“Breaking an old business model is always going to require leaders to follow their instinct. There will always be persuasive reasons not to take a risk. But if you only do what worked in the past, you will wake up one day and find that you’ve been passed by.”
- Clayton Christensen
What do Dell, The New Yorker and the music industry have in common? All three are currently grappling fundamentally with their business models in the face of creative destruction at the hands of digital disruption. The CEO of Dell is struggling to take it private at the moment – in a proposed $24.4bn buyout – in an effort to ensure its strategy looks away from the short-term needs of investors while it restructures with a new, long-term strategy that will shift focus away from its core PC business. An issue of The New Yorker hardly makes for a quick read, but has been one of the more innovative companies among its peers to embrace and experiment with digital. We wrote about their initiatives last summer. Recently, for their anniversary issue, the publisher offered digital issues for 99c, an offer that Zeitgeist took them up on, and it was pleasing to see how well the digital edition mirrored with print one, while at the same time adding some features that took advantage of being on a digital product. Last week, The Economist published an article on the music industry, which is beginning to see glimmers of hope in its revenues from digital sales. “Sales of recorded music grew in 2012 for the first time since 1999“, although only by an anemic 0.3%. This is still better than Hollywood, which had to settle for celebrating a flattening of home entertainment revenues, after years of decline. After almost being destroyed by it, a third of the music industry’s revenues now come from digital, but they are barely keeping up with the decline in physical sales, which makes up the bulk of other revenues. Lucian Grainge, chairman and chief executive of Universal Music Group, spoke to the Financial Times at the weekend,
“The industry needs transforming. It’s for others to decide whether they want to get stuck in the past or whether they want to come on the journey… We’ve learnt an awful lot, but it’s like being in a commercial earthquake and the reality is it takes time to get out from beneath the desk where you’re protecting yourself and move forward.”
Indeed, one of the biggest issues industries must address is when is the right moment to risk their current business model in order to address change and adapt. Grainge talks about the industry need for a “constructive collision” between musicians, content owners, distributors, entrepreneurs and investors. To what extent this is happening is unclear, but it is certainly thinking outside the box, and could well be applied to other areas similarly suffering at the hands of such change. As goes the music and film industries, so goes the print industry too? How do print titles develop profitable models for generating profits in the face of such volatility in changing consumption habits and digital disruption?
In December 2012, consultancy Boston Consulting Group (BCG) published a report entitled ‘Transforming Print Media’. The report begins on a sour note, admitting that the conventional wisdom is that newspaper and magazine publishing is “a dying business”. This is a hard assertion to counter though, and the consultancy’s own graphics show a rather alarming lack of growth in developed countries. Emerging markets, conversely, are seeing growth in both print advertising and circulation, for both newspapers and magazines. For instance, while between 2006 and 2011, the US has seen a compound annual growth rate (CAGR) decline of 12% in print advertising, China has seen an 8.5% uptick, and India a 13.9% growth. One of the immediate problems the report addresses, and one which Michael Dell is looking to neutralise is that of concentrating on short-term gain at the expense of long-term restructuring with a rigorous focus on which adjacencies work well and which do not. This can be immensely hard to justify in an environment of quarterly earnings reports and instant CNBC updates. BCG suggests implementing a strategy that will instill long-term change while also providing medium-term gains to keep investors happy. The report proposes a 3-5 year plan, and, interestingly, notes that success will rely “more on execution than insight”. Zeitgeist would counter that without both being optimal, the strategy is bound to fail. Moreover, knowing exactly who you want to target and how their methods of media consumption and interaction have altered / are altering is a critical tool for success. It also points out that new business models should not be about “trading print dollars for digital pennies”, something that the music and to some extent the film industry are both grappling with currently.
David Carey, head of Hearst Magazines, commented last year that, in publishing, “you need five or six revenue streams to make the business really successful”. One of the key points that recurs throughout the BCG report, which Zeitgeist, while working on developing strategic recommendations for the Financial Times last year, was also in favour of, was in extending the reach of the business in new directions. These directions leverage the brand equity of the company and extend into areas adjacent to the company’s expertise. For the FT, opportunities exist to extend the brand name into complementary areas of luxury with which the paper is already associated. Monocle has made in-roads into diversification by starting a radio station, which it says is very attractive to advertisers because they have a clear idea of their audience; the type of high-earning consumers who never normally listen to radio. As well as new revenue streams, Zeitgeist also focused on customer retention. One important consideration was that of both vertical and horizontal cohesion. The business as a brand must speak in a relevant, cohesive way across channels, and, in the case of the FT, speak in the appropriate way to its many different readers around the world. BCG advocates “reassessing vendor relationships; stream- lining editorial, content sharing, ad pricing, and production processes; and pooling advertising sales across titles or clusters… the right changes to financial policies— particularly to debt levels and ratios, dividends, and buybacks —can create a clear and compelling case for long-term health, can lift stock prices, and can attract more patient investors.”
