Creative Disruption

The problem with talking about ‘transparency’ is that it can mean lots of things to lots of different people.

I sat in on the session at DLD (charied by Jeff) when Google’s David Drummond offered ‘greater transparency’ – but I’m not sure it was the same ‘greater transparency’ that was being asked for by some of the publishers in the room. In fact, I suspect that most of the publishers think of different things when they talk about ‘transparency’.

As Jeff reports, there was more talk of ‘transparency’ in Davos.

[And if you haven't read Alan's description of the same event - you should]

So – to be clear. I’d like to outline the kind of ‘transparency’ I’d like to see from Google.

Drummond said – as Google execs repeatedly say to anyone who asks that no money is made from searches on news content. This is always given as a blanket statement – and we just have to accept it.

Based on this statement, the idea of any ‘fair share’ of revenue for indexing our content is dismissed.

My hunch is that is true, although of course Google’s idea of ‘no money’ is probably not the same as most newspapers’ idea of ‘no money’.

But, what if this changes? What if, over time, in a world long after David, Larry, Sergey and Eric have all moved on, suddenly things change and the money starts to roll in on these searches. Or what if the profile of our content changes over time resulting in a dramatic increase in value. How would we even know?

So here is the transparency I would like.

• I’d like to know how often our content appears in Google searches (say in first three results, first page and first three pages)
• I’d like to know the revenue that was generated for Google from those searches
• I’d like a constantly updated view of the search terms that our content appears against the current cost-per-click of those search words.

Yes, I know – there are intermediaries and SEO specialists who will provide this for you, but frankly, the world would be a lot clearer and more transparent a place if Google provided this information for us. Continuously via a dashboard, please.

Too complex? Surely not for a company that lives on data and is mapping the ocean floor.

I dont’ ask to see it for other media owners. Just us. And we should be free to share it, or keep it secret as we see fit.

I also don’t particularly want our AdSense revenues ‘transparently shared’ with the rest of the market (and from working with Google over the years, I suspect Tom Foremski has slightly misread the smoke signals on this one). AdSense revenues are hard fought for – contractually, and in terms of implementation.

Is that too much to ask?

Perhaps Bing might like to do it first to get the ball rolling.

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• Google news – First, the news: Google told me today … (Jeff Jarvis/BuzzMachine) (techmeme.com)
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• Google’s Drummond explains why search engine pulled out of China (guardian.co.uk)

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I’m very tempted to buy a Kodak Slice when they come onto the market in April (despite a self-inflicted ‘Gadget ban’). Looks like a great ’social’ camera, and a great way to take the next 5,000 pics of the children; and I’m always keen to do my bit to help Kodak on their road to recovery.

I’m writing a fair chunk in the book about Kodak and their journey since their print business crashed about them. Since their refinancing by KKR over the summer, they’re at least on a more stable footing – but the downturn hasn’t been kind to them. They’ll give their full year figures in a week’s time – but Q3 revenues were down 26% year on year, and they losing money.

One of the things I wanted to know is what could they have done differently. It is – as the slideshow above points out – a completely academic question. It is no use for Kodak, but it is a valid exercise if, knowing what we know now ,there are lessons there for other businesses.

In Jeff’s book What Would Google Do? He takes a leaf from Theodore Levitt’s 1964 classic, Marketing Myopia, , and encourages businesses to ask what business there in. Then he looks at Kodak and  says

Kodak is a classic case of a company said to be making the transition from atoms to bits – physical film to digital services. If it had realised soon enough that it was in the image and memories business – if it hadn’t defined itself by the atoms it pushed and processed – it should have beaten Yahoo to the punch and bought the photo and community service Flickr. When I think of pictures today, the first brand that comes to my mind is Flickr…Who now thinks of Kodak…? No one.

If only it had been that simple for Kodak.

Yahoo bought Flickr in May 2005. By that stage Kodak was already all too aware that it had moved on from the world of selling boxes of film to a world of images, memories and much more. In fact, the opening sentence for Kodak’s 2004 annual report, for example, is

‘Eastman Kodak is the leader in helping people take, share, print and view images – for memories, for information, for entertainment. The company is committed to a digitally oriented growth strategy….’

