5
A Strategy for Dealing with the New Business Imperatives

This is a tale of two media companies, both with iconic names that are recognized around the world. One was founded in 1856 and has been largely owned and operated for the past 125 years by members of the same family, with the sixth generation now at the helm. The other company was founded in 1982 by a Wall Street bond trader, who became mayor of New York City in 2002, and then returned to the firm in 2013 in his former role as CEO. Leaders of both the New York Times Company and Bloomberg, LLC, crafted strategies in the latter years of the twentieth century that distinguished them from their competitors and propelled their companies to record revenues and profits.

In the 1980s, Bloomberg unveiled a new computerized system that allowed Wall Street traders and analysts to access current market data and news, while simultaneously performing complicated calculations and financial analysis of various investment options. The Bloomberg terminal was a disruptive technology that dislodged longtime market leaders from their dominant positions. By the end of the 1990s, the Bloomberg terminal was ubiquitous in the big Wall Street investment houses, as well as many of the boutique firms, and founder Michael Bloomberg routinely made the list of the wealthiest people in the world.

In the 1990s, the New York Times simultaneously developed and launched an online edition, nytimes.com, while redesigning its print editions, using color for the first time, and vastly expanding the footprint of the national edition, which became widely available from coast to coast. The success of both print and digital ventures propelled the stock of the New York Times Company to a peak of $52 a share in 2002, and gave the firm a market valuation of $5 billion.

But “past performance is no guarantee of future results,” to quote the warning included in the prospectus for most investments traded on public exchanges. Disrupters such as Bloomberg can be disrupted. Established and prestigious print journalistic enterprises such as the New York Times can fail to develop a sustainable digital business model. Today, both companies confront significant challenges as they attempt to craft business strategies that identify and take advantage of opportunities available in a dramatically changed—and continuously changing—media environment. Since the average life expectancy of companies has declined dramatically in recent years, neither start‐ups nor established companies have room for error.

Media enterprises need to respond to the challenges posed by the rapidly evolving digital landscape by developing new strategies, new competencies, and new business models. In this chapter, we develop a strategic framework that can be used by both start‐up and existing companies seeking to create a profitable and sustainable digital business model.

Among the questions, we’ll consider in this chapter are:

What Are the Emerging Business Models?

In the latter part of the twentieth century, there were four types of media enterprises: (1) news organizations; (2) information providers; (3) persuasion and commentary suppliers; and (4) entertainment outlets. The type of content produced determined the audience. Each type relied on a different business model to achieve long‐term profitability. Most, however, were vertically integrated. In other words, the enterprises controlled every step of the process from content creation to content distribution. Therefore, the most efficient enterprises tended to be the most profitable.

News Organizations

News organizations such as the New York Times and other news publications distributed content to a mass audience, often in geographic proximity to the media enterprise. The aim was to attract as large an audience as possible, without regard to demographic targeting. News publications were veritable “supermarkets,” according to Tom Rosenstiel of the American Press Institute. The editorial focus was on producing “general interest” content that would appeal to the majority of the audience and cover a range of topics from breaking news to lifestyle and sports. Publishers kept the price to the consumer low, relying instead on selling their audience to advertisers who wanted to reach a mass audience with their message. As a result, advertising provided the predominant share of revenue for news organizations—as much as 85%. This was and remains primarily a B2C (business‐to‐consumer) model, which means that consumers are the end‐users of the products (newspapers and news magazines) produced by the media companies. However, because of the low price point set for consumers, news organizations have had very little flexibility in raising the cover price of their products and services, even as print advertising declined dramatically.

Information Providers

Information providers such as Bloomberg created and delivered a variety of information—including proprietary research, data, and analysis—often to a specific audience with specialized needs and interests. This included professionals, such as those in law, medicine, and business, as well as academics. Most of these organizations operated on a B2B (business‐to‐business) model, which meant the purchasers of the content were other commercial enterprises. The revenue came not from advertisers, but from the end‐users themselves. Because many businesses were early adopters of digital technology, most of these B2B information providers transitioned away from print to online delivery of their content in the 1980s and 1990s. Therefore, unlike many B2C news organizations, they have not been saddled with significant print legacy costs. Their main competitive challenge in the digital era is remaining an indispensable source of information for the businesses they serve. If they do, they have significant pricing leverage.