Price is a fundamental consideration too. For the FT, Zeitgeist extemporised on the importance of price. Referencing behavioural economics, price for the FT acted as an anchor. It framed the paper more by juxtaposing it with its cheaper peers than by giving it any inherent value. In reports from the last few years taken both in Europe and the US, several major broadsheet newspapers were studied. They had all raised their prices. Some of them had seen their circulation decrease. But all of them had seen increases in revenue, even the ones that had lost circulation. Zeitgeist presented the FT with an analogy; the champagne label Krug, some years ago, hiked up its price, with little notice and for no perceived reason. Production, pricing and taste had not changed. The company lost some suppliers because of this change. But overall, their revenues increased. Krug was now in the upper echelons of the luxurious world of champagne, done to coincide with a global rebrand that appeared in all the right places. BCG alludes to the price increases in its report, saying consumers will “perceive greater value in the product than the amount it is costing them… there is the ability to increase these prices by as much as 70 to 100 percent…”. The report addresses paywalls, which Zeitgeist have written about several times in the past. The key it seems is in making these paywalls permeable, not inflexible. This is one issue the FT will need to address, one its peers, like the Wall Street Journal (WSJ), The New York Times and The New Yorker, have taken steps in the direction of already. The WSJ has frequently taken down its paywall during times of emergency (such as Hurricane Sandy), or for sponsored promotions. Advertisers still play a significant role in US print advertising – a $34bn role – but it is diminishing. The New York Times reported last year that advertising revenue had dropped below subscription revenue. As worrying as this is, it should provide an opportunity for companies to focus more on producing content that the actual readers want, rather than what the advertisers want to see. Broadly, the difficulty lies in getting consumers to see the worth of a digital product versus a hard copy. Obviously this issue is not restricted to the publishing industry.
The importance of the transition to digital is hard to overstate. As well as issues of pricing and paywall strategy, there is also social media to consider. Here, the FT is a good example of a brand that is playing it safe, operating for the most part with a very top-down messaging strategy that leaves little room for collaborative communication. But digital production and the expectation of instant news also means that companies are having to change the way they produce content. Speaking at the Future of Media summit at the Broadcast and Video Expo recently, Editor in Chief of Time Out London Tim Arthur said their changes were “led partly by necessity and partly by desire”. BCG outlines three models that are emerging: “dedicated print and digital editorial teams, integrated teams that operate throughout the print and digital platforms, and full editorial integration”. There are several advantages to be leveraged through digital as well. Research is a big one. Time Out’s Tim Arthur admitted they never used to carry out research until their recent transformation, which included an overhaul of their digital strategy, as well as making their hard copy paper free. It was great then to hear how the company was now using multiple channels to collate data and engage audiences at the same time. Unlike the FT, Time Out was no longer engaging in a one-way conversation, and they were operating with “less arrogance”. The company changed from a content-stacked, “trickle down” approach to one that recognised different audience needs over different platforms, which is a key insight. Furthermore, the opportunities to make advertising more engaging are also quite evident. iAds for example, allow more interaction. A recent ad in The New Yorker promoted a new book with a ‘tap to read a chapter’ function.
“These considerations inevitably lead to a series of hard choices about the degree of diversification that publishers can realistically undertake”, so summarises the BCG report, which suggests controlled experimentation to work out the best model. On an internal level, the company must convince employees that this change will be for the better and for the long-term. It must also convince shareholders of the benefits, while showing real value as early as possible. Such a transformation provides opportunities for streamlining technologies and future-proofing ways of working. It should make the brand think about what its equity is, and where else it can push out to in order to drive new revenue streams. Digital is not something to be feared, it should be embraced. The opportunities for more targeted, engaging advertising, not least through the use of consumer data, which also can help provide more tailored and attractive content – content that is “useful to others” as Arthur says – will be fundamental steps to take. The music industry, which was ravaged by Napster and its myrmidons at the end of the 20th century, took an age to wake up to realisation that money could be made from the millions of people who were already downloading songs online. The film and television industries have reacted slightly faster, and initiatives like Hulu, Ultraviolet and Tesco’s Clubcard TV will help stem the tide. Print on the whole is more on top of the game. Companies like the Financial Times and Time Out are driving innovation in the sector, but must still more readily embrace change if they are to really connect with future readers. Time will tell.
