During a recent podcast, Harvard Business Professor Clayton Christensen gave an overview of his recent HBR article on how companies need to change their business models to adapt to new threats. It's a very interesting concept and I plan to read the article as soon as I can get my hands on a copy.
The premise, as I understand it so far, is that traditional business models don't work when new threats arrive. As an example he pointed to IBM, which focused on mainframe computers, but when mini-computers hit the market IBM opened an entirely new division in a new location with new profit and loss models to combat this. It did the same thing when PCs hit the market, opening a different office utilizing different skillsets.
During the recent podcast interview Prof. Christensen praised the Boston Globe for taking steps to change its business model to combat the new reality. Not having spoken with Prof. Christensen yet I have to assume he is referring to Boston.com and the digital arm of the publication.
The concept, as I currently understand it, lines up with something I've been thinking about for a while: the fundamental problem with the journalistic business model. Traditional journalism is built on the concept that it can be supported by advertising, but separate from it. The journalist reports on the news, the news brings readers, the advertisers then pay for access to those readers.
This model extends back to the penny newspapers of the 19th century. Why sell a newspaper for a penny when it cost more to produce? So you can get the readers and sell access to that distribution channel to advertisers. The more people who read the paper, the more you can charge for the ads. This concept has grown up over the years but it's fundamentally sound.
The New York Times, for example, earned $1,950,021,000 from advertising in 2007, compared with $889,882,000 from circulation revenue according to its financial statements. Advertising figures in 2006 and 2005 were certainly more robust, but the same calculation applies.
Today it's not just the number of people who read your publication, but the type of people. If you're the Boston Globe, for example, and have great penetration in the affluent suburbs, then you can charge more for access to those readers. Most news organizations regardless of medium use the same basic concept: gain an audience, charge for access to the audience.
A main reason this worked was the high barrier to entry for any new news organization. In order to start one you needed:
- Capital for production;
- Access to production equipment (printing press, TV cameras, etc.); and
- A method of distribution (broadcast license, subsribers, newsstands sales, etc).
Now flash forward to the Internet. Today instead of a printing press you can use a free and publicly available blog, Facebook page or Twitter account. Instead of capital you can simply use the computer at the public library, or the $400 computer you bought for the house. As for distribution, any blog is technically available to anyone on the globe, you just need to tap into the right search terms to attract the audience from Google.
In other words, the news organizations no longer have the monopoply on the audience, so the advertisers no longer need them to reach an audience. The fundamentals are completly broken.
So what now? More on that later.