and advertisers.

Companies must be willing to break the rules, topple bureaucratic fiefdoms and, yes, to selectively and carefully open holes in the Chinese walls that separate newsrooms from the business side of the business. Although the firewall-side chats ought to result in new ways to comfortably package editorial and advertising information, this most certainly is not an argument for publishing the cheesy advertorials that erode an organization’s hard-won credibility.

Last but not least, media companies must summon the financial and emotional courage to take the carefully calculated risks required to bring their innovations to market. This will be particularly challenging for public companies, which must satisfy investors by endeavoring to create consistent and predictable quarterly earnings growth.

If the publicly held media companies are to succeed, they will need to seek the support, or at least the forbearance, of Wall Street for a period of thoughtful strategic rebuilding. Given the dismal performance of most media stocks during the last 18 months of extreme retrenchment, it seems clear that investors aren’t happy, anyway. Why not try something positive?

Though entrepreneurial innovation is easy to discuss in the abstract, it is quite another thing for individuals and institutions to internalize a radically new way of doing business. They need to get over it. And get on with it.

The Old Guard companies must understand that the battle is no longer Oprah vs. Martha, the N.Y. Times vs. the L.A. Times or CBS vs. CNN. Rather than competing among themselves according to the ancient rules of genteel engagement, the legacy companies need to recognize that the true competitors in the future will be not only the upstart digital start-ups they know but also the ones that have yet to emerge.

For all the legendary excesses and goofiness of Silicon Valley and its global cousins, the new competitors share a powerful culture that disdains entrenched market leaders, embraces risk and dares to fail.

They are, in short, engaging the Old Guard in asymmetrical warfare with decidedly alien weapons and attitudes.

The only way the Old Guard can lick them is to learn how to think – and act – like its competitors. En garde!