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Stores and Magazines

The 4 basic types of business, and how to make the shift into the new economy.

Part 1. The Four basic types of business.

There are two types of business that interact with consumers directly - stores and magazines.

Stores sell things to people.

Magazines sell people to stores.

A store collects goods and services and sells them to people.

A magazine collects readers and sells access to them to the stores.

It's a nice, neat little ecosystem - people want information or entertainment so they read magazines. Stores then buy ads in the magazines to show them what is available to buy. People go to the stores to buy the goods they saw in the magazine.

There are two types of business that sell to stores and magazines - suppliers and agencies.

Suppliers sell things to stores.

Agencies sell services to other businesses.

A supplier sells products to the stores, which the stores in turn, sell to consumers. There's a whole supply chain feeding this mechanism that includes everything from farmers and miners to truckers and warehouses.

An agency sells expert services to other businesses. Whenever a business needs to accomplish something that's outside of its core expertise, they'll hire an agency to help them. For example, a store is expert at selling goods to consumers, but not expert at advertising them in magazines, so a store will hire an advertising agency to create an ad to put in the magazine.

These are the four basic types of business.

Part 2. The two revolutions and how they changed business. There are two revolutions that changed the way mankind interacts with the world.

The agricultural revolution created a leisure class that was free to create art, literature, and philosophy. Mankind had tamed the elements to create a simple, cheap, and sustainable way of putting food on the table. You may think of farming, especially before the modern age, as being something very labor intensive - and it is, but it's labor by a few people to feed many. Prior to farming, it was the ongoing labor of many that fed many.

This shift created a leisure class that was free to create other kinds of things people would want to consume. Because work was no longer equally shared, a monetary system had to be created so that you could compare the value of farm fresh eggs to clothes, tools, or works of art.

The industrial revolution further freed mankind by making the production of foods and goods even simpler. Fossil fuels replaced muscle power and by further taming the elements, we made all the thing that were once expensive, very cheap, and we did it in an unsustainable way. Farming took nothing from the environment that it could not put back, however there are a limited amount of fossil fuels in the world.

This shift turned everyone in the Western World into someone with enough free time on their hands to read books, watch TV, and consume the goods created by a small army of laborers in the third world. The supply chain became so efficient that cotton could be grown in Texas, sent to China to be turned into fabric, sent to Indonesia to be turned into shirts, and then sent to New York to be sold to us for $15. All of that travel just to find the cheapest labor. Travel used to be a very difficult and expensive endeavor, and it made sense to produce thing locally because to import them was a luxury. Travel became cheap, so we outsourced production to wherever was the cheapest.

This is a very untenable position. Not only are fossil fuels in severely limited supply, but the previous model - small, sustainable pockets of humanity - has been replaced by a single, large supply chain. If one element of the supply chain breaks - such as salmonella poisoning in a spinach factory - it affects everyone that consumes products from that supply chain.

This created mega corporations that ruled over, not just a small group of people, but over the entire world. Anywhere you go in the industrialized world you can find the same magazines and the same stores, all fed by the same global supply chain.

Part 3. Information wants to be free.

On the one hand information wants to be expensive, because it's so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time.
- Stewart Brand

There is a third revolution going on now - the information revolution. The digital era has done for information what the agricultural revolution did for food, and what the industrial revolution did for travel and manufacture - made it incredibly cheap. What was previously sold as physical goods, is now being sold increasingly as digital downloads - music, books, movies - if they're being sold at all, increasingly people are downloading their music & movies for free.

The agricultural revolution forced some people to do the demanding work of farming so that others could create art and share information. The industrial revolution took art and information and turned it into a commodity, to be sold to the masses in the form of books and records. The information revolution is taking that commodity and turning it into something free, once again.

Ancient man didn't pay for entertainment and information - they created and shared it amongst themselves. Banging on a drum, singing, dancing - these were things everyone participated in to celebrate the end of a long day's labor hunting and gathering. The information age signals a return to our roots - I entertain you, you entertain me. No man stands between us to collect a fee for it.

The industrial revolution and its cheap transportation sent local jobs far away - farms and factories closed down. People protested, but commerce turned a deaf ear to them. For 100 years from 1850 to 1950 manufacturing brought up the standard of living of all Americans, and now that our standard of living is among the best in the world, manufacturing is taking the cheap transportation and raising the standard of living elsewhere.