Persuasion and Commentary Suppliers

Persuasion and commentary suppliers included advertising agencies, such as Ogilvy and BBDO, as well as cable news channels, such as Fox and MSNBC. The ad agencies operated on a B2B model, charging clients a fee for the content they produced and distributed (i.e., placed in other media outlets). They were often a one‐stop shopping center for their clients, providing all the services necessary to implement a marketing program. Cable channels operated on a combination B2B and B2C business model. They received a fee from cable operators who paid to carry them on their systems, and they received revenue from advertisers who wanted to reach the audiences they delivered. In contrast to general news organizations, they tended to attract a niche audience, instead of a mass one. The niche audience was often much more engaged than the mass audience attracted to network news shows. However, the size of their audience tends to fluctuate, depending on the interest in breaking news and politics.

Entertainment Outlets

Entertainment outlets such as Disney and NBC Universal created a variety of mass media products and services, including general release movies, broadcast network television shows, and theme parks. They also produced products aimed at a niche market, including indie movies, video games, and programming for their cable networks. Some products, including movies and video games, were sold directly to the consumer. Other products, including the network television shows, relied primarily on the revenue received from advertisers who wanted to reach a mass audience, supplemented by licensing and other types of fees received from media enterprises who wanted their content (e.g., reruns of old television shows). Whether selling directly to consumers (like the movie studios and book publishers) or selling their audience to advertisers, the economics of the entertainment industry primarily relied on blockbuster hits.

Creative Destruction

Creative destruction in an industry typically occurs in successive waves. Both the B2C and B2B business models had vulnerabilities that have become immediately obvious in the Media 2.0 era. As discussed in Chapter 4, a disrupting innovation often attacks the cost structure of an established industry first. The technology of the Internet destroyed traditional barriers to entry—such as the need to spend millions of dollars purchasing a printing press or investing in a movie studio. This meant consumers could become creators, and small B2B or B2C media enterprises could flourish if they offered the right product to either consumers or other businesses. The interactivity and instant connectivity of the new medium also raised customer expectations about what sort of content media companies should provide, while simultaneously lowering expectations about what customers should pay for that content. It has siphoned off the audience for most B2C media enterprises, which has affected the revenue they can get from advertisers who want to reach a mass audience. In other words, the digital revolution has threatened both the customer and revenue base of most media companies.

In order to survive and thrive in the new environment, both traditional media companies and start‐ups must develop new core competencies around attracting and retaining audiences, and align their costs with their value drivers. Although vertical integration drove the profitability of media organizations in the past, economist Eli Noam, author of Media Ownership and Concentration in America, argues that horizontal integration is most important in the Media 2.0 environment. Successful media companies will focus on what they do best, and will outsource the rest. Book publishers were early adopters of horizontal integration, contracting with various authors to create the content, and with large printing companies to produce and distribute their books.

Instead of four or more business models determined by the type of content that a media enterprise is producing, Noam hypothesizes that there will be two types. Successful media enterprises will be integrators, such as Google and Facebook, aggregating and collecting content from multiple sources onto their platforms and then distributing it to a vast audience. Or, they will be specialists, creating content for a smaller niche audience and/or providing a specialized service—such as aggregation of content on a specific topic. In Noam’s scenario, the largest B2C firms will be integrators, who will have the capability to target specific segments within their mass audience. The size of their audience and the scale of their operations will dwarf those of the specialists, which are focused on creating, packaging, and distributing news and information to much smaller, but engaged audiences. In the Media 2.0 world, both Bloomberg and the New York Times would be specialists, according to Noam.

Marketing and technology consultant Shelly Palmer offered a similar prediction about digital business models when interviewed by strategy + business magazine. He believes that successful media companies will be either really large, platform‐based, with immense scale and capabilities to reach vast audiences, or tiny, flexible, and independent. Mid‐sized companies will be squeezed since they will not have the ability to reach a mass audience like the large enterprises, or the unique targeting capabilities of the small ones.

In the past, media enterprises received revenue from one to three types of sources: (1) consumers who paid to receive the content (subscriptions); (2) other outlets and companies who wanted the content produced by the media company (licensing, syndication and fees); and (3) advertisers who wanted to reach a certain audience. Palmer predicts that in the digital space, successful B2C media enterprises will figure out a way to make money from all three sources. As a result, news organizations, for example, may well employ some of the techniques utilized by entertainment companies to engage and connect with the consumers of their content so they can charge their subscribers more, and not remain primarily reliant on advertising.

