Home > coverstory > Newspaper companies and the challenge of disruptive change

cott D. Anthony and Clark G. Gilbert

The newspaper business has been hearing rumors of its demise for generations. Seventy-five years ago, radio was the threat. Fifty years ago, it was television; 10 years ago, the Internet. Through it all, newspapers have not only survived but even today continue to demonstrate profit margins that are the envy of many other industries.

Yet, there is a general consensus today that the core newspaper business is in trouble. Paid circulation continues to slide, due in part to myriad free sources of information, and the confluence of blogs and classified killers such as craigslist, Google and Yahoo! are polluting key pieces of the newspaper industry’s profit pool.

To be sure, each emerging competitor lacks something that is core to most newspaper companies’ value proposition. Some can’t match a newspaper’s broad distribution network, while others can’t compete with a newspaper’s detailed reporting capability or local reach. All, however, compete in ways different than newspapers are used to, causing what is known as a “disruptive” change.

At the heart of the change is a de-aggregation and democratization of the newspaper. Instead of one-size-fits-all, hard-to-navigate classifieds, there’s Autobytel for cars, eBay for collectibles, Monster for jobs and Match for, well, people. And while there’s a lot of noise in the blogosphere—where anyone can act as a journalist—sites like Gawker, Wonkette and Instapundit provide fresh, real-time perspectives on current events.

Of course, newspaper companies are not sitting on the sidelines of this transformation. Borrell Associates Inc. in Portsmouth, Va., which tracks the online media industry, estimates that newspaper companies made almost $1.2 billion in local online advertising in 2004. Online revenues at publicly traded media companies, for which data were available, increased at a compounded rate of more than 30 percent from 2001 to 2004.

And newspapers are doing more than simply replicating the print business online. Some companies have built unique online offerings, such as CareerBuilder.com, which has been owned and operated by Knight Ridder in San Jose, Tribune Co. in Chicago and Gannett Co. in McLean, Va., since 2002. Acquisition fever swept through the industry in 2005, with The New York Times Co. acquiring About.com; The Washington Post Co. acquiring Slate; Dow Jones & Co. in New York City acquiring CBS MarketWatch; Knight Ridder, Tribune and Gannett buying a controlling stake in news aggregator Topix.net; and News Corp. in New York City paying more than $500 million for Intermix and its popular MySpace.com.

The bad news? The historical odds are against most newspaper companies emerging unscathed from this turbulent transition.

Across the sweep of history, similar disruptive changes caused many great firms to teeter and fall. In industries ranging from photography to consumer packaged goods to health care, market leaders have historically shown an inability to meet the challenge of disruptive change.

In the computing industry, for example, minicomputer titan Digital Equipment Corp. missed the personal computer in the early 1980s, started to fall apart in the early 1990s, and was acquired by Compaq in 1998. Dell Computer’s low-cost business model destroyed Compaq, forcing a merger with Hewlett-Packard in 2001. Dell’s continued incursion into the PC and home-office printing systems now threatens HP, which announced more than 10,000 layoffs last summer in an effort to remain competitive.

However, companies operating in a diverse set of industries have begun to figure out how to overcome these challenges. Consumer packaged goods giant Procter & Gamble Co. has created a portfolio of disruptive products, such as Swiffer, Febreze and Crest Whitestrips. Silicone market leader Dow Corning successfully built a disruptive distribution channel called Xiameter. And one of the media’s own—The Washington Post Co.—has assembled a platform of disruptive education offerings through its ownership of Kaplan Inc. in New York City, which now makes up more than 50 percent of company revenues.

Through studies of how disruption has affected different industries, the newspaper industry can gain a clearer understanding of the traps that make disruptive change so hard for incumbents and develop straightforward principles that can be applied to overcome them. Newspaper companies that can follow such principles and avoid the traps have a chance to successfully navigate through increasingly turbulent times.
Disruptive Innovation: Simple, Cheap, Transformational

Those who employ disruptive innovations are willing to sacrifice performance…to introduce new benefits.
Harvard Business School Professor Clayton M. Christensen identified the phenomenon of disruptive innovation in his landmark 1997 book The Innovator’s Dilemma (Harvard Business School Press, Boston). In the stream of research that resulted in the book, Christensen identified a sort of paradox: There were circumstances in which well-run companies could seemingly do everything right yet still fail.

Consider the history of retailing, for example. In the 1960s, many considered Sears, Roebuck and Co. to be one of the world’s best-managed companies. At its peak, the general merchandise retailer accounted for almost 2 percent of all retail sales in the United States.