In other words, they had – conceptually at least – moved on from being defined by their primary means of distribution (film). In fact, Kodak was pushing itself as a broader imaging business for years before that. It had already bought an early version of Flickr, Ofoto way back in 2001 (three years before Flickr was launched) and turned it into the (admittedly not as good as Flickr) Kodak Gallery.

If Kodak had been smart enough to buy Flickr (and if the owners had wanted to sell to them), and had they managed not to ruin it, it would have been a great little asset for them.  Under a CMO such as Jeff Hayzlett who is genuinely committed to social media, it might have acted, as Jeff (Jarvis)  suggests, as a smart piece of branding. But it would have been no more than that. A Band-Aid for a broken leg.

There problems were much deeper than that. To list but a few

• They were distracted by a ferocious price war with Fuji in the late 90s

• They were petrified of cannibalising their film business with digital (further compounding the impact of the Fuji price war)

• They massively underestimated how quickly consumers would ditch film

• Decades of comparable success had made them fat and way, way too happy with themselves

A few months ago, I asked this question to  the my favourite Swedish PhD student, Christian Sandstrom who has made something of a speciality of creating fabulous Slideshare presentations on the changes in the photographic industry. He responded quickly, but I never posted it here. You can see his answer above.

Here’s the quick summary

• Over aggressive diversification left them burdened with debt and in a weak financial state for dealing with the Fuji price war.
• They put too much focus on ‘hybrid’ solutions – using digital as a way to sell print (eg the Photo CD system)

The first point is an interesting one, because without the diversification – or at least without some of the better bits of it – they wouldn’t really have much of a business.

The second one is something that really strikes you when you look at their first wave of ‘digital’ innovations all started from the premise that people would buy film – and then have the prints digitised.

They developed a future in the shape of the past.

Even though they talked about being in imaging and memories – their financial base was still in film, and even though they could move conceptually, they could see no way to move economically (and I suspect that many of us sitting around the Kodak board table at the time would have come to similar conclusions).

It seems like an obvious mistake, but I stumbled across a piece in Fortune in 1997 (What’s Ailing Kodak?) about the price war with Fuji talked in the final paragraph about  ”the danger–still much in dispute–that film sales will soften as digital cameras made by companies like Sony, Canon, and Casio take up a bigger share of the market” (my emphasis).

Still much in dispute? In other words – way back then, the disruptive power of the digital world was still very much in question.

Now we know differently.

So what do we learn from this?

• There are rarely simple solutions to profound structural problems
• Short term competitive pressures can’t be ignored, but nor can they be allowed to obscure long term strategic challenges
• Redefining ‘what business your in’, only works if it is credible financially, as well as conceptually
• Beware hybrid solutions that reframe disruptive forces as growth opportunities – they are often too good to be true

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Global digital music trade revenues reach US$4.2 billion, up 12% in 2009.

400 services licensed worldwide by music companies with ISPs, mobile and other partners.

New figures show local music collapsing in major markets as piracy bites into releases, sales and investment in France, Spain and Brazil

via RESOURCES – IFPI publishes Digital Music Report 2010.

Total music sales down by 30% between 2004 – 09 (ouch), CDs still accuunt for 73% of the market value.

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Good roundup piece on Blockbuster in the Dallas Observer featuring a bit of an interview with CEO Jim Keyes.

Some of his quotes.

On store closures

Retail chains are like trees. They get dead limbs, and you have to prune them. And sometimes you have to aggressively take off the lower limbs for the tree to grow high. When we cut off a limb, there’s a perception we’re going out of business, when, in fact, we’re keeping up with the changing needs of the customers.”

On their ‘recovery’

Blockbuster, Keyes says, “is a football team that’s rebuilding. At first, the press is all over you. They’re gonna hammer you, tell you you’re dead, you’ll never be as good as you were. Meanwhile, you’re slowly building positions with strong players, and in three years you’ve got a winning team.”

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In an attempt to focus, I’m saying nothing here or elsewhere as I try to get the book finished for the end of November.

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I spent the last few days of last week at WPP’s really quite brilliant Stream 09 ‘unconference’. Last year, I did a ‘OMG, The Internet Ate My Business’ session that was really the kick off for this book (progress update: too slow, thank you for asking). This year, I was more in receive mode. And there was a lot to take in.