Regardless of which scenario prevails—Noam’s or Palmer’s—both point to the need for a different way of thinking about and constructing business models that will lead to success. Both point to the need to connect with customers. As Noam says, the premium for media companies in the digital space is on attracting, retaining, and growing an audience, getting the right content to the right audience at the right time. Media companies will be data‐driven, collecting and analyzing data on their customers in order to understand them and their preferences better. “Data will be cash, and it should be treated like cash,” Palmer says. “You need a data P&L,” and everyone in the company needs to know how to use the insights it provides. Therefore, successful media companies will need to develop core competencies in three different areas: (1) the creation of content that engages audiences; (2) the cultivation of new and diverse revenue sources; and (3) the savvy use of technology to connect with customers, regardless of where they are.

Creating a Business Plan from Scratch

The strategic and financial challenges confronting mature companies trying to transition to new business models, such as the New York Times and Bloomberg, are different from those of start‐ups. So let’s first consider how the founder of a newly‐formed digital media enterprise would put together a business plan. The first order of business is getting funding for the venture.

Until recently, many of the business plans for the digital start‐ups relied heavily on financial models that pushed a company to reach scale quickly, regardless of profitability. Now, however, many venture capitalists are asking for a strategy behind the numbers that will ensure profitability and sustainability. Therefore, a business plan for a start‐up should address this strategic question: What are your potential customer’s critical needs and expectations, and how will your firm meet those needs in a way that distinguishes you from your competitors?

The adoption rate of an innovation affects the long‐term economics of start‐up enterprises. Maloney’s Rule posits that a new technology must attract more than 16% of potential customers in order to become profitable. The earliest customers of a new product are called innovators and early adopters—and together they comprise only 16% of a potential customer base. Start‐ups must also attract mainstream users—often called the early majority—in order to become profitable. (On the flip side, for legacy enterprises, the first tipping point in their own business models occurs when their current customers begin switching to the new technology. They represent a mainstream (majority) acceptance of the new technology.)

Harvard Business School professor William Sahlman recommends in Creating Business Plans that companies seeking investment funds organize their business plans into four parts: (1) information on the macro‐environment; (2) information on the opportunity you’re proposing; (3) the potential risks and rewards of this venture; and (4) the people who will be bringing the idea to fruition.

  • Context: What are factors that you cannot control? This is the environment in which your business will operate. It should take into account demographic trends, macro‐economic shifts (such as interest rates, projected inflation), the regulatory environment, and the industry outlook (projected growth rates, competitors, barriers to entry, overall profitability, and special challenges).
  • Opportunity: What are the factors you can control? This includes your target customer, the size of the market, and your potential market share. What are the innovative ways in which you are responding to customer needs and wants (i.e., your unique value proposition)? How does your product or service differentiate you from your competitors?
  • Risks and rewards: This involves cataloging everything that can go right, and perhaps more importantly, everything that can go wrong. This is often called scenario planning, in which you calculate a breakeven financial point on high growth, low growth, and no‐growth opportunities. In each scenario, you anticipate how your firm will respond to the opportunity or challenge, and, just as importantly, how your current and potential competitors respond. Will they copy your idea and underprice you? How can they move to limit your upside opportunity? What is the window of opportunity? How will you measure success in three years or five? What is the delta (difference) in ROI (return on investment) between the most realistically optimistic scenario and the most realistically pessimistic one? (See Chapter 3 on how to calculate ROI.)
  • People: What are the key capabilities that you need in place to ensure success? This is really a review of the three Ps: people, processes, and procedures. Do you have the right people in leadership roles? Do you have the ability to hire the right people as your company grows? Do they have the knowledge, skills, and resources to succeed? If not, can you provide the training needed? Is your firm organized in such a way as to capitalize on opportunity and quickly recover from setbacks?

