Three Critical Mistakes Digital Businesses Make With Content

 
 
New Book: Do companies really understand the nature of today's digital transformation? Bharat Anand's book The Content Trap offers a new view of digital strategy that shifts the focus from "produce the best content" to "create the best connections."
  • Author Interview

Interview by Michael Blanding

The world is drowning in content. As a business competing in the digital realm, it can be tempting to believe that the key to success is to produce better content to rise above the digital clutter. That kind of approach, however, represents a basic misconception about how the digital world works, says Bharat Anand.

“What digital technology is fundamentally good at is connecting people,” says Anand, the Henry R. Byers Professor of Business Administration in the Strategy Unit at Harvard Business School. “Most companies that have experienced digital success—Facebook, Amazon, Uber, Airbnb, and others—are not just creators of products, but connectors.”

Anand explores this phenomenon, and the tension between “content” versus “connections,” in a new book The Content Trap: A Strategist’s Guide to Digital Change . In it, he explores digital transformation efforts in media, entertainment, and related arenas that have experienced nearly a quarter-century of digital change, with a view to understanding what lessons can extend to other sectors.

The book traces its roots in part to a Harvard Business School Executive Education program on digital strategy Anand created many years ago with Felix Oberholzer-Gee, Andreas Andresen Professor of Business Administration in the Strategy Unit, for companies struggling to adapt to the digital realm. The professors saw the same problems repeated over and over, “many of which came from pursuing seemingly rational mindsets that turn out to be flawed.”

“One effect of digital technology is that value in one part of a sector often gets redistributed to another"

The first trap Anand identifies is paying too much attention to content or product instead of focusing as well on how to connect users. As an example, he points to the newspaper industry, which has struggled to compete in the digital age.

“Conventional wisdom is that the internet destroyed newspapers because online news is cheaper, faster, and better,” says Anand. Most newspaper companies responded by investing heavily in online news sites of their own. “But the real problem was losing revenue generated by classified ads to sites like Craigslist and Monster.com.”

One company that recognized the threat was Schibsted, the largest newspaper company in Norway and a company Anand has been studying for a decade. In 2000, while other newspapers were pulling money back from the internet following the dotcom crash, the company invested aggressively in online classifieds. “Their thinking was if we get this right, this could be a winner-take-all market,” says Anand.

After investing heavily in the business, it emerged as the most popular classified advertising site in Norway, drawing listings from neighboring countries as well. “There were more cars sold on the site than there are cars in Norway,” says Anand. From there, the company expanded into other countries. Today it is a leading player in the world in classified ads, which constitute the vast majority of Schibsted’s operating profits.

“More interestingly,” Anand notes, “the company is taking lessons it learned by connecting people through ads back to the newsroom, where they ask a simple question when covering major news events: How can we help readers help each other?”

Anand elaborates on this idea of user connections using the example of one of the largest digital companies most Americans have never heard of: Chinese internet giant Tencent. The company began in 1998 as an instant messaging service, but has since expanded to create the microblogging product Weibo, online gaming, and the social media app WeChat.

What’s particularly interesting about the company, says Anand, is how it has monetized the service. Facebook raises 90 percent of its revenue from advertising, Tencent makes less than 20 percent from ads. Instead, it relies on virtual currencies called Q coins that users can spend to customize their online presence, buying virtual clothing, jewelry, and pets, as well as wallpapers and ringtones.

“The heart of its success is going back, first, to a deep understanding of consumer behavior, and what people are willing to pay for,” says Anand, “and then leveraging success from one product network to another—user connections.”

The second problem Anand sees in digital strategy is when a company gets too tied to one form of content or one product rather than embracing a more expansive view of its business. “We hear all the time in business that the way to be successful is to narrow product focus and leverage core competencies,” he says. “One effect of digital technology is that value in one part of a sector often gets redistributed to another.”