This process is now happening in reverse to the entertainment industry. Companies sought cheaper alternatives to expensive labor, and now consumers are seeking cheaper alternatives to expensive entertainment.

Record labels, magazines, newspapers - anyone who sold information as a physical product is being threatened by this new world economy, and the message is clear - adapt or die. Even the television networks that give their product to consumers for free (in exchange for selling those consumers to advertisers) are suffering. In an age where information is everywhere, and is becoming increasingly less expensive, just giving it away for free is no longer good enough. What do you do in a world where free isn't good enough?

What I called "stores" in the previous model has been split into two - old, traditional stores that sold physical goods & services, and modern media companies that attempt to sell information - something that can be downloaded. Also, with advertising money drying up, magazines are pursuing a media strategy - focusing on making money from subscriptions rather than from advertisements. Media companies are a store-magazine hybrid. They sell information to consumers and need to find a way to compete with the increasing availability of free information.

Part 4. Adapting to business in the information age.

Clayton Christensen in his book The Innovator's Dilemma explained how large, monolithic businesses were displaced by smaller new businesses that they didn't see as a threat because they served a niche the larger business didn't want to serve. He calls for a paradigm shift in how businesses perceive themselves. The railroads, he says, died at the hands of the airlines because they thought they were in the railroad business, but really they were in the transportation business. There's no reason the railroad magnates, with all their wealth, couldn't start their own airlines, or buy into existing airline businesses.

So what business are the media companies in that they're just not realizing? I talked to someone recently who works for a major book distributor. They're threatened by the Kindle and desperately trying to figure out what their digital strategy ought to be.

They have an advertising branch in New York City that takes up two floors of a high-rise office building, a technology branch in New Jersey with giant rooms full of servers and programmers, and a distribution branch on Pennsylvania capable of shipping hundreds of thousands of items directly to consumers every month.

They're threatened by Kindle and Nook - the whole world is going digital, and a viable digital strategy has been created - control the media device and make purchasing decisions so simple that they're basically pain free to the consumer. So how do they catch up to Kindle? Can they partner with Kindle?

A digital strategy is essential for media companies, and the way I see it, there's three possible ways for them to move forward.

1. Sell physical goods that aren't media.

They believe their strength is in selling books to people, but a digital strategy ignores one third of their operation - distribution. If they were willing to drop the word 'book' from their vocabulary their strengths become clear - they can sell things to people, and they can ship things to people. They're not in the book-selling-and-distributing business, they're in the selling and distributing business.

2. Create original content that is so valuable, that people are willing to pay for it.

Avatar was a huge blockbuster hit because it gave audiences a new and exciting experience that they couldn't get at home. The Avatar DVD and Blu-Ray will sell well because they offer an experience at home that you can't get on the internet, at least not easily. A digital song compresses into the space of about 3 megabytes. A movie like Avatar - to get the full visual HD experience - will be closer to 10 gigabytes. At this point in time, downloading and storing 10 gigabytes of information is still a somewhat expensive proposition and then you need a computer powerful enough to decode all that information. People are willing to spend the money on a physical disc because they're valuable enough.

3. Control the distribution channel.

Apple pursued this strategy successfully with the iPhone. People paid for apps because the phone itself had value and the apps added value to the phone. Kindle pursues the same strategy - the Kindle itself has value as an eBook reader, and the ability to pay for and download a book in moments adds enough value that people are willing to pay for it. eBook readers are relatively new on the market (Sony's eBook reader was around for years before the Kindle, but hadn't gained much market share because distribution of eBooks on the internet is so poor).

These three strategies can be summed up as 1. Become a store that sells physical goods. 2. Become a better media company. 3. Change the playing field.

And what of the magazines, newspapers and television stations?

Increasingly, they're also switching to a Media model - charging their customers for content rather than charging advertisers for access to customers. An April 2009 article in the New York Times talks about how magazines are raising their subscription prices [link]. Previously, they lowered their subscription prices to gain a large readership, which they used to entice advertisers. Now, however, they're looking at raising their subscription price and using that as a primary source of income. In the face of declining newsstand sales [link] they're beginning to look at maximizing subscriber value, and that's a very different proposition.

If you were charging $10 per year to each subscriber ($1 per issue), 10,000 subscribers would get you $100,000. If you raise the price to $100 per year ($10 per issue), how many subscribers could you lose and still get $100,000? The answer is 90% - you only need 1,000 subscribers at $100 each to make $100,000. If you lose less than 90% of your subscribers, then you're making more money.