Thanks to cloud computing, it is easier and less expensive than ever to come up with a business plan and start a company, since server space and development tools can be rented, instead of purchased. As a result, Harvard Business School professor Ramana Nanda found that the number of media outlets that received funding from venture capitalists doubled from 2006, when Amazon introduced its web‐based services, to 2010. However, many fewer companies were likely to receive the second round of funding. As a result, in the period from 2002 to 2010, 43% of companies failed before receiving the second round of funding, with the failure rate increasing significantly after 2006. Additionally, firms with first‐round funding received less strategic guidance from venture capitalists, who were inclined to hold off on placing someone on the board of directors until after the second round of funding. On the positive side, the valuation of firms that made it to the second round of funding increased substantially.

All this places an increased premium on start‐ups gaining traction fast. This also suggests that successful founders will take a long‐term, strategic view of the entire industry segment—and consider the context in which they will be operating three to five years from initial funding. This is exactly the sort of forward‐looking strategic view that the consulting firm PwC advises leaders of existing firms, such as the New York Times or Bloomberg, to do. This viewpoint anticipates that the tremendous pace of change and disruption will continue, and perhaps even accelerate in the media industry. Therefore, leaders of start‐ups, as well as leading legacy companies, should ask: What are the big trends sweeping across the industry? What are the most disruptive outcomes of these trends? How can my company anticipate and react to the highest risks?

What Are the Strengths and Weaknesses of the Current Business Model?

While start‐ups create their business plans on blank canvases, existing media companies, like the New York Times and Bloomberg must be mindful of the current legacy business, which pays the bills. So, before crafting a new strategy, existing businesses typically make an inventory of both the positive and negative attributes of their current business models. A so‐called time‐honored SWOT analysis utilizes a matrix approach to identify two internal factors and two external ones that can significantly influence profitability and future growth trajectory (Figure 5.1). The internal factors are classified as strengths and weaknesses, and the external ones as opportunities and risks (Box 5.1).

SWOT matrix depicted by a square divided into 4 portions for strengths, weaknesses, opportunities, and treats, with 2 arrows at the right labeled Internal and External pointing to the top and bottom row, respectively.

Figure 5.1 SWOT matrix.

There are limitations to using a SWOT analysis since it is a subjective exercise, dependent on the biases and perspectives of those involved in the process. A SWOT analysis also does not compare and quantify upside or downside potential for the various opportunities or the impact of doing nothing. More sophisticated financial analysis is always needed to determine an ROI. However, it is a valuable starting point in assessing the long‐term viability of a current business model and some opportunities available for growth. Let’s use a SWOT analysis to consider the current business models of both Bloomberg and the New York Times.

Current Bloomberg Business Model

Bloomberg is a B2B (business‐to‐business) firm, selling directly to customers in the financial services industry. Its founder, Michael Bloomberg owns almost 90% of the privately held company. In 2016, it had estimated annual revenues of $8–9 billion, and profits of more than $3.5 billion. (This suggests an profit margin of roughly 40%.) The driver of 85% of the revenues for the company is the Bloomberg terminal, which has unique analytical abilities valued by its customers, especially Wall Street traders and analysts. Bloomberg does not discount the price of its terminals ($2,000 a month per terminal), regardless of the number a company purchases. By using the terminal, customers in the financial services industry can get instantaneous updates on news that might affect the market, while simultaneously using Bloomberg’s extensive data to analyze the performance of various financial instruments. At the beginning of 2017, there were more than 320,000 terminals in financial offices around the world.

Bloomberg is a classic closed network. A customer needs to pay for the terminal in order to get access to the company’s unique services and products. According to a Fortune article written in 2006, Bloomberg tends to retain its customers—not necessarily out of affection and good will for the terminal, which can be cumbersome to use. Instead, they fear losing a competitive trading advantage if they do not have access to Bloomberg’s data and analytics. Bloomberg, which received a $10 million buyout when the investment house Salomon Brothers was purchased in 1981, teamed up with three other investors to develop a terminal that could be used to track market information and calculate the price of financial instruments.

The Bloomberg terminal was a very disruptive innovation when it arrived on the scene in the 1980s. In short order, it displaced the market leaders—Dow Jones News Services and Reuters. Bloomberg holds a dominant market position—more than a third of the market—with Thomson Reuters, a publicly traded company with $12 billion in annual revenues, lagging significantly behind. Despite numerous efforts in recent years to catch up, the Thomson Reuters Eikon is considered inferior to Bloomberg’s in terms of its analytical and trading functions. Over the past three decades, Bloomberg has added numerous services and features—aimed at enhancing the reliance of its customers on the terminal and other sources of Bloomberg‐produced news and information. This includes the establishment of a robust news service that includes online, television, radio, and print (Bloomberg BusinessWeek).

