Monday, March 30, 2009

Early Indications March 2009: A Disruption Scorecard

With the newspaper business in apparent freefall, it's perhaps useful to tally up some of the various winners and losers among the incumbent business models as compared to 1994, the year the commercial web began to take off. It appears that there are multiple ways to be disrupted, that some industries are far better off than they were 15 years ago, and that there may be more dominos yet to fall. In roughly reverse chronological order, here's one judge's scorecard.

Industry: Newpapers
Status relative to 1994: Critically ill
Primary disruption: Unbundling

Compared to old-school stockbrokers, who were disintermediated by $10 trades, newspapers have been undone in other ways. The power of the traditional newspaper was its bundling, in economic terms, along two axes. First, subscriptions bundle content by time: readers pay for delivery of papers that don't always get read thoroughly for the sake of convenience. In addition, a daily paper contains content that a given reader ignores: look at how many hundreds of pages of a 1990s Sunday New York Times were thrown away untouched. This daily bundling allowed profitable sections (such as food/cooking, with grocery store ads) to subsidize other efforts, such as foreign news bureaus, which could not afford to pay their own freight.

Many of these facets of a newspaper have been separated out by standalone web businesses, each taking some segment of the readership and unbalancing the former cross-subsidies. Sports readers can go to the league sites (with heavy video footage), television spinouts from Fox/ESPN/CNN+Sports Illustrated, fan-driven blogs and/or message board efforts, or to any number of sites updating them on favorite cricket, soccer, or other international sports the metro dailies can barely cover, if at all. News is still primarily gathered by the usual suspects, but commented on, linked to, and re-aggregated by everyone from Google News to bloggers to ideology-driven destination sites. Daily A-Z stock charts aren't a particularly helpful way to watch the financial world, opening the door to broad distribution of previously professional-grade charting, archiving, and analytics; less professional message boards, blogs, and other mechanisms spread the wisdom (or lack thereof) of crowds.

The papers' extremely profitable classified ads were hit hard by multiple competitors. eBay then later Craigslist took over the realm of random objects, Monster and others (including the hiring firms directly) redefined the help-wanted field, and Edmunds and along with eBay Motors improved on the car-buying experience by improving information availability and transparency. and eHarmony improved on the user experience and inventory levels of the personal ads, while real estate agents alone and in their trade association aggregated and augmented millions of property ads with photos, maps, and video walk-throughs.

In the end, most any page of a 1990s-era newspaper was challenged by an online outlet. With the readership in decline, both ad and subscription revenue spiraled downward, and the splintered nature of the competition made coordinated response impossible. In addition, the culture of "free" has affected news nearly as much as music, but far less so than books, for example. Some observers, including The Economist, have speculated that a Kindle or other reader might play a part in a revitalized news distribution business model. This makes sense: books, newspapers, and magazines emerged as business opportunities following a technology disruption, so changing the technology implies change for both reading habits and business-building.

The advertising industry has been fundamentally challenged by targeted, interactive, and well-instrumented ads and all they imply. If e-readers do reinvigorate the news business, this sector will need to move sure-footedly to regain much of the ground it has lost to Google in the past few years. While the movement away from traditional print models is highly visible, YouTube and the phenomenal rise of Internet video will also force a reshaping of television's economics.

Industry: Telecom
Status relative to 1994: Reinventing
Primary disruption: New technology platforms

The telecom industry is in the middle of a fascinating process. Back in the mid-1990s, the MIT Media Lab's Nicholas Negroponte noticed that television was moving from airwaves to cable while voice telephony was going in the opposite direction. Now, the triad of video, voice, and data is increasingly defined simply as flavors of data, and data is moving over copper, ether, and glass: what I want how I want it at any given time. The legacy telecom business model is at once getting substantial lift from the optical and wireless pieces of the picture even as the copper segments are in steep decline from wireline voice defection to VoIP or raising big questions about the need for their eventual and massive (if not total) replacement by fiber to the premise. In the current economic climate, both communications and entertainment appear to be relatively resistant to recession. In the long term, though, the huge capitalization requirements of both the strung infrastructure and the hung infrastructure, particularly in multi-billion-dollar spectrum licenses, leave ample leeway for companies or even entire sectors to get themselves in deep trouble.

Industry: Enterprise computing
Status relative to 1994: Leaner and more concentrated
Primary disruption: Offshore, network computing

In 1994, Sun Microsystems stock traded at about $3.50 a share. Six years and four 2:1 splits later, it capped out at just under $250, a tidy 1,000-fold payback. Consulting plays with invented names like Viant, Razorfish, and Lante sprouted, grew like weeds, and died. Software firms enjoyed a similar burst of prosperity: a 1994 Oracle investment increased by a factor of about 150 in 6 years, while investors everywhere vied to spot "the next Microsoft."

That progress was slowed by a confluence of headwinds, several of them directly related to Internet business model disruption. Offshore programming firms in India built on their success in year 2000 code remediation to slice margins in systems integration and later outsourcing. Virtualization and so-called cloud computing are subjecting both software and hardware to commoditization tendencies. Finally, budget pressure on CIOs introduces cost constraints and further profit pressure for software, hardware, and services.

