28 Jan 2002  Research & Ideas

Read All About It! Newspapers Lose Web War

Newspapers saw a threat to their livelihood from the Internet, and aggressively put their own competing products online. Problem is, says Harvard Business School professor Clark Gilbert, they didn't take advantage of the power of disruptive technology.

 

Editor's Note— Many newspapers saw the emergence of the Internet as an attack on their core business, and responded with online products of their own. Unfortunately, says HBS professor Clark Gilbert, the papers failed to take advantage of the Web as a unique medium. He discusses the implications of disruptive technology on the newspaper business with HBS Working Knowledge editor Sean Silverthorne in this e-mail interview.

An article based on Gilbert's doctoral research in this area received the Robert Litschert Best Doctoral Student Paper Award in the Academy of Management's Business Policy and Strategy Division.

Silverthorne: Your work examines how the newspaper industry responded to the perceived threat of the Internet, and how that response matched—or failed to match—what might be expected from models of disruptive technology and other swamp-the-boat challenges. Why look at the newspaper business?

In an effort to defend their core market from attack, newspaper companies were missing the new emerging market altogether.
— Clark Gilbert

Gilbert: The newspaper business worked for several reasons. First, the industry was clearly facing a threat of disruption, which was not true for all companies facing the Internet. Note that in the newspaper industry, digital content initially started with different advertising customers, a different business model, and a whole set of performance characteristics that made it appear unattractive on the metrics traditionally used to evaluate the newspaper business. However, despite these perceived limitations, the newspaper industry largely recognized the threat that digital media posed to the traditional printed newspaper business. In fact, many industry analysts were predicting a complete eventual collapse of the newspaper industry and these predictions did not go unnoticed in the industry.

This point was critical to the study. In most of the previous research done on disruptive technology, the established firms simply had no idea what was happening until it was too late. The question remained, does recognizing the threat of disruptive technology enable you to overcome it? Finally, the fact that there are more than 100 U.S. newspapers with average daily print circulation above 100,000 meant that there were a number of large organizations experiencing this issue almost simultaneously. The large number of firms meant that we could study firm response in a robust way, using rigorous statistical analysis.

Q: In general, what were your conclusions at this stage of your research?

A: Previous research on disruptive technology suggested that that challenge was basically one of resource commitment. Because disruptive technologies start out in different markets with different customers and employ different business models than those traditionally successful in the established organization, they are typically undervalued by that organization. Managers refuse to provide the necessary financing or they simply fail to allocate time and attention to the disruptive proposal.

For example, when DEC launched the minicomputer, IBM might have looked at that new business and said, "let them have it." IBM's mainframe customers didn't need it, the small business market was nascent, and the margins appeared inferior to what IBM could earn on mainframes. DEC moved up-market with a much lower cost structure and eventually attacked IBM.

In the newspaper industry, we saw that firms can overcome this resource commitment problem by recognizing the challenge and framing the disruption as a threat to the core business. Funds can be secured and managers are able to commit aggressively with the recognition that the disruptive business might eventually attack the core business.

Unfortunately, threat-induced response also leads to very rigid behavior. We found that despite recognizing the problem, most companies aggressively "crammed" the new business into the old business model and sales processes. For example, most newspapers tried to force their online sites to make money by selling the same types of advertising to their traditional print advertisers. The early online advertisers were different and the type of advertising they sought was much more focused around the interactive and direct targeting attributes of the new media.

Threat had motivated action, but it was resulting in an aggressive replication of the newspaper business. Newspapers had spent a ton of money, with little to show for it. In an effort to defend their core market from attack, newspaper companies were missing the new emerging market altogether.

This paradox can be summarized: absent a sense of threat, response to disruptive opportunities is inadequate; but with threat, the fully funded response is too rigid.

We also found that a de-coupling mechanism could allow firms to capture the benefits of being motivated by the threat to their core business, without being bound by its rigidity-producing effects. By separating those who were running the business from the core organization, newspaper sites became much more innovative and received much higher market penetration. In our large sample study, sites that separate their online organizations from the newspaper were more than twice as innovative than sites that remained integrated into the newspaper. More importantly, these sites gained 60 percent higher market penetration! Thus, all else equal (similar market sites, launch date, and number of employees) separated sites were much more likely to innovate and gain traction in the market.