In addition, Bloomberg has established other data management and subscription services, including Bloomberg Law, which serves lawyers and competes with LexisNexis, and Bloomberg Government, which serves lobbyists and tracks congressional and regulatory changes in Washington. Despite some recent efforts to diversify and seek new customers for its products, Bloomberg’s profitability still depends on the health of the financial services industry. Growth in subscriptions to its financial terminals slowed in 2009—in the wake of the 2008 Great Recession—and again in 2012. As the dominant market leader in the financial industry, Bloomberg must continually focus outward, trying to stay innovative and prevent the emergence of a competitor that builds a better mousetrap. If that happens, then the disrupter can be disrupted.

Let’s do a SWOT analysis on Bloomberg.

Strengths

  • Established market position with dominance in the financial information systems. In early 2017, Bloomberg provided real‐time financial information to more than 327,000 subscribers worldwide.
  • Extensive data layer makes the company the strongest player in the industry. A market share of 33.3% in 2015 (vs. Thomson Reuters at 24.3%).
  • Diverse products and services offerings, including financial products, enterprise products, and media products.
  • Brand considered “reliable” by Wall Street customers, giving Bloomberg pricing leverage with its terminals.
  • Strong presence across digital platforms. In early 2016, Bloomberg.com recorded digital traffic of 27 million unique visitors.

Weaknesses

  • Bloomberg’s fortunes tied to strength of Wall Street.
  • Profits tied primarily to the terminal.
  • May be reaching market saturation with terminals, resulting in slowing growth.
  • High cost of terminal may limit growth outside financial services.
  • Privacy scandal in 2013 at Bloomberg (reporters at Bloomberg News were using company’s terminals to monitor subscriber activities).

Opportunities

  • Projected strong growth opportunity in US capital markets—US debt market reached $1.6 trillion in high‐yield and investment‐grade insurances in 2017, from $1.5 trillion in 2014.
  • Rising consumption of online content—Bloomberg delivers premium content across numerous digital platforms. Bloomberg News publishes more than 5,000 original stories on an average day.
  • Significant partnerships, e.g., Twitter offers 24/7 streaming video and news in partnership with Bloomberg.

Threats

  • Emerging alternatives, including Markit’s federated messaging platforms and Symphony, an instant messaging platform. Thomson Reuters and many banks, including Goldman Sachs and Bank of America, are supporting the new platforms.
  • Alternatives are expected to put pressure on Bloomberg to lower the price of the terminal.
  • Negative trends in magazine publishing industry—global print consumer magazine subscriptions are expected to decline at a compound annual rate of 2% through 2020, putting pressure on print products, such as Bloomberg Businessweek.

Current New York Times Business Model

In contrast to Bloomberg, the New York Times is a B2C (business‐to‐consumer) media enterprise. It is one of three national print newspapers, circulated throughout the United States—along with the Wall Street Journal and USA Today. It carries a range of general interest information, including politics, culture, and sports, as well as business news. The readers of its print edition tend to be affluent, well‐educated, and influential decision‐makers in both the business and political world. However, the news industry is in flux. As a result, the New York Times faces strong competition for both audience and advertising from a range of media outlets, including online ventures (such as Vice and Buzzfeed), as well as more traditional broadcast outlets.

Over the past three decades, the New York Times made several major acquisitions that had a negative ROI (including the Boston Globe and About.com). Simultaneously, the company sold most of its non‐newspaper properties, including its magazines and television stations, as well as its smaller, regional newspapers. So, in contrast to other B2C media companies—such as News Corp (which owns the Wall Street Journal)—it is almost exclusively reliant on income from the New York Times. In 2016, the New York Times, a publicly traded company, had $1.5 billion in revenue and $102 million of operating income—an operating margin of 7%.

