Spring 2006

Can the Newspaper Industry Stare Disruption in the Face?

‘Lessons learned from past failures can help to ensure future triumphs.’

By Scott D. Anthony and Clark G. Gilbert

These are scary times for newspaper veterans. Hardly a day goes by without news about disappearing readers, shrinking revenues, declining stock prices, or looming layoffs. Tellingly, these editors and writers are just as likely to come across this news in a blog or hear it through a podcast as they are to read it in their local newspaper.

The newspaper industry is going through what we call a "disruptive" change, a phenomenon that has transformed industries such as retailing, computing, airlines and automobiles. The bad news is that when the dust of disruptive change settles, historically even the best-run companies typically end up in the loser's column. In the computing industry, for example, Digital Equipment Corporation missed the personal computer (P.C.) in the early 1980's, started to fall apart in the early 1990's, and got acquired by Compaq in 1998. Dell Computer's low-cost business model destroyed Compaq, forcing a merger with Hewlett-Packard (H.P.) in 2001. Dell's continued incursion into the P.C. and printing office now threatens H.P., which announced more than 10,000 layoffs last year in an effort to remain competitive.

There is good news: Lessons learned from past failures can help to ensure future triumphs. Even better, newspaper companies have real assets to bring to this fight, and a number of emerging industry experiments with new products and business models could point the way towards future success.

This article describes some reasons why powerful market leaders stumble in the face of disruption and describes a few simple tips to help companies avoid those pitfalls. Success won't come easily, but by following these tips, newspaper companies have a chance to successfully navigate through increasingly turbulent times.

Disruptive innovations typically offer lower performance along dimensions that firms consider critical. In exchange, new benefits are introduced along dimensions such as simplicity, convenience, ease of use, or low price.

In the media industry, blogs, Google, eBay, Monster.com, and freely distributed commuter papers each fit the pattern of disruptive innovation. Each emerging competitor lacks something that is core to most newspaper companies' value proposition. Some can't match a newspaper's broad distribution network. Others can't compete with the newspaper's detailed reporting capability or local reach. All, however, compete along dimensions of performance that are different than the traditional metrics emphasized in the print newspaper business.

Three barriers typically make it difficult for market-leading incumbents to get disruption right:

  1. Fail to spot the disruptive change early enough: Disruptive change tends to start innocently at a market's fringes. Market leaders tend to dismiss early disruptive developments because they just don't affect their core business.

  2. Fail to allocate sufficient resources towards disruptive offerings: Disruptive innovations often have lower performance and lower prices than established offerings. Companies find it hard to prioritize spending time and money on disruption when they have seemingly attractive opportunities in their core business.

  3. Force the disruptive initiative into the existing business model and product concept: Eastman Kodak Company spotted digital imaging in the 1970's. It invested billions of dollars to create its first commercial camera, a $30,000 camera targeting the professional market. Only recently has it embraced simplicity and begun to experiment with new business models. Had Kodak made different choices and realized the potential to create new business models sooner, it could have owned digital imaging instead of being one of many players in space.

Our work with the newspaper industry suggests that the second and third problems are the more pressing. Most newspaper companies still focus a disproportionate share of time and attention on their print product. While not ignoring that product, allocating more resources towards new disruptive products makes sense. It seems clear to us that newspaper companies must reimagine their content and business models if they hope to succeed.

Despite the sense of doom and gloom that pervades the industry today, there are signs of hope. While newspaper readership is declining, information consumption is increasing. Almost every newspaper company has made the transition to the Web, with their properties attracting new audiences and new advertisers. In fact, the interactive nature of the Web allows forward-thinking companies to completely change the way they interact with readers and advertisers. Readers can become content creators and community builders. Web sites can serve advertisers that would eschew the static nature of print.

Additionally, companies are experimenting with new approaches. Dozens of companies have launched free papers targeted at young readers or recent immigrants. Last year Knight Ridder, Gannett and Tribune were among top buyers of HomeGain and a controlling stake in news aggregator Topix.net. Earlier this year Gannett took a minority position in an emerging mobile information provider called 4INFO.