Take the music business. The common perception is that piracy killed the music industry: CD declines coincided with the rise of Napster in 1999. But value didn’t flow entirely to consumers—instead much of it shifted to firms with complementary product and service offerings. Says Anand, “Think about how much money we spend on hardware such as MP3 players and smartphones, or on digital broadband access that has become increasingly important to streaming digital music. The perverse outcome was that companies would often benefit at the expense of their sister divisions.” Even while Warner Music started suffering, Time Warner Cable’s fortunes were going through the roof.

Then, there were concert revenues, which started skyrocketing at the same time revenues from CDs were falling and with a bigger portion going to the artist. “It’s not a coincidence. Thirty years ago, concerts were advertisements for you to buy music; now with content prices harder to control, free or cheap music is the advertisement for seeing a live show,” says Anand.

For companies operating in digital worlds, success requires recognizing product connections, too—complements, adjacencies, and spillovers.

The third trap that Anand sees companies fall into is trying to follow the lead of other successful companies too formulaically. As different as digital is from the analog world, the essential points of strategy—determining what your customers want and how you are uniquely poised to provide it—remain the same. But this requires seeing and managing the interdependencies, the functional connections, across all parts of the organization. “Context matters. It’s a simple idea, and yet we so often ignore it. The best companies, even in digital worlds, create unique strategies that tap into customer needs.”

Tapping into the concept of connectedness requires a shift in organizational mindset. “Most companies find it very hard to break out of the trappings of product and content.” says Anand. “But they should. Strategic success requires shifting focus from content alone to customers and connections.”

During the last three years, and just as Anand began writing the book, he was drawn into a digital effort closer to home: online education. Together with some HBS faculty and staff colleagues, he helped create HBX (the school’s digital learning initiative), and then lead it.

The ideas in the book shaped Anand's thinking around online education and certain decisions at HBX. "A few months into the effort, the team found itself settling into a rhythm of trying to build a great platform with great content. It was the same trap,” Anand recalls. The HBX effort subsequently shifted towards leveraging the power of social learning, one of the features that is now thought to differentiate the HBX experience for its learners.

“Digital efforts in education and other sectors can benefit from looking at media firms and the experiences they’ve gone through. We’d do well to try to avoid the same mistakes that they’ve learned from.”

  • Book Excerpt

Chinese Connections: Tencent

from: The Content Trap: A Strategist's Guide to Digital Change
by Bharat Anand

And the end of all our exploring Will be to arrive where we started And know the place for the frst time.

—T. S. Eliot, “Little Gidding”

Let’s return to Tencent, in China, and the puzzle we started with: How do you create a $100 billion business from free instant messaging?...

How do you create a business as valuable as Facebook’s while largely eschewing advertising revenue? How do you persuade users to pay for online products and services in a market generally regarded as one of the toughest nuts to crack in this regard?

The answers to these questions lie not in leveraging network effects or understanding price discrimination or managing fixed costs or creating platforms for user content. It lies in all these things. Perhaps more than any company, Tencent centers its entire strategy on user connections.

Instant messaging is about the simplest media product you can offer. The content is provided by users themselves (the messages); you simply provide a platform through which they communicate. It’s easy to start and even easier to scale once you have users. The reason is that the business of IM is characterized by strong network effects. As the number of users grows, the platform’s value to any single user increases since she can com- municate with many more others. When IM platforms win, they win big.

The problem with IM is that it’s the quintessential free product. And once users are used to getting something free, monetizing it is very hard.

That’s where Tencent charted new territory. It gave users personal online identities—and then charged for them. It started fairly innocuously. In 1998 more than 95 percent of Chinese households had no access to a personal computer, so had no email address. Tencent gave them their first online identity—typically, a multi-digit number on its platform called QQ. Eight-digit numbers aren’t very memorable by themselves. Generic ID numbers, as a result, quickly gave rise to demand for numbers that could more easily distinguish users from one another. Numbers that were “straight” (for example, 2345678), identical (where all digits were the same), or symmetric (numbers that read the same forward or backward, such as 9888889) quickly became popular, along with numbers that had particular meanings. As they did, they started changing hands in second- ary markets for high fees. For example, 89975 (David Beckham’s marriage date preceded by the Chinese happy number 8) resold for nearly $1,000 in an auction; 88888, once the number of Tencent’s CEO, sold for more than $30,000. Other numbers had value because of their personal signicance to users—ones that matched a birthday or a cellphone number, for instance.

