The twentieth century may be
remembered as the era when show business became big business. One hundred
years ago, vaudeville and baseball were part of the American scene. But
they were economically trivial compared to, say, railroads or agriculture
or mining. Today, cable and television broadcasting employ more people
than the railroads. Professional sports has become a global obsession.
Entertainment, from video games to music, is a multi-billion-dollar
business. And the global spread of the entertainment industry has barely
begun.
In times of change, some
types of media will rise while others will fall. Newspapers began their
long decline even before the advent of the Internet, and circulations
continue to drop. Books, on the other hand, have remained fairly strong in
aggregate demand. While the future may see books becoming a smaller part
of total media sales, the total will rise so significantly that I believe
that dollars spent on books will also rise. Most importantly, the
underlying demand for content will remain strong. Much like we examined
the distribution system in our look at retailing, the media industry needs
to continually analyze how content is distributed. If I make a great film,
will it earn most of its revenue at the box office, on cable, or at the
video store? If I write something you want to read, should it be in Time
Magazine, should it be in book form, or do you want to download it? Should
my music get to you via Virgin or via Napster (or a paid version of
Napster)? And how do those decisions differ by type of content? Might a
short story be distributed one way while a list of the ten secrets to real
estate sales another?
I have stressed the
importance of looking at where each industry fits into the economy.
Probably the most helpful way to look at the media is to divide it into
two parts: content and distribution (the “pipeline”). Vertical mergers
attempt to integrate the two, as in the movie studios’ historic
on-again-off-again interest in owning theatres. The most striking vertical
deal of all was the acquisition of Time Warner by AOL. Now that the merger
is consummated, there continue to be articles debating whether the new AOL
Time Warner will be valued as a media company like Time Warner or as a
technology company like AOL. The assumption is that a media company is not
worth nearly as much as a tech company. I believe this logic is flawed.
To me, AOL is a distribution
company, a pipeline. While, as a retailer, I have been a distribution guy
most of my life, and happily so, the evidence is that distribution
franchises do not have the lifespan of the great product brands. That is,
the top retail chains do not remain on top as long as the top ketchup
companies. I believe that the durability of retail chains is enhanced by
their physical presence on the ground, their bricks and mortar. On the
other hand, “virtual” distribution systems (like AOL) do not even have
this physical reality to cement their relationship with the customer.
While our phone company was our – with a small o – phone company as
long as the government protected their monopoly, we began to desert them
as soon as the free market was allowed to go to work. Switching long
distance services has become easier than changing brands of laundry
detergent. The same is now beginning to happen to local telephone
services, and may come to the electric utilities.
Similarly, virtual pipelines
like AOL, Yahoo, and Internet service providers such as Earthlink and MSN
may not be inherently powerful long-term assets. I believe those
millions of subscribers may be much more tenuously connected than most
observers realize. At the same time, AOL clearly has one of the smartest
managements in the industry. They understand that their real value lies in
their relationship with their subscribers. They work very very hard to
earn the trust and loyalty of those subscribers. Something that rarely
occurred to AT&T and the baby Bells. The electric utilities still call
their customers “ratepayers.” As long as AOL keeps their focus on
their customers and aggressively uses technology in their business, they
have a good chance of keeping their powerful position, extending the life
of their asset.
But contrast this with Time
Warner. This company owns the movie version of Gone with the Wind;
they own every production of the Sopranos; they control the rights
to all those old Fortune Magazines that I cherish. Thousands of
hours of baseball game video archives rest in Turner’s vaults. Margaret
Bourke White’s photographs for Life Magazine. Madonna’s music. No one
can take these things away. Moreover, every day, Time Warner cranks out
more of the same – lots more. Some of very high quality, some not so
high. Some has lasting value.
I believe that AOL
pulled off one of the great coups of modern deal-making by buying Time
Warner at a time when the market had driven AOL’s current stock value
way above Time Warner’s, making the deal feasible. In this deal, AOL got
one of the greatest corporate assemblages of assets on earth. Now, AOL is
beginning to leverage this powerful asset into a benefit for their
millions of subscribers. This will be one more way they can extend the
life and value of their pipeline, distancing themselves from their many
competitors.
But it will not change my
belief that the greater lasting value lies in content, not the pipeline.
The greater value is in media companies, not in “technology companies”
if you define Yahoo and AOL as technology companies. On the other hand
technologists Microsoft, Hewlett-Packard, and Dell not only own strong
tangible product brands, they own extensive patents and production
processes. A little more like ketchup. (At the same time, we know that new
technologies will come along and replace the method of the moment, whereas
ketchup may outlast them all.)
In a parallel way, I believe
that the Disney part of Disney is worth more than ABC, and the Paramount
part of Viacom is worth more (relative to “book” value) than the
theatres owned by the same family. Those media companies that combine
content and the pipeline – ESPN, MTV, CNN, CNet/Ziff-Davis – may be
worth the most of all. (Note that these companies did not result from
vertical mergers, they were designed from the outset as one package. Just
like Dell is both a computer factory and a computer “store” in one
conceptually simple company.)