Even though it has made substantial progress in transitioning to digital delivery of its newspapers, the primary driver of profitability remains the print edition. Because it enjoys strong customer loyalty, the New York Times is able to charge more for a subscription to either its print or digital edition than any other general interest circulation newspaper in the United States—as much as $800 for a print subscription and more than $300 for a digital edition. As a result, more than half of its revenues come from circulation, an anomaly in the newspaper business. However, despite its strong brand appeal, the New York Times has not been able to replace rapidly declining print advertising revenue with increases in digital advertising revenue. In the first quarter of 2017, for example, print advertising fell 18% compared to the previous year. Although digital advertising was up 19%, overall ad revenue was down 7%. Analysts estimate that more than 60% of 2016 revenues came from the print edition. Additionally, the New York Times continues to carry significant fixed production and distribution costs tied to the print product.

Let’s do a SWOT analysis on the New York Times company.

Strengths

  • Multiplatform presence has driven digital growth, which has provided meaningful diversification of revenue. Circulation revenue accounts for more than 60% of total revenue.
  • Digitally savvy audience, among the most affluent and engaged of any publishing company.
  • Strong growth of paid digital subscribers, willing to pay a premium price—$250–325 yearly.
  • Number of digital subscribers to various products (including crossword)—2.2 million in early 2017.

Weaknesses

  • Lack of scale as compared to peers (NYT with $1.5 billion in 2016 vs. News Corp with revenues of $8 billion in 2017). Lack of scale limits ability to compete effectively and might impact investor confidence.
  • Concentrated geographic presence—highly dependent on US domestic market. News Corp generated 54% of revenues from outside the United States in FY15.
  • Pressures on both print and digital advertising revenue. Advertising revenue accounts for only a third of total. Print advertising continues to decline.
  • Market for digital display advertising continues to experience challenges due to abundance of available advertising inventory and a shift toward automated, real‐time bidding.
  • Continued reliance on print paper for the majority of its revenue. High costs, tied to union contracts and related to printing and distribution of print edition.

Opportunities

  • Growth in smartphone market. NYT has been building on its mobile initiatives.
  • Growth in online advertising. US digital advertising is expected to hit $113.2 billion by 2020. NYT has a strong portfolio of digital assets.
  • Global expansion. Rebranded International Herald Tribune as International New York Times. Publishing alliances include Chinese Monthly.

Threats

  • Very competitive market. Competing for audience in both national and international markets and with digital alternatives, such as Google News and huffingtonpost.com.
  • Competing for digital advertising revenues with other ad‐supported websites.
  • Declining print circulation—expected to decline at least 1% annually, 2015 to 2020. Print subscription is double that of digital‐only subscription.
  • Increasing paper prices. Rising wood pulp prices—expected to increase at annualized 5% through 2020.

As these two SWOT analyses show, both Bloomberg and the New York Times face significant potential threats in the near future. Bloomberg is operating in a relatively stable market with a dominant share, but slowing growth prospects. Its fortunes are tied to Wall Street and its profits can turn significantly due to macroeconomic shocks, such as the 2008 recession. Additionally, there is always the possibility that a new competitor will emerge that dislodges Bloomberg from its market‐leading position.

The New York Times confronts an even more uncertain future. The consumer publishing industry is in a dynamic transition from print to digital. There are few barriers to entry, so there are numerous new entrants on a yearly basis. Legacy companies such as the New York Times must also attempt to shed legacy costs tied to the print world, in an attempt to free up the money to invest in digital initiatives. To make matters worse, it is not at all clear which of several digital scenarios will ultimately yield the greatest ROI.

Given the fast pace of change in the media industry, both the New York Times and Bloomberg are continually reevaluating their strategies and modifying their business plans. In 2014, the New York Times published an Innovation report, co‐authored by Arthur Gregg Sulzberger, a member of the sixth generation of the family that purchased the newspaper in 1896. The report stated emphatically that the New York Times was “winning at journalism,” but needed “to become a more nimble, digitally focused newsroom that can thrive in a landscape of constant change.” It mapped out strategic goals of significantly growing the New York Times audience, working with the business side to enhance the “reader experience,” and reorienting the newsroom so that it was a “digital first” organization. The latter goal “means reassessing everything from our roster of talent to our organizational structure to what we do and how we do it.” Although annual revenues for the company declined slightly from 2014 to 2016, in its letter to shareholders, executives pointed out the significant growth in digital subscriptions, giving the New York Times a combined three million print and digital subscribers—the most ever in its history. It noted a number of new journalistic platforms—including a virtual reality project and the launch or expansion of its podcasts and themed “sections”—and the purchase of two boutique digital marketing firms. In late 2017, the 37‐year‐old Sulzberger was named publisher of the newspaper, succeeding his father.

