Something’s got to give – Johnston Press

A Lehman brother’s note on Johnston Press finds its way to my inbox following their (ie JP’s)  rather scary results announcement yesterday.

Tucked away in the numbers is precisely the sort of financial recalibration that I’ve been talking about recently that happens with companies facing genuine disruption.

The column on the left is 2006, and on the right it is a forecast for 2010. So what’s happening – a drop in EBITDA margin from 34% to 23%. A drop in Return on Invested Capital from 9.2 to 4.4 and a drop in Return on Equity from 20.1 to 6.6 – all within four years.

Let’s be clear – the business at the end is still a good business, and 23% margins are more than respectable, but from a purely financial view, it is very, very different to the business at the start of the process. At its most naked, numerical level, this is disruption in action.

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The incumbent’s solution: 90% transformation, 10% innovation

This is a little rough – and no-doubt contains my usual mix of typos and unfinished sentences…but better out than in, as they say.

Time after time in recent weeks, I’ve been speaking with people in different businesses and sectors – all facing digital disruption in one form or another, and all grappling with similar issues. How do we launch something new without losing sight of our core business? Should we use our brand? Our existing teams? Should we integrate or separate? I’m not sure there’s a ‘right’ answer to any of these questions – but I’ve started to think of it in slightly broader terms.

My theory is this: The only way for an incumbent to survive being digitally disrupted is to think 90% transformation, 10% innovation.

What does this mean? Well, put simply: once your core business is being disrupted, once the rules of the game are being fundamentally changed, it isn’t going to be enough to do something smart on the side. Only a radical rethink of the business is going to work.

It might not be where you start – but it is definitely where you have to head to. This is especially true if you have left it too late: and the unfortunate truth of real life is that everyone always leaves it too late.

Innovation is great – but it’s not enough

Innovation is exciting and essential. Every so often, someone comes up with something innovative that takes a company to a new level: The iPod. The Mach 3 razor. Post-it notes.

Without some level of innovation, businesses just stagnate, intellectually as well as financially. So, don’t get me wrong, I’m all for innovation. In the digital world all the more so.

It’s just that when your core business is being structurally challenge at the pace and severity that the internet tends to work at, you instantly find that no matter what neat thing you’ve got cooking up on the edges it’s just not going to be enough.

In some cases it is short term maths.

I did some of the numbers on this when I took a quick look at Archant – a UK newspaper group with small but rapidly growing digital revenue. You’re losing, say three pounds for every pound you gain; or you’re having to invest more to make the same – so something is going to have to give.

But this bit of number crunching isn’t always the case – some media businesses, particularly those in classified markets that attacked the net early are showing net growth. Pages Jaunes in France, for example saw total revenues rise a respectable 4.6% for the first half of this year, with a 23% increase in internet revenues more than making up for a 3.6% decline in their core print business. They are not alone here.

I think they call it ‘leverage’

For a business like this however,  ‘doing enough’ isn’t just about the numbers – it means not just having a neat digital bit and as good a traditional business as you can given the circumstance. It means making sure that you’re putting the full weight of our brand and resources into the future of your business.

This is important for two reasons. First because your key competitive advantage is your existing business. Unless you are building on that, and making use of the best bits of it, you are disadvantaged against disrupting competitors who are by their very nature nimbler and quicker.

The other reason is that there is no point charging ahead digitally if you leave your core business behind.

This is one of the problems that happens when people launch newly branded spin off businesses. Take Abbey National launching Cahoot for example.Cahoot launched quickly – it was a lovely cuddly web-friendlynew brand. Launched much faster than anything possibly could have been from within Abbey National.

Great. But the problem? What about all of those Abbey National customers who didn’t want to bank with something called Cahoot – they just wanted to stick with Abbey National but bank online? In other words, the challenge isn’t about launching something new – but transforming the core.

The big idea vs the three point plan

The final aspect of ‘doing enough’ – is probably the most important – which is having an overall integrated vision for the future of the business – a clear understanding of the role it is going to play in your customers lives (and budgets).

