Failure At The Top

July 13, 2008

Theodore LevittIn his famous 1960 paper for the Harvard Business Review, Marketing Myopia, Theodore Levitt first articulated the idea that many business failures stem from an inability to recognize what business they're actually in. The paper first articulated the oft-repeated claim that if railroads had understood what business they were in, they would have thrived in the new world of buses, trucks and air travel. This is what Levitt calls "failure...at the top."

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented.

Levitt also wrote about Hollywood's failure at the top when television came along. Hollywood saw itself as in the movie business, not the entertainment business, and so it went through a painful reorganization during which many companies didn't survive.

Clayton Christensen advanced Levitt's beliefs in his seminal work The Innovator's Dilemma, because it is so fundamental to a correct response in the face of disruptive innovations. References to the concept are made in boardrooms, conferences and business schools worldwide, and yet, in today's revolutionary media world, it is amazing how many media executives seem unable to completely understand their business. This is a classic failure at the top, and it continues to lead company after company down roads that dead-end in crisis after fiscal crisis. As Thomas J. Wallace, editorial director at Condé Nast recently joked, "Flat is the new up."

A desperate search for some new, scalable revenue model for traditional media occupies the thoughts of every top level media company executive, but an inability to correctly understand the business itself gets in the way of seeing the solution.

It would be easy to follow the railroad metaphor and state that individual forms of traditional media — newspapers, radio and television — each think of themselves as in the "business" of their namesakes. Radio is the radio business. Television is the television business, and so forth. It's also correct to take a step back — as I've heard expressed at many conferences — and make the claim that these are all in the "information business" and leave it at that. It's certainly true, and it allows each to compete with the other. And where better to do that, the thinking goes, than on the World Wide Web?

But this is also a failure at the top, for information is not only being commodified at every level, there is also an inherent consumer demand that it be free. And where any "business" is free, there is no business.

So if the business of media isn't the medium itself or the information (and entertainment) it provides, what is its real business?

Media makes its money through advertising, and this is the only disruption that matters for traditional media companies, for new forms of media aren't taking readers, listeners or viewers away, they're taking advertising away, and this should be the principal focus at the top of all media companies, especially local media companies. Amazingly, it is not.

The Web attacks middlemen in any information value chain by rendering them unnecessary or irrelevant. This is true on the content side of traditional media, but it's also true on the revenue side, for advertisers simply don't need traditional media anymore to accomplish their goals. Advertisers are increasingly becoming media companies themselves, thanks to the tools of the personal media revolution, and this is a much bigger threat to media companies than fragmentation, consumer choice or any form of new platform. Advertising is the business of media, and it's here where our energy must be directed.

Car SalesmanAutomobile dealers, for example, are moving money that formerly went to local media companies to their own web properties and the known online stream that buyers follow when searching for a new vehicle (hint: they don't start at media company websites). Auto dealers have discovered that the brand advertising offered by mass media isn't as important as it used to be in reaching consumers, and that spending money online is a very efficient way to influence the bottom line.

With limited success, media companies have responded by trying to insert themselves into the online stream or using the reach of their brand extension websites to drive traffic to dealers' websites, but nobody has found the formula for getting back into the deep advertising pockets of auto dealers. The reality is there will be no formula as long as media companies insist that their own brands offer competitive solutions for dealers. This is a failure at the top.

Nobody understands this better than local online advertising guru Gordon Borrell. His company tracks the money being spent in every market, and their data (What Local Media Websites Earn May 2008) offers evidence that is hard for local media companies to swallow: outside internet pureplay companies like Google, Yahoo, AOL and MSN now take 60-cents out of every dollar spent in a typical market for advertising online. The growth of this piece of the local ad pie is staggering, and it should be the main concern of those at the top of media companies everywhere. It's not, and even if it was, most wouldn't have a clue as to what to do about it.

Borrell's estimates for 2007

Borrell defines "pureplay" as "an organization that does business purely through the Internet." In the months to come, the pureplay piece of the pie is going to resemble Pacman devouring everything else, and this is the real business problem for all of traditional media. At the very top of media companies, it must be seen that the overall market is the target, not just the corner reserved for brand-extension online plays.

In many ways, it's almost too late to be saying this, but if you run a television station, a radio station, a newspaper or any other form of local media company, your online competition is Google, not the guys you've been competing against all these years. That is a simple fact. We may not like it, but to deny it is to ignore the heavily-armed battalions slowly surrounding your position.

And that position is indefensible, because to defend it is to cease to grow. This, too, is a failure at the top.

Google thinks of itself first as an advertising system, one that serves the entire Web. We also have an advertising system, but it can only serve that which we manage, and that's not much. We're thinking like traditional media — that the distribution of scarce information can scale in an environment like the Web. It can't, and it won't. The more people find other ways of informing themselves, the less they need our walled gardens. So our advertising systems decline in relevance, when the task is to get them to grow. Again, this is a failure at the top.