Do you know where the real
value is in your organization? How strong is your “content?”
So many books have been
written about the Internet and about how it has changed all the rules of
business success. What is the right way to look at the Internet? What does
a long-term business perspective tell us?
Clearly the Internet is a
powerful tool. It stands in the tradition of telegraphy, television, the
radio, the telephone, and even the printing press, and is perhaps the most
powerful of all these tools, especially given that it has arrived on the
scene just as the world is getting freer, wealthier, and more integrated.
The Internet is unprecedented in its ability to tie people together
instantly and interactively, including high-quality sound, still pictures,
video, interactive games, and almost anything else we can dream up.
Publishers and retailers who ignore the Net do so at their own risk. So I
place myself squarely in the camp of those who see the Internet as a
great, great thing.
But the Internet does not
revolutionize the laws of economics or consumer behavior. And many
companies which are called “Internet companies” are in fact not
Internet companies. Amazon is a retailer – a very fine one. At their
core, Google is a form of advanced card catalog system, Hoover’s a
business information reference, Switchboard a yellow pages and white pages
service. Each is part of an industry that existed long before the Internet
and will likely exist long after the Internet is superseded by the next
technology.
Of course, the Internet does
open up new possibilities. As a supplier of business information,
Hoover’s stands in the tradition of Standard & Poor’s and
Moody’s, but before the Internet neither of those services could easily
be updated every ten minutes, neither could report breaking developments,
neither could be customized to each user’s needs.
Amazon is a great service.
But even before Amazon, I could have easily bought a copy of the latest
New York Times best seller at any bookstore. Selling common things to mass
markets is not new magic. On the other hand, if you have a product that
only 20 people want, and they live in 20 different countries, no known
retail “technology” does the trick. At least not before the Internet.
I’m a book collector.
Before the Internet, if you wanted to find a rare or out-of-print book,
you could run ads in a few small, specialized publications or visit used
bookstores, hoping to stumble across the title you sought. By most
standards of efficiency, this system did not work. Today, there are
several great websites for finding hard-to-find books, led by the awesome www.abebooks.com.
This site lets you search through 28 million books in over 8,200 dusty
bookstores around the world by title, by author, or by any keyword –
instantly. Click in your VISA card number and the book is on its way to
you. Truly remarkable.
EBay is another great
Internet resource built around matching hard-to-find products with
hard-to-find customers. Much has been written about eBay, most of which
perpetuates two myths: that eBay is an Internet company, and that it is an
auction company.
As for the first myth, you
can anticipate my objection. EBay happens to take advantage of the most
current communication technology, but there’s no reason why eBay must be
forever linked to the Internet. If the Internet is superseded by some more
efficient technology, eBay will follow.
Concerning that second myth:
auctioning is just one of many ways to set the price of merchandise. Most
of the things bought and sold in the world are priced in one of two other
ways – through haggling (negotiation) or through fixed prices (marked on
the item, with no debate). EBay’s customers, like all consumers, are
accustomed to all three pricing methods, and there’s no special reason
why prices on eBay need to be set through auctions. In fact, today, 30% of
eBay transactions are done at pre-set prices rather than via auction, and
that percentage is likely to grow.
Other Internet
opportunities. The Internet’s power to connect hard-to-find products
with hard-to-find shoppers is simply an aspect of its power to link people
in communities of interest. While conventions and other face-to-face
gatherings will continue to be an important part of the way we build
communities, no tool is as powerful as the Net for bringing together
people from around the world who have something special in common.
Everyone knows that the
Internet has greatly facilitated research and learning. But there is still
a lot of information that is not available on the Internet. When using the
Internet in doing research for Hoover’s Vision, I sometimes began
to feel as if nothing had happened before 1995. It will be decades before
all the old books, articles, databases, historical archives, government
and corporate records, and other vital documents are digitized and placed
online. And what about those shoeboxes full of pictures under your bed? Or
those 78-RPM records in your Mom’s attic?
Despite the rhetoric (“The train is leaving the station!”), there’s
still plenty of room for more successful enterprises that use the Internet
as a medium of communication and commerce. Hundreds will be founded in the
years to come. Most of those business will not in fact be Internet
companies. They’ll be used-car companies, music publishers, schools and
museums, travel agents and financial planners – every kind of business,
in fact – that are similar only in using the Internet more effectively
than their competitors. Of course, there are some true Internet companies
– namely, the providers of the software and hardware that supports the
Internet and its expansion into broadband, companies like Oracle, Cisco,
and Corning. These companies can prosper by making tools, just as Dell,
Black and Decker, and Microsoft have. But those who creatively apply those
tools often profit the most.