In 1962, when Sears was at its height, Arkansas-based Wal-Mart opened its first store. In the years that followed, Wal-Mart Stores Inc. quietly honed its discounting business model in rural America. As it began to burst into the mainstream in the 1980s and 1990s, Sears was almost powerless to defend itself. The previous poster child of retailing excellence started to teeter before finally merging with Kmart Corp. in 2004.

Like all disruptive innovators, Wal-Mart found a different formula to win in the retail market. It didn’t compete by offering better products or service than general merchandise retailers did. Wal-Mart’s discount business model featured large stores with simple products that sold themselves at “rock-bottom prices.” Only in recent times has the company expanded to new product lines, such as groceries, clothing and high-end electronics.

Generally speaking, those who employ disruptive innovations are willing to sacrifice performance in one or more areas to introduce new benefits, such as simplicity, convenience, ease of use, or low prices. Incumbents often struggle with disruptive change because the assets that serve them so well in extending their core business stand in the way of success when the industry changes. Companies tend to encounter one of three problems:

1. They fail to acknowledge the disruptive change early enough.

Disruptive change tends to start among market tiers that are off most companies’ proverbial radar screens. For instance, when Ken Olson, chief executive officer of Digital Equipment Corp., looked at the personal computer in 1977, he famously said: “There is no reason why anyone would want a computer in their home.”

The first personal computer customers were hobbyists and at-home tinkerers, a sharply different group from the engineers and financial professionals who used DEC’s minicomputers.

2. They fail to allocate adequate resources to the disruptive innovation.

MP3 technologies didn’t sneak up on Sony Corp. The company simply found it difficult to prioritize the creation of a winning MP3 player, as Sony’s music arm had no desire to increase the pace with which the piracy-friendly format swept through the industry. Worse, its engineers liked to work on proprietary technologies that improved audio quality.

“I don’t really like hard disks—they’re not Sony technology,” Takashi Fukushima, head of the company’s Walkman division, told The Wall Street Journal in June 2004. “As an engineer, they’re not interesting.”

3. They fail to re-work their business models to succeed in the disruptive space.

Eastman Kodak Co. wasn’t blind to digital imaging—one of the company’s engineers created a working digital prototype in 1975. Kodak didn’t fail to allocate resources toward digital imaging—it invested billions of dollars over the next quarter century. However, by trying to ensure that digital imaging didn’t cannibalize its core business—the production and sale of silver halide film—Kodak enjoyed little net growth in the early days of digital.

The company’s first digital camera was a $30,000 piece of equipment tailored to the professional market. Only in recent times has Kodak embraced simplicity and begun to experiment with new business models. Had the company made different choices and realized the potential to create new business models sooner, it could have owned digital imaging instead of being one of many players in the space.

In short, history teaches us to bet against established market leaders facing disruptive threats. Events usually follow a predictable pattern and, at best, leaders miss the transforming trend and slowly dwindle into irrelevancy. At worst, the transformation happens quickly, sending the historical leaders into a devastating tailspin.

Is there any reason to expect that media titans will somehow avoid the fate that befell DEC, Sears, Kodak and the countless other industry leaders that struggled with disruptive change? Many newspaper companies seem to have overcome the first two traps, identifying at least some of the disruptive trends and allocating resources aggressively. But market leaders still need to continue to employ innovative thinking alongside creative organizational designs to truly master the industry’s disruptive change.

Overcome Limitations

Getting disruption right isn’t easy. When confronted with the game plan for disruptive growth, many companies immediately recoil, saying, “We can’t do that!” Companies need to overcome three specific “we can’ts.”

1. “We can’t introduce a disruptive product. It is not good enough.”

Many established companies unintentionally slow the innovation process by pushing for needless perfection. Meg Whitman, chief executive officer of eBay, put it nicely in a March 2005 story in USA Today when she said, “It’s better to put something out there and see the reaction and fix it on the fly….It’s another way of saying ‘perfect’ is the enemy of ‘good enough.’”

Quality is always in the eye of the beholder. Many newspaper editors scoff at the quality of the writing in the blogosphere, but many consumers appreciate the freshness and directness of user-generated content. Some newspaper companies are beginning to figure this out.

In April, Morris Communications Co. in Augusta, Ga., created a free daily publication, Bluffton (S.C.) Today, and a tightly integrated Web site with heavy doses of user contributions. The Bakersfield Californian has created a separate subsidiary that produces a reader-generated print newspaper called The Northwest Voice. In both cases, the companies rightly believe that consumers will find nonprofessional contributions delightful.

2. “We can’t risk failure.”