Current thinking in some media circles is that the creation of community information portals will do the trick in terms of increasing the advertising system of local media. These already exist or are under construction in some markets, and their creators deserve kudos. They are excellent sources of information, and a ton of work has gone into creating them, but they still function with a limited advertising system inside the market. Moreover, the way local media companies think is that if one does something, everybody has to do it, so eventually we'll have, let's see, at least four of those in every market. And each will feature the content from its offline brand, so the idea can easily become just a news portal site in new clothes. Google would love that.

Of course, we could always include links to the other guys' content, but we'd still feature our own.

In order to compete with the likes of Google, we must offer a better local advertising system than they provide. This can be done, because local media companies already have feet-on-the-street, whereas Google is moving from an outside-to-in position. Google also has limited access to local information (it can only scrape that which is on the Web), but these are things that we can easily gather to build a better database. There is still time, but the window is closing.

Local media companies can do two things. Both require hard work, and one is definitely outside the media company comfort zone. The first is to create a horizontal local ad network, one that serves all websites within the market and about which I have written extensively. This is the holy grail that the pureplays seek (and are well on their way to creating), but it's one that we are already equipped to create and manage. Who will do it?

HULU logoThe second option is to combine resources to create a single local information portal and to compete within that instead of standing alone on the Web — where we are divided — and offering to our communities fragmented local news and information. This may seem idiotic at first brush, but a successful example of it is already growing rapidly. It's called hulu, and one day all networks will offer their programming through its doorway. What began with NBCU and NewsCorp (Fox) has already grown to include Viacom and PBS. It works so well, because it is so customer-friendly, not only for viewers but also eventually for advertisers.

As Levitt noted, the most important duty for those at the top is to think about their business from a consumer's perspective.

When faced with criticism for offering a phone-less version of the iPhone, Apple's Steve Jobs made a remarkable statement that all media company executives would do well to hear. "If anybody's going to cannibalize us, it's going to be us." With this perspective in mind, creating a single local information portal with all local media companies participating becomes a logical business initiative. Moreover, if we don't do this, one of these pureplays will do it for us, and we'll just be the content providers, not the owners of the advertising system within.

This is not to say that local media companies should give up on their own brand-extension sites, but there are significant advantages to working together on such an advertising system. Here are just eleven:

  1. It is extremely pro-consumer, in an age when that is an operational mandate.

  2. It creates new value within the community for consumers.

  3. It provides an advertising platform that goes beyond the walls of our branded sites.

  4. With everybody on the same software platform, content specific RSS feeds can include multiple original sources.

  5. As its popularity grows, so does its ability to create maximum "Google Juice" benefits for advertisers in their SEO strategies.

  6. Revenue algorithms can be constructed so as to benefit the creator of the content being consumed.

  7. In aggregating content that's not actually created by the partners, revenue can be split between all players. Half a loaf is better than none. The mission is to dominate the local information landscape, not hand it over by default to an outsider, because we're too busy trying to protect our own brands.

  8. All participants can sell ads anywhere. Again, revenue algorithms can be created, so that the bulk of the revenue goes to the owner of the content adjacent to the ads. This gives everybody an incentive to sell and greatly expands the reach of any individual contributor's branded advertising system.

  9. Cookie data is shared with all participants, thus enabling contextual or even behavioral advertising — within or without the information portal.

  10. Self-serve advertising revenues can be split evenly, assuming such an application is created.

  11. All local media companies would be working to overcome the common enemy presented by the pureplays. As the ancient proverb says, "The enemy of my enemy is my friend."

To be sure, such a concept is fraught with issues and problems, not the least of which is overcoming traditional competitive thinking. But today's environment demands the willingness to be different and do different things, and the barriers standing in the way of a shared portal are merely process and procedural issues that don't have to block the end game. The point that really matters here is that, whether it's the creation of a local ad network or the building of a joint information portal, media companies MUST do something to expand the advertising systems within which they do business. To do otherwise (or nothing) is a textbook failure at the top, which future business school gurus will write about one day.

As Levitt wrote about the railroads, "they were product oriented instead of consumer oriented." This is our blind spot, that which makes us cling to our content and the ads that support it as our core business.

To be sure, the paradigm of ad-supported content isn't going to go away. Media companies will continue to make good money from their own content, but it will never be the growth engine it once was. We simply must find another way, because the more advertising evolves without us, the harder it will be for anybody to sustain the kind of business we've known in the past, much less make it grow.

These are challenging times for those at the top of media companies big and small, and while we can easily point fingers of blame at culture, technology or a hundred other things, it's the responsibility of our leaders to rise to meet business challenges. The only failures that matter, therefore, are those at the top.

And just as it was during the time of those early business challenges to railroads, the demand for what we do has never been greater. More people are watching television and consuming media than ever before, and that affords business opportunities for those who can rise above the fear, the noise, and the tyranny of the quarterly reports.