Another way of putting this – as others have said, is that having a ‘digital strategy’ is not as important as having a business strategy with a digital aspect running through it.

I have lost count of the number of three point plans/ strategy presentations I’ve seen recently from businesses in different sectors that go as follows.

1. Accelerate digital growth

2. Stabilise the core business

3. Reduce costs across the board

I’ve attached one from HMV c. 2007, but there’s a lot more out there once you start looking (HMV .pdf here).

There is nothing wrong with these actions -  On a similar HMV slide from another presntation they at least have the big bubble – Transforming HMV…although it would be just that bit more credible if they explained what they were transforming from and to.

For example, they might well launch a social network, they might revamp their website for the umpteenth time and revamp their stores, but the only way that business will really work is if they manage to find a role for the business as a whole in a world of Amazon etc, and where Verdict predicts that 60% of the music and DVD market will be online by 2012.

My favourite bit of integrated retail transformation is Argos. By rights their form of catalogue based retail should by now be dead. Maybe they could launch a website, but that would simply make them a second rate Amazon (without any books…but you get the idea).

Instead, they’ve used the web – and the phone -  to make shopping with Argos a better experience all round thanks to their Check and Reserve it functionality where you can reserve online or by phone (either call or SMS) and then just go to the shop to collect.

The result? According to their latest results (.pdf here) the internet now accounts for 21% of sales and Check and Reserve is growing at 50% a year. In all 37% of sales are multi-channel.

I suspect purists might say the internet has been an ‘enabling’ technology for Argos rather than the sort of disruptive presence HMV has found it. That is true

Yes, but you still need 10% innovation

The kicker in this argument is that some businesses would rather have 100% transformation and 0% innovation. The point is – everything starts with innovation. It’s where the business learns. But, almost from the start you need to think about how this can be used to transform the core business.

In other words – it’s ok to have something away from the core or off brand – but if it stays there, it is depleting value, rather than creating it.

And the innovation never stops.

But what’s all this got to do with newspapers

Well – I’ve deliberately set out on this blog not just to write about newspapers – so perhaps I’ll just leave it here for the moment – and come back to what this means for newspapers in another post.

The outsider solution: chuck away your business..wrong, wrong, wrong

Now, normally I quite like Steve Rubel, but his recent lecture to the newspaper industry is way way off the mark. Under the head: how to turn problems into profits, he says that putting up cover prices to meet higher distribution costs is a flawed strategy, and continues:

What they should be doing instead is using this as an opportunity to put a hard date on when they will abandon print altogether, close down plants and migrate completely to a digital paradigm. They need to have faith that their brands and quality editorial product will encourage readers who haven’t already migrated to do so.

OK – this looks nice in a column, but it’s wrong, wrong, wrong.

First, a quick bit of maths let’s assume this is a standard newspaper organisation where digital revenues are at best 10% of your total – often less (see my little slide rule on Archant); and in some cases (eg – Tribune) those digital revenues aren’t actually growing at the moment.

The nub of the matter is you might save 30-40% of your cost by ditching print; but you’re probably going to lose 90% of your revenue -  more if you factor in the amount that. You’re not just left with a smaller business…you’re left with not much of a business at all.

At this stage ‘faith’ in your brand and your editorial quality is going to be very important – because you’re not going to be left with much cash to support either of them.

I suppose you could ‘name a date’ for your digital switchover – but it would have to be so far away as to be meaningless. 5 years? 10? 15? 20? How many of the chief execs who make such announcement will still be in place then? How many of the companies it affects will still be under the same ownership?

Not that this is a great situation to be in. Ideally we wouldn’t be here. Ideally all newspapers would now have 90% of their revenues coming in digitally and be soaring away. The industry has to take a fair bit if blame for not being there (read Ken Doctor’s excellent Newspaper Stories We Tell Ourselves on this). But we can’t play ‘coulda-woulda-shoulda’ for the rest of our days; we have to start from here.