The name Margaret Anne Lake might not ring too many bells. But if you were in the UK towards the end of the twentieth century, you’ll be familiar with her alter-ego Mystic Meg.
Having made her name as an astrologer in The Sun, Meg was catapulted into the national consciousness when she was given a slot on the fledgling prime time National Lottery draw programme.
In an attempt to build excitement and pad out an event that took two minutes to complete, Meg was brought in to ‘predict’ the winners.
Her predictions were suitably vague.
The norm was something generally along the lines of “the winner would live in a house with a 3 in the number, in a town beginning with L or M and have bought their tickets from a woman.” with a sprinkling of astrological terminology for extra authenticity.
However it would seem that back in the mid-to-late 1990s Meg wasn’t the only one struggling to see what the future held. Far away from the glamour of TV, a number of well-paid businessmen were busy making decisions that would see their organisations squander their dominant positions.
And a couple of weeks ago, after struggling along for years, both HMV and Blockbuster UK, once leaders in their categories, hit the buffers and called in the administrators.
The phrase caught on, partly because it made a point in a catchy way. But like many wisdoms, it doesn’t tell the whole story.
Just because something works now, doesn’t mean it always will. And those in position of responsibility have an obligation to future proof their organisation.
Back when Mystic Meg was in her pomp, the digital revolution that helped bring about the demise of both retailers was in its infancy. But signs of its potential were there, particularly for HMV.
The first was how people acquired their music.
Software that ripped files from physical storage, coupled with faster web connections, gave birth to peer-to-peer sharing. Programmes like Napster, Kazaa and Limewire removed the need for physical reproduction and distribution.
The whole entertainment industry never really came to terms with illegal downloads, opting to use legal threats and emotional blackmail, rather than adapting their businesses to meet the demand.
In reality, not all pirated content would ever have been bought legally. Peer-to-peer applications offered users the freedom to sample new artists they would never have paid for and get digital versions of music they already owned physically, easily and without it costing them money.
One of the reasons people wanted their music digitally is the second reason the digital revolution helped bring about the demise of the likes of HMV – the way people consumed and stored music.
The emergence of the digital music player, culminating in the release of the iPod in 2001 meant that people also wanted their music in a new format. They could now store their entire collection on one machine.
When people had upgraded their vinyl to cassette, and then their cassettes to CDs, HMV had been in pole position and reaped the profits. However a digital format didn’t require physical stores and HMV didn’t react. Their model was suddenly ‘broke’, but they didn’t realise in time to fix it.
Can such demises be avoided? The future is notoriously hard to predict, but there are some guidelines that can help companies avoid suffering a similar fate to HMV.
1. Be alert to new and niche competitors
Back in the 1980s and 1990s, HMV may have considered their competition to be the likes of Tower Records, Virgin and Woolworths. When they all disappeared, it might have seemed that HMV had won the battle. In reality they were all killed by the same bullet. The game changed as companies diversified.
Back in 1981, following a dispute with Apple Corps, Apple Computing agreed not to enter the music business. Now, iTunes offers over 28,000,000 songs.
Just because someone isn’t a direct competitor now, doesn’t mean they never will be.
2. Keep an eye on the Path to Purchase
HMV didn’t suffer because people suddenly stopped wanting to buy new music or watch films. What changed was how people acquired their material.
Online downloads provided a new way to access digital music. For those who wanted physical media, Amazon et al provided an alternative way to buy CDs and DVDs. Now that nearly 80% of UK households have broadband connections, consumers can stream films at the press of a button or watch a dedicated Movies channel.
Sometimes people will still want physical media immediately, but just not often enough to sustain a business as big as HMV.
3. Understand the next generation
Many years ago, I worked in Woolworths. A large proportion of the music we sold was to youngsters spending their pocket money on their latest idol. While online might have been niche in the mid-to-late-90s, the youngsters of today have grown up with it. As a result, consumers under 35 won’t have had the opportunity to develop an engrained habit of buying their music in physical stores like HMV. Buying entertainment online is no longer an alternative, but the norm.
4. Play to your strengths
While online retailers can offer lower prices and a wider catalogue, physical retailers offer immediacy and have the opportunity to provide enhanced in-store engagement.
Shoppers want convenience, value and experience.
Browsing for and buying music, film and computer games ought to be a fun, pleasurable act. Online shopping will continue to grow across pretty much every category. Physical retailers need to understand their role in fulfilling shoppers’ needs. Sometimes it will be about delivering the product quickly and easily, but sometimes it will be making the act of shopping an enjoyable experience that merits a slight price premium.
