New Rules

Capsule:  What has the media been missing in its mad dash to a digital future?  A new book out of the Columbia Business School reveals which media content and distribution forms work and why.  The post-apocalyptic wisdom: everything old is new again. 


The Curse of the Mogul


"The Curse of the Mogul: What's Wrong with the World's Leading Media Companies" by Jonathan Knee, Bruce Greenwald and Ava Seave promotes new rules for media success based on traditional B-school wisdom.  The book grew out of a Columbia Business School course called The Strategic Management of Media and its authors quickly reveal that most media considerations have nothing to do with strategy.

Strategy, says Knee et al, is the exclusive provenance of media businesses with clear barriers to competitive entry.  The only direct way to enhance the long term value of a business is "by establishing or reinforcing barriers to entry." 

Short term business value can be enhanced by striving for greater efficiency, preferably by spreading the fixed costs of a business over increasing numbers of revenue-producing customers (short of the point where unrestrained growth actually opens the market for new entrants.) The authors also celebrate disciplined management teams who continue to improve their business operations and who manage revenue production to consistent standards of profitable growth.

Knee is clear about how rigorous the standards for true competitive advantage and profitable growth must be.  For a media company to qualify as possessing competitive advantages, it must stand alone in its field, protected by a moat of high fixed cost barriers, scale, customer captivity--the kind that is borne of high switching costs or the networking effects of an ingenious product model like Google--or government protection (ah, Ma Bell.)  If a media company does not have a unique enough moat, it may be one of a very small group of industry peers with a cooperative moat, shared amongst industry leaders without violating antitrust laws, where the right balance of cooperation and independent operation avoids value destruction.

For everybody else not moat inclined, efficiency is the course to pursue.  Per Knee, efficiency is the mark of operational excellence and is never the result of the efforts of any single gifted executive, but instead achieved by successive management teams working with rules and processes that create efficient products and well maintained profit margins over time.

Using this framework, "The Curse of the Mogul" evaluates media businesses as diverse as Bloomberg (loud applause,) Google (fainting and cheering,) and a collection of cable networks (reserved appreciation) against pure content plays without unique competitive packaging (like movies and music performance.)  The problem with "disjoint" content businesses is their over-reliance on a creative result that is not replicable, as well as dysfunctional economics that distribute revenue to talent and lawyers rather than making consistent profits. 

The book's title is reinforced by the authors' theory that Media Moguls get so carried away by narcissism, their devotion to their own genius insights (as well as those of a small group of insiders on whom they believe their businesses are staked) and media popularity that they disregard the rules of successful business performance--namely, build a moat and operate your castle efficiently. 

Significant examples in every media category are trotted out shame-faced.  Those examples of media businesses that have consistently under-performed the S&P 500 over time were easy to find, given that the media--in part because of a tendency to see growth as God and to pursue deal-making growth through big and generally disjointed acquisitions--under-performs the market reliably.

So who cares about profit anyway?  The authors maintain that if you want to operate a sustainable business, you must.  And flash in the pan profits are not sustainable anymore than CDO's were--even though they deliver disproportionate cash and glory to a small sector before they knock the lights out. 

Knee is not a big internet lover when it comes to growing businesses, although he acknowledges the huge value represented to consumers.  Knee writes in a chapter called "The Internet is Not Your Friend":  "The Internet may be somebody's friend--most notably the consumers of media--but it is not the friend of incumbent media companies.  For the incumbent, any benefits from the Internet on either the cost or new revenue opportunity side are overwhelmed by the damage done by the lowering of barriers to entry."

Surely there are a few friends of the Internet--Google, Amazon, eBay, Facebook, Apple and Microsoft/Yahoo! amongst them.  In even these cases, Knee walks each company through his competitive barrier and efficiency framework demonstrating how unique and beyond replication these examples are for the mere mortal (and, especially, he believes, for the mere mogul.)

There are many important media lessons in this book that are not obvious and yet don't require a Columbia degree.  Amongst them is a clear preference for distribution businesses that--like cable, satellite, broadcast and telecom--have built virtually impenetrable structures with fixed capital investment, local franchises and Federal government cooperation.  Even as these businesses slow down and threaten to be overtaken by what appear to be digital comparables, their unique advantages distinguish them and support sustainable profits.  Nothing lasts forever and big distribution will ultimately be overtaken by either itself or other media forms, but forever is a long time and many profitable dollars away. 

Also important: Knee's debunking of the idea of Content as King.  (Knee doesn't seem to like the whole King idea however it's served up.)  He points to pure content play media businesses--which he divides into creative and packaging examples--as amongst the least consistently profitable of the media field.  The more creative or talent-based these businesses are, the less sure their profitability will be. 

The packaging side of content provides some barriers to protect it in the form of network structures that demand a continuous supply of content, making them difficult to duplicate.  One of Knee's favorite forms of continuous content businesses are database businesses, including Bloomberg.  The huge costs associated with building a continuous media service that includes original content as well as continuous data and other borrowed innovations that are habit-forming, like instant messaging, keep competitors away. 

Conversely, the more dependent a continuous content business like a cable network is on a single hit series--that, no matter how popular, is unlikely to maintain profit-growing capabilities because of the nature of TV hit economics--the more vulnerable it becomes.  The idea: better to build an expensive niche network around a small collection of first or re-run hits.  (Big applause here for Discovery.) 

Once again, score one for the ingenuity of the cable industry's founders.  Unfortunately, the niche continuous content enterprise may be falling for big ratings plays in today's cable world, just as advertising rates--the only way to monetize ratings--are under significant market pressure.  Knee also celebrates the past potential of newspapers and magazines--especially niche magazines--to generate profits with the network effects of highly motivated niche audiences, local franchises, high fixed costs and continuous content.  Their collective downfall--from which a few niche publications may be saved--has come from a mad embrace of the unfriendly internet.

What is it with "The Curse of the Mogul" and the internet?  Because success in the highly efficient digital structure of the web requires very little initial capital investment, only the strong infrastructure plays--like unique habit-forming search and marketplace commerce that leverage a growing loyal audience--survive.  Newspapers are the most obvious example of media companies that moved away from their essential strategic advantages believing that their intelligence and the star quality of their content, leaders and brands would translate.

Here, Knee and his colleagues make another important point about media futures.  Looking at the near-collapse of the music business--only recently rejuvenated by Apple's tenacity in focusing not on the music itself, which is talent inexpensively sold, but on its devices and its digitally networked system as sustainable competitive advantages--"Curse of the Moguls" points out the critical revenue and profit-reducing tide that lowered all ships.  When the music business turned from albums and CD's to singles, it reduced its revenue-per-unit in accordance with its digitally enabled lower per-unit production costs.  What it failed to anticipate was that this made it possible for every company in creation to enter the field without barriers, along with a profligate counterfeiting audience.

Is there a TV corollary?  Did VOD open the door to You Tube?  How much sense does it make for the media to parse and resell individual programs to consumers hoping for profitable sales and repeat devotion?  If we're following the Knee framework, the best way to sell VOD is in a bundle with a continuous content network, as well as other unique benefits that can be assembled out of the wild west of digital technology and the internet.  The harder it is for competitors to replicate a secret sauce packaged from high fixed cost/viral audience-building ingredients--like cable networks--mixed with efficient digital content elements to enhance profits (but only to enhance profits, as opposed to becoming the product itself,) the more sustainable TV content and the collaborative partners who distribute it will be.

"The Curse of the Moguls" is pretty old-school in the end, favoring groups, traditional business standards, discipline and hard work over individuals and magic.  It's interesting that, in these days after the deluge, the old rules seem both certain and somehow new.