To maximize their chances of successfully prospering in the next generation, newspaper companies should remember the following principles.

Assume a market-first perspective: One of the core principles of succeeding with disruptive innovation relates to how to connect with customers. The concept is elegantly simple: People don't buy products, they hire them to get jobs done in their lives. When people encounter a problem, they look around for the solution that allows them to solve the problem. Too often, companies define markets through their own internal lenses, missing great opportunities staring them in the face.

To succeed, then, try to look at the world from the perspective of your readers and advertisers. What are the jobs they are seeking to get done in their lives? How could you improve your current products so they get the job done better than by using any other competitor? What new products could be introduced that address a point of consumer frustration?

These jobs can be very different in different contexts of use. Up to 50 percent of online registrants for newspaper Web sites are not newspaper subscribers. Even print subscribers follow very different patterns of use online. As one former metro editor said to us: "When I first joined the online group, I couldn't understand why everyone referred to our readers as 'users.' It took me more than a year to realize that people read the newspaper, but they use the Internet. The whole relationship with the product is different."

Newspaper companies should look at their local market to identify jobs that people can't get done well today. They should think of the great assets they have at their disposal — top-flight journalists, strong brands, in-depth local knowledge, healthy balance sheets — and think how they could reconstitute those assets to address important, unsatisfied jobs.

Break old business models: The newspaper industry's business model has stayed broadly consistent for years and its still-high profit margins are a testament to its power. Succeeding with disruption requires embracing new models. Metro International shows how a company can build an attractive business without any circulation revenues at all. Its key is matching its costs to its revenue sources. Metro augments content that its staff produces with substantial contributions from wire feeds and minimizes distribution costs by placing its papers in centralized locations.

The industry's online business model also needs some rethinking. Too many newspaper companies have replicated their print models online, relying on display advertisements and classifieds, instead of creating new business models. A recent study showed that as few as 10 percent of top print advertisers are top online advertisers in newspaper Web sites. These new online advertisers often require different ad metrics than those traditionally used in print media. Newspapers need to ask how much money their sites make from lead-generation, consumer direct marketing, and pay-per-use content. If the answer is zero, then they should not be satisfied with even 50 percent growth rates, because they are missing big growth opportunities.

Embrace new mindsets: Generally, succeeding with disruption requires challenging mindset barriers that might stand in the way of success. There are two specific mindsets that newspaper companies need to watch out for:

  • Don't define quality internally. Often, companies evaluating a disruptive offering say, "We can't do that. It is just not good enough." The problem comes when a company applies its internal filters to make that evaluation. Although newspaper editors might scoff at the quality of the writing in the blogosphere, many consumers appreciate the freshness and directness of user-generated content.

  • Assume your first strategy is wrong. It seems strange that underfunded entrepreneurs so often triumph over resource-rich companies. One challenge that big companies face is that they often run fast and hard in the wrong direction. The initial strategy for a new growth business is typically the wrong strategy. Companies that pursue perfection and fear failure too often shut off signals that suggest they need to change their approach. Learning what's wrong with an approach and adapting appropriately is a good thing, not a failure. Focus early efforts on small-scale experiments that offer more knowledge about key assumptions.

While it might be hard to see through today's clouds, the newspaper industry has the potential to do some very exciting things in the coming years. Most companies have good brand reputations, strong cash positions, and a deep well of content. The plethora of experiments throughout the industry suggests a readiness for change. The newspaper industry has a chance — if companies make the right choices over the next 18 months — to stare disruption in the face and succeed where other industries have failed.

Scott D. Anthony is a managing director at Innosight LLC, an innovation consulting company. He is the coauthor of "Seeing What's Next: Using the Theories of Innovation to Predict Industry Change" (Harvard Business School Press, 2004). Clark G. Gilbert is an assistant professor in the entrepreneurial management department at Harvard Business School. He is the coauthor of "From Resource Allocation to Strategy" (Oxford University Press, 2005). Anthony and Gilbert are spearheading the Newspaper Next project with the American Press Institute.


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