The recipe for success going forward appears to lie in some combination of low-cost human capital (Tata, Wipro, IBM), scale (Oracle, SAP, IBM), and integration of product and service at scale (HP, IBM). Such firms as SAP and IBM have invested heavily in vertical industry expertise. Going forward, it's possible that the horizontal attack of in software and the twin forces of reduced energy consumption and commodity computing (in turn applied to standardized process and data structures) could potentially combine to lower the verticalization premium.

Insurgencies -- that benefit from the combination of alternative economics and smaller labor costs -- from Google and Amazon appear to be gaining force, leaving Microsoft in particular at a crucial juncture. Dell also confronts some formidable challenges: even as the shift from desktops to laptops diminishes the power of the build-to-order model, it faces off against a reinvigorated HP, the premium-priced consumer electronics and design expertise of Apple, and the diffuse forces of clouds. For all that Dell gained from the Internet in implementing its direct model, between iTunes, consumer message boards, and cloud computing, forces related to the Net are now also causing headaches.

Industry: Music
Status relative to 1994: An empty whiteboard
Primary disruption: Unbundling, cultural norms

Much like newspapers, the music industry has been forced to adapt to the digitization and subsequent liberation of its core information product. Once music stopped being a physical artifact and instead was moved, understood, and redeployed as a fungible bit-based resource, the old model's market characteristics failed. The pricing model, the sales channel, the promotion vehicles, and the margin structure all fell apart. Selling people one song for the price of 12, trying to fight the long tail, and relying on a radio industry itself in turmoil for airplay no longer worked. Perhaps more centrally, expecting to maintain traditional "Hollywood accounting" when people's allegiances, to the extent they had any, lay with the artist spelled further doom for the old music model.

That said, both newspapers and music face parallel challenges insofar as large numbers of people now value their offerings at or near zero. Suing customers or nearby victims failed to reverse the trend and increased people's already negative feelings toward the labels. Radiohead's "name your price" downloads worked because of the gestalt of the band and its fan base; the model is unlikely to be widely implemented. Potentially in part because so much listening is done in private through earbuds, it's easy to view music behaviors as invisible and personal rather than public or accountable -- and the old economics of artists being so widely ripped off don't help the morality of the labels' positioning.

Going forward, models that more directly connect artists and labels hold promise, so maybe the final diagnosis will be disintermediation of the labels by word of mouth, hard-core touring, and/or some new discovery mechanism.

Industry: Brokerage/travel
Status relative to 2004: Transformed
Primary disruption: Disintermediation, transparency, self-service

Unlike the businesses above, both travel and brokerage served as early case studies of middlemen who charged too much for too little value getting end-run. In both cases, the dominant providers have had to reinvent their core business to survive and when they did not, the industry consolidated. Carlson Wagonlit presents one example: rather than relying on ticket-printing fees, the firm manages corporate travel spending as a coordinated service. By contrast, Rosenbluth, a competitor, was bought by American Express in 2003, and American Express in turn manages travel within a much broader set of procurement management offerings.

In brokerage, Merrill Lynch never fully adjusted to online trading and its attendant customer mindset, cost structures, and competitive landscape. For a multitude of reasons, it was bought last year. An element of unbundling also played out here and in travel: expensive transactions included advice, whether it was needed, or qualified, or not. Once the core transaction was laid bare, the advisory component failed to commend its previously overpriced premium.

In contrast, crowds, whether of investors, ecotourists, or frequent business travelers, combined to offer more and more powerful research than had been available previously. Whether of the up-to-the-minute (is the flight late?) or in the realm of long-term trends (how will India's equities markets perform in 2010?), the Net contains more and often better advice -- along with substantial noise -- than any one person could acquire, organize, or dispense. The combination of do-it-yourself research and serve-it-yourself transactions is now so deeply ingrained it's impossible to envision going back at any scale for routine interactions.

Who's next?
The bell has tolled for several old business models. Who's on the watch list? Briefly, some combination of disintermediation, unbundling, transparency, and consumer affection for free stuff could pose dangers for industries as varied as retail, television/media, pharmaceuticals, education, health care, retail banking, and automotive (which has already been hit pretty hard). Other sectors have less to worry about: e-government is increasing efficiency in some functions in some places, but entrenched ways of doing things persist more here than perhaps anywhere else, in part because of the lack of competition.

Construction, energy, and agriculture are powerful and so intensely tangible that it's hard to see digital disruption in the near term. In part, this security relates to successful defensive positioning: monitoring my home's energy usage on an hourly basis is trivial from a computational standpoint, but impossible because the electric company so jealously hoards the data. The consumer products sector has lots to worry about right now, beginning with double-digit unemployment, but the business model looks secure for the medium term.

Finally, it would be inaccurate to focus only on the losses to the forces of business model disruption. Whether it's Apple's rebirth (largely at Sony's expense) as a consumer electronics power, or Amazon's continuing resistance to any conventional sector categorization, or the unrelenting adoption of mobile phones by the world's masses, disruption also carries with it upside potential. As the global recession gives way to new varieties of prosperity, who will capitalize on the wealth of opportunity and be the success stories of 2012, or 2020?