Obviously, separating the venture is just one factor. There were a lot of other efforts required to make the site successful, but that one management decision can have a tremendous impact.

Q: What newspapers were particularly successful in responding to the Internet challenge?

A: Some of the more successful newspaper responses include companies like The New York Times, Knight Ridder, and The Washington Post. For example, The New York Times has been a real leader on consumer demographic marketing. With 16 million registered users, nytimes.com is one of the only media sources that can let you customize an advertising message around rich contextual context with specific demographic cuts, e.g. male users over fifty reading the sports section. They collect only five categories of consumer demographic data: age, sex, income, geography and e-mail. And yet they have been able to garner 70 percent premiums for their demographically targeted adverting.

Knight Ridder has been successful in building out two very strong national networks. REALCities.com links city guides from over forty different markets with a very powerful user interface. Its national job board, CareerBuilder.com, is one of the leading national job sites, recently acquiring Headhunter.net. The Washington Post has managed to become a national player in political news, while owning the local market down to the level of PTA information and high school sports.

All of these sites are separated from the core newspaper business and all of these sites have been successful by building new markets with new sources of revenue.

Q: What were the critical decisions made by newspapers that successfully created a Web-based product?

A: If I haven't already emphasized it enough, separating the site is key to finding the new market. Also, bringing in people from outside the newspaper business. Whenever you are launching a disruptive business, it is critical to have people who can see beyond the core business and help you identify the emerging new markets. Structure helps with this, but even if you create organizational autonomy, but then rely 100 percent on managers steeped in the old business, you are likely to see a replication of the old business models.

Q: Similarly, what were the mistakes made by news organizations that did not mount a successful product?

A: They continued to frame the new business vis-à-vis the old business. Again, disruption creates new markets and new customers. The business that gets built around these new constituents eventually attacks the established market, but too often in an effort to anticipate this, companies miss the new and emerging market. DEC didn't enter the minicomputer market because it thought it could lose money until it eventually attacked the low-end of IBM's mainframe business. DEC saw a new independent market that was attractive on its own merits. The key is that disruption creates new growth! It does eventually attack established markets, but the overwhelming feature of it is that disruption creates new customers, new markets, new applications, that result in net growth overall.

Q: Given that many papers got burned in their rush to create Web-based products, have you detected any change in how the industry may greet future such challenges? That is, once burned, twice shy?

A: Unfortunately, after all of their efforts, many newspapers are retracting from the online business altogether. Again, this is not because there is not a strong and emerging business there, but that the newspapers failed to see it given their emphasis on their core markets. Last year, Monster.com cleared over $100 million in net income! There is real money being earned all around these guys, but they continue to insist that the market doesn't exist.

For example, I've done a study where we compared the income statements of new start-up online businesses to those of the typical online newspaper business and we find that anywhere from 35 percent to 45 percent of the categories of revenue are missing from the online newspaper. Again, there are exceptions in a few companies, but this disappointing discrepancy is quite common.

Q: What can all companies take away from your study of the newspaper industry and its response to the Internet challenge?

A: Again, disruption creates net total growth. As I work with so many companies responding to disruptive technology, their overwhelming response is to focus on the potential losses created by disruption. In fact, the time from when a disruptive technology initially emerges to the time it eventually attacks an established market can be quite substantial. In the mainframe computer example, minicomputers were launched in 1967, and even though unit sales quickly passed mainframe unit sales, dollar sales did not eclipse mainframe sales until the late 1980s. Mainframe dollar sales did not have double year declines until the early 1990s. Thus, both markets continued to grow for some time after the initial emergence of the disruptive technology.

Disruption always creates new net growth because it expands the total reach of products and services. As companies learn to recognize this potential opportunity, they are more likely to be able to create and capture the value created when these new markets are built.

Q: What will the next phase of your research entail?

A: My future research in this area will go in two directions. First, I will continue to look at the newspaper industry and what happens when the new business moves up-market. The questions we will examine include: How do you coordinate efforts between the new venture and core business? Does it ever make sense to eventually integrate the two businesses and under what conditions? The second way I am extending this research is to look across a number of other industries to examine other successful mechanisms for response. All of this research is designed to help strong established companies continue to grow in a viable, sustainable way.