As QQ grew, so did the menu of identity options. First Tencent allowed users to augment their ID numbers with cartoon-character-like icons (chosen from a menu of a few hundred options). Next, in 2002, it offered simple visual figurines termed avatars. Called “QQ show,” avatars were Tencent’s second major product. (The term comes from Sanskrit and literally means “incarnation”—more colloquially, “appearance” or “manifestation.”) There were hundreds of varieties, and as more and more users flocked to QQ, they embraced them.

Psychologists and sociologists regard identity as an important anchor for relationships. Identity can be personal (self-image, esteem, individuality) or social (where it reflects one’s position vis-à-vis others). Many daily actions—eating at a restaurant, buying a car, wearing clothes—have elements of both: They give us pleasure or contribute to our self-image, and they let others know who we are. We signal our relational identity through what we wear (Armani or Abercrombie), where we eat (French or Ethiopian), what we read (Grisham or Gladwell), what we watch (dramas or documentaries), and what we hear (punk rock or funk pop), to name just a few.

It was initially thought that one of the Internet’s greatest benefits was anonymity. Users could communicate without others knowing who they were. Expressing opinions, sending customer complaints, or seeding grassroots movements could all be done without fear of reprisal or retribution. But as interpersonal communication and the social Web grew, a funny thing happened: Relational identity became as important online as in the real world.

Tencent’s first stroke of genius was in recognizing this early on. As the users on Tencent’s IM platform grew in number, so did their desire to differentiate themselves from millions of others.

To allow users to stand out from the pack, Tencent tapped still more alternatives. Users could supplement their avatars with various features—a happier face, a different hairstyle, a more colorful hat, a Gucci bag—for a small charge each, less than $1. In 2003, fewer than 10 percent of Tencent’s users bought these identity enhancements. Annual purchases amounted to roughly $5 per person. But given the size of the user base—10 percent of subscribers amounted to more than thirty million users, generating $150 million in aggregate revenue—and given that the cost of creating a virtual Gucci bag was the same as creating an unbranded one (namely, zero), the business of selling virtual figurines was spectacular.

This was price discrimination at its simplest and most powerful. Tencent did not need everyone to purchase a premium avatar. In fact, it didn’t want everyone to purchase one—if that happened, differentiation would suffer.

In 1974 the future Nobel laureate Michael Spence, then a young economist at Harvard, wrote about the value of signals and how they are conveyed. The power of a signal, he noted—whether it was about identity, ability, or any other personal attribute or action—wasn’t inherent in the signal itself; it derived from the fact that it would be costly for others to use the same signal. Thus “smart” students signaled their intelligence through a college degree—not because education necessarily provided special knowledge, but because doing the hard work required was costly enough to provide differentiation. A firm might signal its quality through advertising—not because advertising was necessarily lucrative, but because a low-quality firm could not afford it.

Tencent recognized that virtual goods could be powerful signals. Purchasing an expensive virtual Gucci bag would have the same sort of signaling effect as owning a real one. This simple intuition redefined how Tencent saw its business, and its opportunities to leverage user connections. It was now far more than a communication platform; it was, in essence, selling identities.

By 2003, three years after its founding, Tencent was proftable, enjoying gross margins of more than 65 percent. In June 2004 it became China’s frst Internet business to go public, on the Hong Kong stock exchange.

Excerpted from The Content Trap: A Strategists Guide to Digital Change, by Bharat Anand, © Random House 2016.

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