If you love something (and/or want to make money from it online), set it free.

This past Sunday, I had a long discussion about the NY Times article on Time-Warner’s new content-centric strategy with my father, who happens to be in the film business. While the article touched on some of the complexities that exist in the legacy value chains for both movies and tv, I thought it glossed over important details and ended up being somewhat contradictory. On the one hand, the author labels the move to spin off T-W Cable as “eviscerating the once-popular corporate notion peddled by business consultants and merger specialists that content and distribution should reside under one roof.” But just a few paragraphs down, he talks about T-W’s interest in NBC Universal, primarily as a distribution outlet for the tv shows T-W produces.

In theory, a pure-play content company would *just produce content* — it wouldn’t program (i.e. tv network), it wouldn’t distribute (i.e. movie studio), it wouldn’t deliver (i.e. cable/satellite provider). This type of horizontal focus (or modularization) is advocated by Clayton Christensen once a market of vertically-integrated solutions has reached a “good enough point” for consumers, because it enables the firms at each layer in the value chain to focus on what they do best and exploit best of breed solutions available in the rest of the stack to do the rest, thus maximizing overall efficiency and profit. In our terms, a company purely focused on making the best content is free to choose *whatever* distribution solutions will make it the most money from that content. In NewTeeVee’s analysis of this same NY Times article, they said “How we watch is all the same. What we choose to watch, however, is a different story.” In other words, distribution is the commodity and content is the differentiator. I couldn’t agree more if the only channel in question is online. But as long as content creators want to exploit their content beyond the Internet, there is a different set of rules, and those rules generally extend to what those creators can do with their content on the Internet as well.

Studios can no longer claim ignorance of what consumers want — Jeff Bewkes (T-W CEO) tells a story of how he was told by file-sharers “We’ll pay for movies if you give it to us the right way” — but, they are now claiming (however ironically) impotence to deliver it —  that the major stakeholders in their other (more lucrative) means of exploitation, like Walmart (DVD), theater owners (theatrical, duh), and cable/satellite operators (PPV), won’t let the studios innovate too much online for fear of cannibalizing the other channels. As much as this may be true, the studios are pretty happy to have their hands tied because they already know how to (and do) make a lot of money from those other channels and they have barely started to figure out how to make real money online. Going back to Christensen, this is a classic example of an entrenched incumbent seeing disruptive innovation coming a mile away and doing nothing, as epitomized in this quote from the NY Times article:

But until technology forces Hollywood’s hand — Mr. Bewkes suggested that it would take three to five more years before high-definition videos are delivered conveniently over the Internet — the industry will retain its grip on sequential windows of release.

This all stems from the fundamental discontinuity of extending an offline media business online. In the offline world, control is the key to success — it is what enables the winners to exploit the inherent inefficiencies in the system at the expense of the losers and, to no small degree, consumers. In the online world, attempts to retain control generally stifle growth by limiting exposure — you have to be willing to let go of your content to a certain degree and you need to build business models designed to take advantage of that approach. Not only is this counter-intuitive to a lot of conventional media executives, who have built careers (and personal fortunes) retaining the tightest controls possible, but it may also be in direct conflict with other important revenue streams, as we see with T-W above.

Unfortunately, there is no easy solution for those trying to bridge the gap. Some companies, like the NY Times itself, are leaping across this digital divide while they still can and largely abandoning efforts to artificially protect their offline business from the specter of cannibalization. And, they seem to be having some success. This past Sunday evening, there were five NY Times stories on the front-page of Techmeme (the next closest sources were TechCrunch and CNET with two stories each), which should be driving some solid traffic to nytimes.com. By making their high-quality content available for free on the web, instead of holding it back to drive paying offline subscribers, the NY Times is aggressively driving readers (and thus ad revenue) to its online business. While those online readers may not be as lucrative as the offline subscribers today, there’s lots of room to improve online monetization if you have the readers, and offline readership is only going down and fast. On the opposite end of this spectrum is the Philadelphia Inquirer and their recent moves to consciously make their online offering *less* competitive in preservation of their offline business. T-W and the rest of the film industry seem stuck somewhere in the middle — keeping abreast of what consumers are demanding and giving them just enough incremental progress to remain satisfied without actually doing anything really disruptive to the studios’ other businesses. Christensen would argue that waiting too long on the offline side will preclude one from successfully making it to the online side when it’s finally more attractive (see Recording Industry). I guess we’ll see which side Bewkes and company end up on when “technology [finally] forces [their] hand.”

2 thoughts on “If you love something (and/or want to make money from it online), set it free.”

  1. Great post. I am working on a post that takes a closer look at the LA Times’ Internet strategy. I know the LA Times is the ugly stepsister of the NY Times but on the surface it looks like they are doing some cool things as well.

    I often wonder whether the old media companies should even bother to try to prevent their eventual death. Its a business ethics question. Should the goal of management be to maximize the present value of all future cash flows or should it be to maximize the probability that the corporation survives forever. Classically the answer is the former. If that’s the case, it just might be that the much maligned labels (and now other media companies) are actually behaving rationally by doing all they can to slow down the pace of change and under-investing in new models. In other words, its more profitable to maximize your profits now and forgo the uncertain and discounted (and likely smaller) money you might be able to make ten years from now producing content for online channels. So its rational to put the brakes on “progress” as best you can.

  2. Great point Steve! I really hadn’t thought about things that way. In theory, a lot of these companies could probably squeeze a lot of money out of focusing solely on exploiting the shit out of their current business models and assets and forgetting about the costs and distractions of attempting to take a leadership position in “new media.”

    But, I think shareholders, who demand growth and consider these legacy businesses “mature,” would severely punish any public company that openly abdicated the (largely undefined, but undeniably huge 😉 ) opportunities everyone is convinced exist online. This is in the vein of an argument I recently read that Charles Prince (former CEO of Citigroup), who is on the record as having recognized the dangers of the sub-prime mortgage/credit bubble early on, would have been fired in 2005 (instead of 2007) had he exercised what we all now know to have been his better judgment and not pursued what investors saw as the financial industry’s most attractive growth area at that time.

    While you couch your question in the theoretical terms of business ethics, I’d argue that discussion is rendered moot (at least in the case of public companies) by the practical consideration of short-sighted public investors. So, the only scenario in which I see your question having the potential to be answered in practice is one where the company is held privately. EMI under Terra Firma/Guy Hands is the first example that springs to mind, and I think there’s a very real possibility Mr. Hands may end up deciding to maximize present value and get out if he can’t figure out a clear path to sustainable survival pretty soon. One more thing to watch.

Leave a Reply