During the same time period—2014–2016—Michael Bloomberg was also attempting to reorient his company. Almost immediately upon his return to the company in 2014, he began a reorganization of the newsroom that led to the layoffs of 90 people in 2015. A memo from the editor explained the shift. The company was returning to its roots—focusing on the financial professionals who provided 85% of total revenues. This meant that it would back off covering topics such as sports and education, and would instead focus on six main areas: business, finance, markets, economics, technology, and policy (government and politics). Bloomberg was for journalists with “a passion for business, finance and markets,” the editor’s memo said. “So if you are not intrigued by how people make money…or yearn to practice ‘gotcha journalism’ on investment bankers…then Bloomberg is probably the wrong place for you.” Bloomberg would focus once again on providing data and shorter pieces since “people on a terminal are short on time.” Given its global reach, there would be more emphasis on locally translated stories and the use of social media.

Existing media companies, like the New York Times and Bloomberg, must strike a delicate balance between preserving revenues and profits from the legacy business, which still pays the bills, while trying to transition to a new model. To get around this conundrum, strategy experts often recommend starting with “a blank sheet of paper” and asking this question: If we were building this company today, how would we build it? That’s what we’ll attempt to do in the next section.

What Are the Components of a Sustainable Digital Business Model?

“Your strategy is your promise to deliver value: the things you do for customers, now and in the future, that no other company can do as well.”

This definition of strategy from the consulting firm Strategy&, captures the essence of the shift in business models for media companies over the past two decades. Pre‐digital strategies for media companies tended to focus on achieving operational excellence and efficiency. They were inwardly focused. Successful entrepreneurial media companies in the digital space—existing companies as well as start‐ups—will be outwardly focused, prioritizing the end‐user, the customer, instead.

In their book, Business Model Generation: A Handbook for Visionaries, Game Changers and Challengers, consultants Alexander Osterwalder and Yves Pigneur created a business model “canvas” that served as “a shared language for describing, visualizing, assessing and changing business models.” This canvas—a simplified, one‐page diagram with nine components—considered both internal and external factors (i.e., strengths and weaknesses, opportunities and threats) that could affect the success of a strategy. It prompted entrepreneurs to perform a SWOT analysis on: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.

Given the customer‐focused imperative that media enterprises confront in the digital era, we’ve adapted their model, and those of recent authors, including Robert Kaplan and David Norton (The Strategy‐Focused Organization) and Robert Simons (Seven Strategy Questions) to develop a more outwardly‐focused strategic framework. This can be used by leaders of start‐ups crafting business plans from scratch, or legacy enterprises, attempting to rapidly transition to more of a digital business model. The strategy framework consists of five questions that correlate with the five primary components of a digital business model for both large and small B2B and B2C media enterprises.

  1. What is the unique value proposition your enterprise offers current and potential customers?
  2. What are your most promising (and profitable) current and potential customer segments?
  3. What are the best channels for reaching current and potential customers and enhancing your relationship?
  4. When should you compete and when should you collaborate in a digitally networked world?
  5. What are your key assets (including people and capabilities) that will deliver value for your customers and drive long‐term profitability and sustainability?

The business model we are using in this book (Figure 5.2) is an integrated and iterative one in which the various components feed into and continuously shape both internal and external outcomes. Therefore, we’ve represented it as a circle in which the arrows extend in both directions, assuming continuous feedback and adjustment when necessary. The five components of the strategy influence costs and revenues, and vice versa. Similarly, all five components must be integrated into a coherent strategy. This in turn influences, and is influenced by, organizational structure, culture and leadership. In the chapters that follow, each of the five components in Figure 5.2 will be discussed in greater detail, as well as tools and processes for assessing your current position in the market and future prospects.

Digital media business model depicted by a circle with center labeled Revenue Streams and Cost Structure surrounded by 5 arcs labeled “Defining…,” “Understanding…,” “Reaching…,” “Competing…,” and “Investing….”

Figure 5.2 The components of a digital media business model.