Whether or not it's enough to make up for the loss of much of their advertising budget remains to be seen, though I would argue that their readership is even more valuable to advertisers, because they've demonstrated that they're willing to spend money on the things they like. The financial news and analysis magazine The Economist charges $100 per year to subscribers, and subscriptions are up 60% since 2004.

In many ways, this is the cable television model. Networks such as HBO and Showtime produce programming that their audience is willing to pay for, which allows them to produce daring shows, such as Weeds, about a single mom who turns to selling pot to make ends meet, or the show Breaking Bad which takes the formula one step further - the main character makes crystal meth.

These should would never be allowed on network TV because of their controversial nature - advertisers wouldn't touch it with a ten foot pole. Which is precisely why people are willing to pay for it. This is the kind of programming you can't get elsewhere. It's almost a movie model, but brought into your home in weekly installments.

If your model was gaining readership in order to sell advertising, and that model no longer works, you have to think long & hard about what sort of value you're adding to your readers. What are you giving them that they can't get for free somewhere else - and then do that, and do it well. Then you may want to consider charging your customers for your service.

Part 5. A digital future for physical products.

The digital world is transforming physical goods as well. If the digital world has taken books, music, and movies and taken the "data" out of the physical product, it's also taking physical goods and making the "data" much more easily replicated on a local level.

In centuries past, furniture was made by artisans who went through an apprenticeship program and each developed their own style. Today, furniture is mass produced according to a plan - and that plan has been digitized.

The cleanest example of this is flat-pack furniture that's made from a single piece of wood that is machine cut to exacting standards. If a human is involved at all, it's to sand out the rough edges. These are then fit together like a three-dimensional jigsaw, sometimes with metal connectors such as brackets or screws.

IKEA made this business model famous, and I admit I have some IKEA furniture in my apartment - none of it is quality, but that doesn't meant the method itself can only produce inexpensive pressboard furniture. Starting with quality wood and by using solid design principles it is possible to create furniture that has form, function, and endurance.

One such company is EcoSystems. Their basic business model is creating furniture, and then sending the design to local companies to be replicated using locally sourced FSC certified flat-pack wood. The important piece of the puzzle is separating out the design from manufacturing. Modern technology allows them to email their designs across the world so that any factory with the appropriate machinery can take a standardized piece of wood and build their furniture.

This means each region's furniture will be unique because the wood they use will be locally sourced, but the design - as Aristotle may have said "the chairness" - is intact. It also means that to get a bit of furniture from EcoSystems, they don't have to worry about the logistics of shipping worldwide, and everyone breathes a little easier knowing that the carbon cost is lower than if things had been centralized.

Part 6. Making the shift.

Whenever a new technology comes along, businesses either adapt or they die. eBook readers have been out for years, as has been cell phone technology. It took Amazon to combine the two and create the Kindle. The time between seeing an innovative technology, and seeing it in consumer products is decreasing. Yesterday's tech demo is tomorrow's million dollar product.

In such an environment, you must be prepared to constantly re-evaluate your strategy in order to stay in step with the competition. You must constantly ask yourself how you add value to your customer base, and how you can add a value that is unique enough that you've truly differentiated yourself in a way that makes it worth not just your customer's money, but in today's fast-paced society, also their time, to stay in touch with you.

You must be willing to re-evaluate what your core business model actually is, and decide whether a shift to a store, media or magazine model is appropriate for you. This doesn't mean abandoning what came before - frequently two or more models can (and I hate to use this 90's buzzword in the year 2010) synergize nicely.

A magazine that caters to a specific niche can open up a store to sell the goods it discusses, or you can increase the cost of a subscription so that they directly (and not just the advertisers) are supporting your business. A physical store can launch a magazine to promote itself, or offer courses in whatever it sells as part of a media package.

Whenever you see a game changing technology that affects your business, be prepared to re-evaluate your strategy in light of this technology and ask yourself whether you can use it to make a shift into one of the two other primary consumer-facing business areas, or even into the supply chain or agency models. Amazon has replaced the old supply chain of mailing books printed on paper to ebooks downloaded through the cell phone network.

The lesson is clear - be flexible or die.

May 13, 2010

© Mark Wieczorek