5. Be prepared to change
Taking all of the above into account, it might be easier to spot how a business structure that is dominant now might not be so successful in the future. It is often said that defending a title is harder than winning it in the first place.
However, it can be done.
McDonalds have long dominated the fast food industry. Just over a decade ago, their restaurants were tacky red and yellow places with plastic seats.
Yet they saw that their competition was no longer just the likes of Burger King, but also other food outlets and increasingly the likes of Starbucks et al who offered a more pleasant in-store experience.
Now their outlets have all been refurbished with designer furniture and offer free wifi.
They also observed other trends that would impact them. From obesity to ethical sourcing of produce and packaging, they adapted their business to stay one step ahead.
Their menu still offers the old favourites, but also includes lighter options. Their burgers come from British and Irish farms and much of their packaging is made predominantly from recycled materials.
As a result, they are still thriving on the high street.
While this video from Google might seem a bit fantastical – and it has drawn parodies – it’s actually all now feasible. It’s just a question of integration, mixed with a bit of time.
How will the snow affect the UK retail landscape?
While the news at the time focused on stranded air passengers, a crippled transport network and the need for some inventive parenting to explain why Father Christmas was unable to deliver presents on time, the after-effects of December’s heavy snowfall are now being felt strongly on the UK high streets and shopping centres.
With the tinsel and fairy lights still in full view, it has been a far from Happy New Year for the number of retailers forced to announce that their sales were lower than expected with the consquences ranging from store closures and job losses to profits warnings. Many cited the unwelcome cold snap as compounding difficulties brought about by the economic crisis, changing consumer habits and threats appearing from non-traditional competitors.
First to register concern were HMV, who admitted in an unscheduled trading statement, that like-for-like sales across its UK and Ireland outlets had plunged by 13.6% in December. Having seen other music and entertainment retailers, including Zavvi, Our Price, Tower Records and even Woolworths bite the dust in recent years it isn’t surprising that the entertainment specialist is feeling the heat while the rest of us freeze.
Zeitgeist has already touched on how ‘In some industries, the concept of owning something tangibly has become redundant;‘, with music and film sitting high on that list. More worryingly for HMV as the owner of Waterstones bookshops is Amazon‘s online dominance of the category and the rise of devices like the Kindle and regular smartphones that are likely to eat into book sales in the coming years.
While the sub-zero temperatures may have kept shoppers out of their stores the weather can’t take all of the blame. This weekend, this half of Zeitgeist bought a CD as a friends birthday present. A quick look online showed the item retailing on HMV.com at £8.99, however in-store I was obliged to pay £17.99. The Sales Assistant helpfully told me that the difference was because online sales are shipped from Guernsey. I rather suspect that the lower price has more to do with the fact that other online stores such as Amazon.co.uk and Play.com are also selling the item for £8.99 than where the item is shipped from.
It’s not hard to see why the bricks-and-mortar stores are in so much trouble when they have to sell items for nearly double the online price to cover their overheads. In this instance the extra cost doubles as a ‘Failure to Plan‘ tax for me, but increasingly shoppers will go online for their entertainment needs rather than paying a premium for the convenience of getting it immediately on the high street. Alternatively they’ll simply download or stream it and do away with the need for any physical material purchase.
This final option shows how behaviour change can be brought about with the right motivations. For years now, we have been encouraged to reduce unnecessary waste and raw materials to help the environment. However, it is the convenience of having music, film, games and books stored digitally, rather on discs in plastic boxes or paper, that has proved more of a driver than any desire to save the planet.
For Clintons this is the second such warning in six months and time will tell whether ‘strategic intiatives‘ taken by the board will have the desired effect or whether as a nation, a new generation is growing up to wish ‘Happy Birthdays’ and ‘Merry Chistmases’ via text message or social media sites.
Encroachment on their traditional market by the major multiples hasn’t helped Mothercare and brokers Seymour Pierce have questioned quite how much of their problems are down to the snow.
With the Christmas period so crucial for many retailers there may be more similar statements being prepared in boardrooms up and down the land. The slightly milder weather in early January may help ‘The Sales’ boost some bottom lines, but with a number of retailers choosing to delay exposing shoppers to the increase in VAT the bargain hunters may not spend enough to make up the shortfall, particularly if they are saving for a more expensive 2011. If a handful of retailers do go under it begs the question, ‘Who will take over their retail space and what will the retail landscape look like in a couple of years from now?’.