The one session that everyone goes to is (Sir) Martin Sorrell’s state of the nation address: an off the cuff. The juicier bits of which were covered here by the Telegraph.

Having now listened to a couple of these, the most interesting dimension for me – is not the latest letter to describe the shape of the recession (L.U.V- if you’re interested), nor the pronouncements on the fate of the media industry, but the way that WPP has evolved over the years.

This year as last, he pointed to three growth trends that are dictating WPP’s direction as a group.

- The growth of the BRIC economies and ‘the next 11′

- The internet, now 25% of revenues and growing (including mobile)

- Consumer insight – which now accounts for 40% of revenues (more than advertising).

[I should add that the one different focal point this year was on the need to 'improve the way we do things' - ie focussing on efficiencies in processes, working across the group. In other words: short term need to keep cost down]

The precise details of each of these is not as important as the overall implication. Following these trends the group shifts from being a UK/ US advertising group into something completely different all together.

Following these three trends has meant change at all levels – from major acquisitions (eg TNS), to organisational change within operational business (eg Mediacom), to edge innovations and investments (eg the stakes taken in a number of start ups by WPP Digital).

As I’ve been putting the book together, a real gulf has appeared between companies/ groups who operate like this, constantly evolving and seeking out growth areas – the standard practice in say, the technology sector; and those who remain in one sector and in one country – which has been the standard practice in much of the media industry. Certainly among those who currently find themselves most troubled.

Some of this is down to public ownership. Investors prefer a public business to do one thing well. And to get bigger and better at it. You don’t get to diversify – because, they will argue they’d rather find a business that excels in a new sector, rather than fund your foray into it. The problem, of course, is that when that one thing you do really well stops delivering the returns it once did – you have nowhere to hide; and investors will leave you like so many liggers scuttling away from a party once the free booze runs out.

The problem is that in this workd, there are very few businesses that can just stand still in this way. They need to be able to evolve – to move into adjacencies, to nudge step-by-step away from the core business before it implodes.

My McKinsey-bred colleagues call this ‘classic S-curve thinking’. Yes, in some sectors it is classic. In others, however, it remains rocket science of the highest order.

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I’ve spent a lot of time this week digging up the history of Lou Gerstner’s turnaround at IBM.

The move from mainframe to PC is pretty much the definitive technical disruption – and the fact that IBM exists at all is pretty remarkable if you consier the state it was in back in 1993, when it declared the biggest loss in US corporate history ($8bn – which is admittedly rather tiddly by recent standards).

The shorthand version is, of course, that he found a mainframe business, and created a services business. Ta Da. Looking at the process in more detail, however

First of all, he invested in the mainframe

Everyone said the mainframe was dead and the PC was taking over. It was true, IBM had completely underestimated how important the PC was, but Gerstner saw there was life in the mainframe business yet. In his first couple of weeks, he agreed to invest $1bn to revamp the mainframe technically, which allowed them to sell them at a massively reduced price. ‘This decision saved IBM’ he later said.

The year of biggest loss, was a great year for patents

In 1993, as well as that $8bn loss, they also were awarded more patents than any other business in the US. The first time a US company had done that in ages. There was no shortage of smart people and innovation there; but it wasn’t enough.

Anything but a vision

Gerstner famously said of his turnaround “The last thing IBM needs right now is a vision”, pointing out that the business had draws full vision statements but needed decisions and execution.

The services business started inside the sales business – and they scrapped

The services business was teeny when he joined. You would normally set it up as its own business. Initially he put it inside the sales organisation, and as it was the role of the services business to recommend ‘competitors’ products, the sales team weren’t entirely happy (that is a euphemism, I suspect). It was only when the services business reached a certain scale that it became its own division.

He ‘did what he did best and linked to the rest’

They decided to get out of the business applications business (proprietary business software running on their machines) as all it was doing was making them enemies with often superior software providers. Instead they went into partnership with the likes of Siebel etc.

He invested in the brand

When he took over, IBM had 70 ad agencies in the US alone. He consolidated everything into Ogilvy, and started to celebrate the IBM brand.

There’s a whole host of good stuff in this story – and plenty of echoes with some of the other businesses I’ve looked at (especially HMV, rather strangely).

Then again – maybe I’ve got it all wrong. If so – please feel free to put me right.

