SpectatorBytes

Over the past few years, we have witnessed the transformational impact of digital technologies on traditional media. The music industry was the first to be overwhelmed. Currently, the digital spotlight is on the newspaper and magazine industries whose business models are under intense pressure. The television business appears to be next in line as consumer viewing and media consumption behaviors appear poised to change significantly over the next few years.

As the digital revolution runs its course, it is evident that the digital revenues for each of these media industries may struggle to offset the decline in analog revenues.  In the case of the music industry, for example, digital revenues have not offset the declines in CD sales. At $18 billion in 2008, total music sales have declined by $6 billion since 2005 and close to $27 billion since 1997. Digital technologies have exposed and circumvented the inefficiencies in the current media models (e.g., price-to-value ratio, distribution limitations, packaging A & B products together, etc.). This leads to consumers paying only for what they want (which is usually less than what they were paying before), and allows advertisers to make their spending much more efficient (which may also lead to lower spending).

As a result, for traditional media to thrive after the digital shake out, companies need to focus on remaking their operational approach. The primary goal is to help maintain robust profit margins. The secondary goal is to create competitive advantages which may allow the businesses to maintain and further build scale.

Current cost structures of traditional media businesses reflect the operational practices and revenue sources where content was scarce and distribution could be tightly controlled. The traditional cost structures are built around a specific ecosystem of distribution channels and distributor intermediaries. Existing models tend to rely on mass-marketing-driven strategies and support product development cycles that work best on less empowered consumers.

The new digital reality requires a new set of operational practices and revenue sources. While streamlining efforts are helpful in managing profits, they tend to emphasize preservation of current practices rather than the development of innovative approaches that can address the opportunities and challenges of the new digital world.
In my experience, successful new operational models tend to:

1. Adopt technology and engineering as a core capability: Engineering teams can develop tools that allow operating teams to redesign their overall practices to increase efficiency, drive up speed to market and foster scalability. For this to happen, engineering teams need to work closely with key product leaders/managers to ensure that there is continuous flow of communication throughout the process. This would allow engineering teams to help innovate operations rather than to simply develop a tool that serves the current operational practices. Most successful digital media consumer services have been developed by teams who value and foster engineering-driven thought leadership.

2. Rethink product development/production processes: Digital technologies have enabled the production of content at much lower costs. This does not mean that quality needs to be compromised. Publishing is probably the area where the greatest innovation has taken place. There are several niche digital publications who have created significant amounts of content with relatively small teams (e.g., Talking Points Memo, Engadget, etc). These new production models are still being developed. Scale remains a challenge for these new players. However, since the downward pressure on production costs will continue, media will be better off by striving to put in place more efficient processes rather than simply preserving current practices.

3. Build/own new distribution channels: Just as TV production companies own TV station groups in the analog world, it is important that traditional media control their means of distribution in the digital world. This is especially crucial because the scale of revenues in the digital world may prove too small to support sharing any economics with third-party distribution services. In the digital world, content/service owners need to retain every digital dollar they can. There are already major distribution platforms that have been created independent of content producers (e.g., Google, Facebook, Digg, YouTube). Content owners would benefit from aggressively developing competing distribution platforms. Hulu is a great example of the type of initiative that is needed.
4. Use a different marketing channel mix: As I have said before, successful digital businesses have not relied on marketing spending to achieve consumer adoption. They have done it by focusing on offering a high-quality product/service to its customers. Digital media businesses should follow this model and  not rely on traditional marketing to drive success. Having said that, digital media should leverage new marketing channels (e.g., social networks, Google, digital publications/blogs) to reach the “influencers/enthusiasts” and kick-start word of mouth campaigns. These efforts can prove highly cost efficient and valuable.

These are some examples of the initiatives that could be pursued to establish new operational models. I am sure others could suggest alternative approaches to tackle the issues in each of the areas I discussed above (please do so in the comments). Yet, in a world where digital dollars may not fully offset declines in the analog media business, the ultimate goal of creating a new operational approach is to establish a low-cost, highly efficient model that can be defensible long-term, and which would allow media companies to retain scale in revenues and high profit margins.

Companies that are able to remake their businesses will enjoy significant competitive advantages over those that are less prepared. These companies will be able to leverage their more efficient cost models to build scale and gain market share. The sooner media businesses recognize the need to set new operational models, the better positioned they will be to reignite their growth and capture value from changes in consumer behavior and overall media consumption.