One reason the pursuit of perfection can be so dangerous is it can lead companies to run fast and hard in the wrong direction. And the initial strategy for a new-growth business is typically the wrong strategy.

Companies that pursue perfection and fear failure too often shut off signals that suggest they need to change their approach. Managers need to recognize that learning what’s wrong with an approach and adapting appropriately is a good thing, not a failure.

3. “We can’t afford to do this. It is too expensive.”

Many companies make the incorrect assumption that creating disruptive growth businesses requires massive up-front investment. In fact, massive up-front investment is oftentimes the wrong thing to do. Spending too much money too soon can allow teams to follow fatally flawed approaches for too long.

Because the exact strategy is unknown and unknowable, companies need to invest a little to learn a lot. Run focus groups before developing prototypes. Develop prototypes before building new plants. The close-to-
market experiments allow you to quickly adjust your strategy before making big investments.
Newspaper companies with multiple properties have natural laboratories for experimentation. They should encourage low-cost experiments and learning across properties.

Find Nonconsumers With a Job to Be Done

In 2003’s The Innovator’s Solution (Harvard Business School Press, Boston), Christensen and co-author Michael E. Raynor have a deceptively simple message: Customers don’t buy products and services; they hire them to solve the problems they face in their lives. In searching for new growth opportunities, companies should work to understand these problems.

Many of the emerging threats introduced by non- newspaper companies target nonconsumers, who find it difficult or expensive to get their problems solved, through new Internet-based business models. Companies like the University of Phoenix, for example, are increasingly turning to online advertising brokers, whom they pay only when receiving a promising lead for new customers. Brokers tend to favor efficient “local search” advertising, passing over traditional media vehicles.

Newspaper companies ought to search for markets where consumers or advertisers still have important jobs that aren’t being adequately addressed. For example, one newspaper company recently determined that the local services industry (plumbers, contractors, etc.)—a fragmented, messy market with high levels of consumer frustration—was ripe with new-business potential. The paper believed it could create revenue growth by introducing a service that made it easier for consumers to select more trustworthy service providers.

Taking a jobs-based perspective also can help newspaper companies optimize their current products. Executives at the Star Tribune in Minneapolis, for example (see p. 34), tried to understand why young adults don’t subscribe to their newspaper. In tandem with the Readership Institute at Northwestern University in Evanston, Ill., the paper discovered that many of the potential readers who were choosing not to purchase the newspaper had common desires: things they could talk about with their friends; a product that was looking out for their interests; and to be surprised and humored.

The company redesigned the paper around these “needs,” improving its ability to connect with a mercurial customer group.

Media that Innovate

Acknowledging the “disruptive” changes affecting the industry, many publishing companies are experimenting with products and approaches to get a jump on new competitors.

The NAA-ASNE Audience Development Initiative, launched last fall, is focused on understanding media landscape shifts and documenting innovative newspaper strategies to grow audience. Later this month, as part of the ADI effort, a report by market

research firm Clark, Martire & Bartolomeo Inc. in Englewood Cliffs, N.J., will identify best practices—both inside and outside the newspaper industry—for new-product development.

ADI also will issue a report on 10 examples of innovation from newspapers in the United States and overseas. The electronic publication will look at innovation in design, storytelling, community collaboration, print-online strategies and product management. Among those examples are:
The Janesville (Wis.) Gazette. Responding to a world that puts more demands on consumers’ time, and a media environment that provides a variety of choices, senior managers at the 21,866-daily circulation newspaper radically changed the paper’s front page. The Gazette, which was redesigned in September 2004, combines a magazine-style primary news element with a quick-read news summary on the rest of the front page (PRESSTIME, January 2005, p. 28).

Elements of the new design emerged in large part from findings by the Readership Institute at Northwestern University in Evanston, Ill.
Bluffton (S.C.) Today. Executives at Morris Communications Co. in Augusta, Ga., saw opportunity in the disruptive trend of free daily newspapers and the growing desire for citizens to have more of a voice in the media they consume. The launch of Bluffton Today in April 2005 is a bold experiment to integrate the two, providing the community with a blog-based Web site, including content from the newspaper, and a free daily that features community content plucked from Blufftontoday.com.
YourHub.com. As with Bluffton, the Denver Newspaper Agency found a way to offer deeper local content by engaging the community to provide information online, which, in turn, is used in a weekly print product distributed with The Denver Post and the Rocky Mountain News. The site was launched in May 2005.
In addition to user-generated content, YourHub offers free classifieds for certain merchandise, a response to disruptive business models introduced by craigslist and other competitors.
ChicagoCrime.org. While not a newspaper-developed product, ChicagoCrime.org demonstrates that “good enough” products requiring little upfront investment can result in innovative new products and services. It’s also a good example of what a single journalist with Web development skills can do.