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Image via Wikipedia

HMV Group is one of the businesses I’m focussing on in the book. A few years ago, I thought there were destined for nothing but failure, a traditional business that had simply failed to make the leap into the 21st century.

They faced a perfect storm of Amazon; Apple; illegal downloading; and supermarkets selling books, CDs and DVDs at cheaper than cheap prices. You could forgive them for going the same way Tower Records had gone before them.

A friend in retail, however, told me when Simon Fox took over that he was a class act, and I shouldn’t dismiss them quite yet. And sure enough, he was right – to the point that Fox of course was said to be top of the list to transform that other digitally challenged UK institution: ITV. In the end, to HMV’s good fortune (and I suspect to his as well) he decided to stay.

Waterstones is still a long way from out of trouble – despite store closures and the savings from the launch of their distribution hub, like-for-likes continue to fall. But the transformation at the HMV business (where Fox is managing director in addition to his Group CEO role) is genuinely impressive.

The lesson here is that the real transformation was achieved by sorting out the core, traditional business. New mix of products (including Apple stuff and iPod accessories – Apple previously wasn’t allowed in the store, because it was seen as the enemy), and a focus on smarter promotion and presentation have all helped.

With that underway, and with financial targets being met, it allows them to expand into new areas, and develop their online business at a more reasonable pace.

The joint venture with Mama Group; the launch of digital cinemas in store in partnership with Curzon; and pushing Sony e-readers at Waterstones – all of these provide a good narrative and glimmers of future growth, but won’t be making a meaningful contribution to the bottom line in the near future.

I doubt they  not going to meaningfully challenge either Apple or Amazon in the online space. In fact, they still have their work cut out to take on Play.com, but the mix of a strong high street presence (at their core, HMV has always been a really well run retailer), a decent online offering and diversification into live music – helped by the decline of Woolworths and Zavvi is a pretty healthy platform for the future.

Today’s news that they’ve bought 50% of 7digital is another nudge in the right direction. A relatively small deal (£7.7m) that will give them a more meaningful digital footprint, and will bring some serious digital expertise into the business. The only thing I’m surprised about is that is that they’ve only bought half the business (not to mention a trading relationship with Spotify).

Why not go the whole hog, I wonder? Or was it just that the VC’s wanted out and everyone else wanted to stay in?

The heft of the still very credible HMV brand is also just what 7 needs if it wants to raise its game. Frankly, in this market, the chances of them creating a viable consumer brand is pretty minimal (they haven’t done it so far), better to team up with someone who already has one.

But, to go back to my point about the importance of the core business – this deal would be largely irrelevant if it wasn’t for the other announcement today that HMV UK like-for-like sales are up 1.7%, with total sales up 12.9% thanks to the integration of the stores they acquired from Zavvi.

They aren’t truly out of the water yet. Given the market the fact that they are high street retailers in a world that is ever faster becoming online and digital, you suspect they never really will be. The fact that their share price is down by 13% this year, despite everyone widely acknowledging that Fox has done an excellent transformation job shows the market is still luke warm about prospects for genuine growth. But, right now, things could be a lot, lot worse for them.

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If there is one lesson to be learned from the DVD rental market – it is to be very careful about your predictions.

Way back in 2001 when I was briefly at INSEAD, Blockbuster was already a case history in how a sector will be disrupted. The narrative, of course, was that it would be nailed by Video On Demand etc.

What no clever clogs at business school of course anticipated was that an entrepreneur Reed Hastings would one day get a $50 fine for taking back Apollo 13, and realise there had to be a better way of doing things. The result, of course was Netflix; and in Europe, the myriad of start ups that now operate under the LoveFilm banner.

What could threaten these businesses? Well the logical narrative, of course, is downloads and streaming – digital distribution. And yes, it’s coming. Or perhaps another disruptive innnovation from a hot shot entrepreneur like Hastings.

Errr no – it’s a vending machine that originally (I think) came from some R&D work at McDonalds…(yes, McDonalds) and run by a vending machine company – Redbox.

The business says ‘no thanks’ to the long tail. And a big ‘hasta la vista’ to the online world – and instead offers top titles for $1 rentals.

The truth is – new entrants and entrepreneurs shape markets – not just technology.

Great write up on Redbox/Netflix here on CNN Money (with a Reed Hastings video interview also embedded).

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