End-to-End Value Chain Transformation. In today's era of platforms, high-quality content remains important, but the entire value chain matters more than ever. Media executives, however, tend not to speak about value chains. In the newspaper business, it has long been understood that editorial “did its own thing” while the business side managed revenues. A similar divide has existed in movie studios, broadcasters, and other creative companies. This separation prevents organizations from working closely together.
Many media companies have started to digitize parts of their value chain. (See Exhibit 4.) But few have digitized comprehensively. Yet this is their best hope for providing their audiences, viewers, and readers with the most enjoyable creative and commercial experience— and, ultimately the best hope for their own survival. As Mark Thompson, the CEO of the New York Times Company, wrote in the Reuters Institute publication, “Newsrooms and commercial divisions of news organizations must become far closer strategic partners than is generally the case today.”
Although he was referring specifically to news organizations, Thompson’s advice applies broadly: “Editorial and commercial leaders need to work together on integrated strategies which combine editorial mission and standards, user experience, innovations in data, technology and creative design, and radically new approaches to monetization. Not five different strategies, not even ‘aligned’ editorial and commercial strategies, but a single shared way forward.”
These new approaches require new skills. Media companies need executives with strong quantitative skills, akin to the pricing experts so critical to the success of airlines. They also need sophisticated sales executives who understand advertisers’ strategic needs and can work with digital and content teams to create compelling mobile and online experiences.
The Digital-Disruption Opportunity. In this new era of platforms, OTT content, and digital targeting, traditional media companies cannot rely solely on their historical bases of advantage, such as scale and relationships, to remain relevant. To avoid becoming victims, they need to be the creators of disruption.
With their revenues at risk, most traditional media companies need to be much bolder and ambitious. Of course, they should aggressively pursue organic growth in adjacent areas. But to make changes in their growth trajectories and business portfolios, they need to engage in M&A, partnering, and other external moves that integrate them into a wider innovation ecosystem. In video, for example, new studios such as New Form Digital and All Def Digital are creating online stories that resonate with younger generations and niche audiences.
As the incumbent social media player, Facebook has not taken its perch for granted. It has expanded into hot areas by acquiring Instagram, WhatsApp, and Oculus. Meanwhile, the flash popularity of Pokémon Go suggests the existence of pent-up demand for AR and VR.
Amazon has more than 1,000 people working on its Alexa and Echo voice-enabled ecosystems. It acquired Twitch, an online social video channel for game players. Facebook is building DeepText, an AI-based technology that can understand the intended meaning of a user’s post—not just recognize keywords— and can make recommendations or take actions as a result. Google’s commitment to AI, for example with its acquisition of DeepMind Technologies, is well-known. Few traditional media companies have made similar bold moves into these fields.
It’s too early to tell how these developments will affect the business models of traditional media companies. But these companies have already proved that they know how to disrupt the media industry. Media executives need to counterpunch with something radical and far-reaching.
This is a high-stakes assignment. Traditional media companies are competing against digital attackers that are focused on user growth first and monetization later—a strategy that investors tend to reward. Most traditional media companies, however, are evaluated on the basis of their cash flow. They don’t get credit for expanding their user base unless that also brings in cash. Even when they build new businesses, a dollar of digital revenues is not equivalent to a dollar of analog revenues. Margins are lower even if multiples are higher. Most digital revenues are from advertising rather than recurring subscriptions or revenue streams such as retransmission fees. Therefore, in addition to preserving legacy cash flows through cost cutting and building new businesses, executives need to create carefully crafted portfolio, TSR, and investor relations strategies. They need to tell a better story about their reinvention. (See “Creating Shareholder Value at Media Companies,” BCG article, October 2012.)
Some companies get the challenge. Early on, South Africa’s Naspers recognized that its print business was lagging behind, so it bought stakes in digital companies—such as Tencent in China and Mail.Ru in Russia—and expanded into pay television. In the US, Gannett split its publishing and broadcast assets into separate companies, providing focus and investor transparency.
It’s too early to declare winners. But the losers will certainly be those companies that treat reinvention as an option rather than an imperative.
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