In the meantime we’ll have to wait and see what legacy the snow is going to leave in other sectors such as insurance, utilities and travel. Either way, it might be an idea to start saving now for those premiums and gas bills.
Form follows profit is the aesthetic principle of our times
- Richard Rogers
You know your movie is knocking on the door of the cultural zeitgeist when razor brands are piggybacking off your product. Disney’s ‘Tron: Legacy’, released around a month ago, has accrued a great deal of spilled ink in newspapers and online. The reporting has focussed not only on the film itself, but also its unique design aesthetics and marketing formula across multiple platforms.
Zeitgeist has mentioned the film’s marketing activities before in it’s blog, including it’s three and a half year journey as a promotional campaign to screen, (surely a record). It was a good eighteen months before the December 2010 release of the film that electronic music duo Daft Punk were revealed to be composing the soundtrack. On a brand level, this was a good fit; those who were inclined to see Tron would find this news very exciting; it would hopefully also pique fans of Daft Punk’s interest in the film. The collaboration naturally allows for figurines, bears and awesome headphones to be created, too.
The razor mentioned earlier – the Philips Norelco Senso Touch 3D – could have been an exploitative gimmick launched without much thought of the product itself and how it connects to the movie or their audience. To it’s credit, as reported by brandchannel,
The maker of the new Senso Touch 3D electric razor is offering tickets to an advance screening of Tron: Legacy via a special website that includes a rebate offer, the ability to “customize your photo into the world of Tron,” and a sweepstakes with a $10,000 prize.
The above tactics all help build a connection with the movie itself, ameliorating the product in the eyes of the film’s audience, as well as building anticipation for the film’s release. The week of the release was when footwear designer Edmundo Castillo announced the arrival of a pair of LED ‘Light Sandals’ that, according to Luxuo “pay homage” to ‘Tron: Legacy’. They will retail at $1,650 at Sak’s from February 1st. The article also mentions eyewear manufacturer Oakley is releasing special 3D glasses to tie-in with the film’s opening. Nokia have employed a similar effort with the release of a new handset. More collaborations can be found in a very comprehensive article by brandchannel, here.
In the digital world, it would be ironic if Disney had dropped the ball. Similar to other recent accounts like that for the film ‘Inception’, the film featured several region-specific accounts on Facebook that were regularly updated, informal and promoted reaction and engagement. One of the best things that Zeitgeist saw on the account was the brief chance to attend a free 20-minute preview of the film in several locations around the country. Zeitgeist attended and found himself surrounded by a very particular type of demographic, who doubtless were exceedingly excited to be there, as evinced by their cheering when anything vaguely exciting happened during the select scenes shown. The other digital platform to be wisely exploited was that of videogames. We’re not there yet, but we are fast approaching a time when movies open to support the release of a new videogame, rather than the other way around. There has been a significant fanfare around the release of the videogame based on the film. The game(s) make the bold, yet logical and laudatory move, of differing greatly between platforms, based on the typical owner of such consoles, reports Reuters. For example, the more family-friendly Nintendo Wii’s version lets you race around on a variety of the vehicles featured in the movie. For other platforms, where hard-core gamers make up a bigger portion of the audience, the game delves deeply into the mythology of the films, providing a back-story only hinted at in the new film.
The film itself also sees a number of product placements, including Coors, Apple (so to speak) and Ducati. The latter’s placement seemed rather glaring to Zeitgeist, but to those not on the lookout for such placement it might blend in more easily and authentically. The prominent placement of the motorcycle was spotted by many on Twitter however, with mostly positive reactions:
Associating one’s brand or product with such a cool film is a way of adding to your cachet, to be cool by proxy. Most surprising of all the collaborations then, is that of Apple, who need engage in no such ‘cool by association’ tactics. Yet here they are with a very, very cool app on the iPad. Between the film and the tablet, which is promoting the other in this case is hard to divine.
All this talk of marketing ploys ignores the film’s greatest asset, it’s aesthetic beauty. The film is indeed a wonder to look at, hence how it has inspired so many product collaborations, particularly in the world of fashion. While Zeitgeist realised he was supposed to be feeling somewhat tense and anxious near the end of the film as the goodies race for home, the climactic chase scene is one of a stunning light display that leaves one fairly awe-struck. The design of the film as a whole has been influential enough for the Los Angeles Times to produce a feature on it recently.
You may of course just be looking for a Tron: Legacy Coliseum Disc Battle Play Set, or one of the 37 other items related (vaguely) to the film that Disney has commissioned. In which case, best to head here.