I spoke recently with the chief exec of a business that has made a hugely successful digital transition. He said ‘as long as we can keep the print business going for another 18 months we’ll be ok’. That is a phenomenally powerful position to be in – but that is so far away from most newspapers’ experience.

Why am I so grumpy about this? Well – it’s the assumption that there’s always a quick fix for disrupted companies; normally one that involves them chucking away their past and embracing an uncertain future. Close up – when you have owners, investors, customers and staff to answer to – those decisions are much tougher.

A sense of detatchment helps – but complete detatchment from financial reality is utterly unproductive.

That is the reality of living through disruption. It is a process of constant, tough transformation rather than instant switch-flicking.  It is fascinating hard work. It is why I started this blog.

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Disrupting Microsoft

We had the first wave of our roll out of Google Apps today at work. We’re still without Mail, and the Calendar doesn’t sync with everyone’s Blackberries – so it’s still not quite there yet; but it will be interesting to see how it gets used – and what will be the impact on our Office-dependency

An ex Microsoft employee told me they thought this was the perfect example of disruption in action. I suspect the spreadsheet and presentation packages are going to have to get quite a bit better before it really starts to hurt Office’s sales…but you can sort of count on Google delivering that.

Microsoft I’m sure would argue that there’s nothing in Google Docs you can’t get from Office Live. (tried it..didn’t like it).

At the same time, the BBC last week reported on the proposed post-Windows operating system Midori (see coverage also on ZDNet and SDTimes. I won’t pretend to grasp the full technical details, but as the BBC describes it

It is centred on the internet and does away with the dependencies that tie Windows to a single PC. It is seen as Microsoft’s answer to rivals’ use of “virtualisation” as a way to solve many of the problems of modern-day computing.

Clayton Christensen’s colleague Scott Anthony asks on his blog whether Windows could be disrupted (quick answer – yes, everyone can) and if so – can they do anything about it..

The fundamental question behind Midori and other efforts that are surely kicking around Redmond is to what degree will Microsoft truly let go of Windows? Can the company truly approach solving the problem of enabling computer applications and providing productivity enhancements from a somewhat blank piece of paper?

Microsoft’s overwhelming tendency will be to look at the world through Windows-colored glasses. The urge will be to try to force fit its current business model–where most of its growth comes through the sale of a new computer–onto new growth markets. If Microsoft does this, the company will miss the real opportunities to prosper from disruptive growth.

NYT: Margins, dividends, top-line growth – something’s got to give

They call it ’structural change’ because it is exactly that – structural..and the hard edge of that comes in the financial numbers. Quite simply, the company that comes out at the end, doesn’t have the same financial constitution as the one that went into the beginning.

Something has to give – be that margins, top-line growth, or the dividend paid to shareholders. It is a process of financial recallibration; and right now, we can see a number of businesses facing the structural change brought about by digital disruption having to grapple with this.

It comes even more to the fore when these businesses have a load of debt and a cyclical downturn hits. Even the fear that they might breach their covernants is enough to send investors running [as Trinity and Yell can attest].

All of this became more than evident yesterday with the story in Bloomberg about pressure on the NYT Co to reduce their dividend, in order to stop their debt being valued as Junk as their earnings tumble.

The rock: reduce your dividend and see investors run away. The hard place: keep it high and see your debt completely downgraded. As Bloomberg reports, a raft of other newspapers have already reduced and cut their dividends.

Let’s see what the Times does, and the impact it has on its share price.

The point is – this is the proprietor of the biggest and probably best respected online presence in the world with NYT.com at the core, and everything from their dinky new iPhone app at one end to About.com at the other. They’ve taken 100 jobs out of the newsroom, and they are are anything but in denial of the web – yet their digital success doesn’t save them from this sort of crunchy dilemma.

I think this goes to the heart of the disrupted dilemma – sometimes doing everything just isn’t enough – especially when public markets are concerned.

City gloom about newspapers…

Mickey Clark in the Standard picks up on a JP Morgan report on the newspaper market which has slashed their target price from 480p to 125p (it dropped today to 119p).