Defining a Unique Value Proposition

The creation of a new strategy and business model for any enterprise begins with the articulation of how a company’s products and services create value for the customers who buy them and use them. A media enterprise must establish a unique value proposition in order to differentiate itself from the competition and establish a sustainable business model. The Internet has disrupted the traditional value proposition that media enterprises delivered to their consumers, putting downward pressure on pricing and also changing consumer expectations about how they interact with content. In Chapter 6, we’ll explore strategic tools and processes you can use to profile your customers’ wants, needs, and motivations, and then match them with the products and services you offer. It is important for media companies to consider the content they deliver as both a “product,” as well as a “service.” What are the benefits that your customers uniquely receive from interacting with your products and services?

Understanding Customer Relationships and Segments in a Digital World

The Media 1.0 era focused primarily on the size of the audience in determining financial winners and losers. The bigger the audience, the more potential for revenues and, if costs were managed effectively, profitability. The Media 2.0 era rewards those media enterprises that can differentiate among their customers, sorting them into segments based on a range of characteristics—including demographics, psychographics, and behaviors. Successful media entrepreneurs will “target” specific groups of customers, directing their creation and distribution of content and their marketing efforts, at these groups. In Chapter 7, we’ll explore tools for understanding customer relationships and for calculating the strategic value of various types of customers.

Reaching Current and New Customers

Today, customers create, purchase, and consume content through many channels—traditional ones (such as purchasing a book at a brick‐and‐mortar retail outlet) or digital ones (by downloading a mobile application or accessing material through an aggregator). How do media companies use these numerous channels to attract new customers and enhance the relationship with existing ones? In Chapter 8, we’ll explore tools for mapping the customer journey, designing and delivering content that engages, and evaluating the efficiency and effectiveness of the various channels.

Competing in a Networked World

We now live in a networked world. In order to survive in the digital era, media companies must learn how to take advantage of the new economics of networks and partnerships. The economist Noam envisioned two types of media organizations in the digital age: the large integrators that aggregate and distribute content (such as Google and Facebook) and the smaller specialists that create content (such as the New York Times). This dynamic can create a “contested space”—with both the integrators and the specialists competing for the same customers. In Chapter 9, we discuss how media enterprises can thrive in a networked world by understanding when to collaborate and when to compete.

Investing in Key Assets and Capabilities

Strategy is about marrying the key resources that a company possesses, such as its tangible assets and its assorted capabilities, with the expectations of its customers. How do the leaders of media enterprises use the limited resources and assets that they possess to best advantage so that they meet the expectations of their customers and maximize their return on investment? In Chapter 10, we develop a framework to help media entrepreneurs identify the key assets in their organization and then prioritize investments in capabilities that will ultimately drive profitability.

In the 1995 business classic, Competing for the Future, authors Gary Hamel and C.K. Prahalad encouraged leaders to “create and dominate emerging opportunities.” Successful media enterprises will have an agile organizational structure, and a leadership attuned to moving quickly. The goal of any digital media strategy is to fully utilize the new capabilities unleashed by new technologies to attract new audiences and develop new sources of revenues, ultimately driving profitability and sustainability.

Summary

“Today is the slowest rate of technological change you’ll ever experience in your lifetime,” technology consultant Palmer advises his clients. The fast pace of change in the market, driven by both consumer expectations, as well as technological innovation, complicates matters for both start‐ups who are trying to gain traction and profitability, and for traditional media companies attempting to move more aggressively into the digital space.

In the pre‐digital era, media companies typically produced four different types of content—news, information, persuasion/commentary, and entertainment—and had a variety of business models. Prognosticators see two dominant types of media enterprises emerging in the digital space—large integrators, which aggregate content from many sources, and smaller specialists that create their own unique content that will be consumed by specific types of customers. Successful media enterprises—whether large or small—will have a diversified revenue stream.

Founders of start‐ups should craft a business plan that takes into account factors you can control and those that you can’t. This then allows you to consider the risk and reward of each potential investment, while also determining whether you have the right people and processes in place to succeed. Before crafting a new strategy, the leader of a legacy media enterprise needs to first identify the strengths and weaknesses of the current strategy and business model. The SWOT framework provides a snapshot of the positives and negatives, while also highlighting potential threats that may need to be addressed and opportunities for growth.

In the digital era, all successful media enterprises—start‐up as well as legacy firms—will have a primary strategic focus on delivering unique value to their customers. In this chapter, we offered a customer‐focused strategic framework that can be used by leaders of both new and established media enterprises to develop a sustainable and profitable digital business model with five key components.