The site, launched in May 2005, integrates crime information, publicly available on the Chicago Police Department’s Web site, with the free mapping service by Google to provide a comprehensive resource for Chicago citizens. Created by Adrian Holovaty, today the editor of editorial innovations at Washingtonpost.Newsweek Interactive, the site chronicles what crimes are being committed and what part of the community is affected—down to the block.
THE INNOVATION CASE studies, as well as other data and resources, will be available later this month at www.growingaudience.com. For more information, contact Randy Bennett, NAA vice president of audience and new business development, at randy.bennett@naa.org.
Organize Differently to Find New Business Models

Every company has strengths and weaknesses, although those seeking to meet the challenge of disruptive change often fail to realize their own limitations. Their corporate blinders and shackling procedures turn the best of intentions into limited, often cannibalistic options. Finding ways to break processes and overcome mindset barriers is another way to create novel growth strategies.

Mobile phone giant Motorola, for example, had to fight against internal forces to find success with its ultrathin Razr phone. Usually, when Motorola planned to develop a new phone, representatives from each of the company’s major geographic regions (Europe, Asia and so on) weighed in on the concept. The regions would request the features and functions they wanted included in the design. Each region would then forecast how many units it thought it could sell. The aggregated regional plans would then help Motorola decide whether to invest in a phone’s introduction.

Thus began a complicated dance. If a development team ignored features that a specific region deemed critical, that region would project low sales for the phone. The lowered forecast would make it tougher to get approval to move the project forward. As a result, design teams knew they had to appease each of the regions or their projects would die on the vine.

Although this system ensures that products reflect some critical in-market feedback provided by the regions, it can force designers to develop compromised products that end up being acceptable to everyone yet delightful to no one.

Luckily, Motorola management correctly recognized that it had to act differently if it wanted to innovate differently. The first step was exempting the Razr from the company’s standard process, giving development team members the freedom to create a product they thought would be successful. By removing the project from the normal process, senior management enabled the team to quickly create a novel product that delighted customers and caught competitors off guard. The Razr exceeded the company’s total lifetime projections for the product in its first three months, turning into a massive success story for Motorola.

Newspaper companies seeking to create new growth have to similarly be willing to experiment with different organizational forms and new business models that go beyond the traditional subscription and advertising models. Most newspaper companies rely on traditional forms of revenue, such as classified listings and display advertising.

Online leaders, on the other hand, have very different offerings and feature revenue streams such as demographic marketing and lead generation. One leading online real estate provider earns almost 95 percent of its revenues from lead generation—a business model foreign to most newspaper companies.

Newspapers experimenting with focused print products also need to think about giving those products the necessary freedom to target new advertisers and follow new business models. Belo Corp. in Dallas has given its free daily, Quick, substantial operating freedom to follow a distinct approach to connect with 18-to-34-year-olds. Quick borrows content from The Dallas Morning News but shapes it in very different ways. Without substantial freedom, the publication would likely be languishing instead of thriving.

Belo projects that Quick will reach break even ahead of schedule, has attracted many new advertisers, has driven a competitor out of the marketplace, and has quickly established a loyal reader base.

Newspaper companies need to let the customer—not the company’s history—shape new business models. Newspaper companies that identify a consumer need and build a business around that need will find themselves with fundamentally different pricing models and cost structures than will companies that seek to force their historical operating model into new market spaces.

Most newspaper companies have good brand reputations, strong cash positions and a deep well of content. If these companies combine those assets with a reframing of their market and appropriate organizational designs, they can seize the opportunity lurking in the threat and drive the transformation themselves.

Success will not come easily. The more companies can avoid the gravitational pull of their existing structures and mindsets, and traverse distinct paths utilizing new content generation and distribution models, the better their chances of remaining relevant enough to play a significant role in the future age of information.

Scott D. Anthony is a managing partner at Innosight LLC. He is the co-author of Seeing What’s Next: Using the Theories of Innovation to Predict Industry Change (Harvard Business School Press, Boston). Anthony will be a featured speaker at the 2006 NAA Marketing Conference, Feb. 19-22 in Orlando.

Clark G. Gilbert is an assistant professor in the entrepreneurial management department at Harvard Business School. He is the co-author of From Resource Allocation to Strategy (Oxford University Press, Oxford, Britain). Anthony and Gilbert are spearheading the Newspaper Next project, which will provide additional guidance to newspaper companies hoping to manage disruptive change, with the American Press Institute in Reston, Va.

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