The move forms part of a review of UK newspaper industry in which it says comparisons with the United States suggest worse is yet to come. JPMorgan points out the cyclical downturn is clear, noting weakening consumer spending will probably hurt all advertising categories this year and next year may be just as bad, if not worse.

And the point of this: it’s what happens when cyclical change clashes with structural change – creating the hardest background for transition of all.

Full story: Trinity Mirror hit amid gloom on newspapers

Digital disruption of NGO’s

On The Agitator – a blog for direct marketing fundraisers and non-profit execs and boards, Roger Craver asks…

…if the “disruptive innovation” of peer-to-peer philanthropy – the third party giving sites like Global Giving, Kiva, DonorsChoose and Social Actions – will eventually replace the big, brand name nonprofits? Afterall, dozens of these sites have sprung up in recent years and they’re raising tens of millions of dollars for good causes. Many experts in the field are predicting exponential growth.

I havent’ factored the world of NGOs and charities into my thinking – not least because from the outsider’s point of view I’ve only thought of the internet as an enablng technology…but from a read of this, that’s probably an oversight on my behalf..

Artists will make more money from being played in shops than selling their CDs in them..

The changing nature of the music industry was covered in the Observer this week:  Songwriters see slump in profits from CD sales . With these nuggets

The amount of money that songwriters received from sales of CDs fell by 15 per cent in the first half of this year, according to figures to be published this week by the MCPS-PRS Alliance, which collects royalties for songwriters and composers.

And for the first time, artists will be making more money by the end of the year from having their songs played in shops and pubs than from sales of recorded music, according to the statistics, which are contained in the organisation’s half-year results.

Interesting because there’s been a huge amount written about how there is now more money being made from live performance – but not about this.

And interesting also the circularity of this – bands once started in pubs and sold CDs in shops. Now they probbably earn more money getting played in the background of both..

Anyway – here’s the full release from MCPS PRS

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Blockbuster earnings – and Blue-Ray

For me, Blockbuster is one of the most fascinating disrupted businesses out there. Officially, the model of physically rented videos/ DVD has been ‘dead’ for a decade or more.VOD was meant to have seen it off ages ago.

And yet it is still a $500m business – albeit one that is worth a fraction of what it was five years ago.

Consumer inertia has probably helped them somewhat. But that isn’t a sustainable strategy. Their scale has helped make them the last player standing in their sector. And their brand has helped – but it wasn’t enough to see off Netflix or Lovefilm (in Europe) once they copied that model).

But it takes more radical action than this. Under the headline ‘Change means opportunity’ their presentation from last year [Blockbuster - Annual presentation ] put forward the sort of credible transformation plan you would expect – look to a broader market; maximise all delivery channels; re-invent the retail experience (including shutting some 400 stores). The question is whether they can do it all quickly enough to keep the markets happy.

Anyway – they just announced a second quarter loss, greater than expected, which resulted in a 10% drop in share price.Which seems to suggest it remains a challenge in investors’ minds.

Beneath the headlines, there was some good news. Same-store revenues were up 14% – thanks to non-rental revenues (rentals were up 6% which is still impressive).The underlying nature of the business seems to be in a better state than a quarter ago.

Meanwhile, Wired asks: Can Blue-Ray save Blockbuster? The answer is a resounding no – not because of anything inherent about Blue-Ray, but because no single innovation is going to save a business as structurally challenged as this. If only it was so easy.

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Reacting to disruption – what will India do about China?

Interesting piece in the Indian Daily News and Analysis – which looks at India starting to lose out to Chinese Business Process Outsourcing.

And quotes outsourcing expert Arijit Sengupta: “the British used to dominate the motorcycle industry, but the Japanese disrupted them very quickly…the incumbents were initially overconfident about their strengths relative to the disruptors until it was too late. I fear that the same is happening today as regards Indian attitudes to Chinese BPOs”

Read: India being Bangalored by China – Daily News & Analysis.

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