I was listening to an interview with Jeff Bezos about his purchase of the Washington Post. He made an interesting assertion. He said that the Washington Post business model had been to collect a reasonably high rent from a relatively small number of subscribers and he was going to change that so that he would extract a reasonably small rent from a reasonably large number of subscribers and make a lot of money in the process.
He believes this because the Washington Post is a platform which can with a reasonably modest marginal increase in cost (compared to the revenues that will come in) can significantly expand its readership (which traditionally was focused on the “Beltway”) to encompass a National (U.S.) if not international audience.
This (having a national/international audience and a paywall) is a model that only a handful of publications have successfully implemented, but one that the Post (given the quality and breadth of its infrastructure and talent pool) might be able to pull off. And, competition (which the Washington Post is poised to provide to the New York Times) is a good thing.
- Build a product that has a small marginal cost. The cost of distributing the next online copy of a newspaper is essentially zero. So, if you have a large number of subscribers, even if the price is low for each subscriber, you can afford to pay the costs of production and make a tidy profit. I would note that Microsoft leveraged this model with (much success) with its Windows operating system and Office productivity suite. The marginal cost of producing a copy of either product is very close to zero, but the value to the customer is high enough to make the production and distribution of those products very profitable.
- Build a good product that provides value. That is not easy to do. The product must be appealing, serve a good purpose, be delivered at a price that makes the consumer feel like they are getting something that is worth (hopefully a bit more) than what they are paying.
This is the idea behind large scale custom and leveraged software. Back in the day, we used to say that software that was being demanded by 10 customers would be customer written. When the demand was in the hundreds, the demand is served by leveraged software (bare bones implementations that would then be customized to the buyer’s specifications). And when the market has more than 1000 customers, it would make sense (as in the case with the Microsoft software mentioned above) to develop a packaged product that was essentially ready to be used once it is easily installed.
In the first two cases, the trick was to price the software just below what it would cost the customer to customer deliver the software themselves and in the 3rd case, you would charge as much as the market would bear understanding that if you raised the price too high, you would likely induce competition. Luckily, it turns out (at least in the packaged software market) that if you have a good product and a decent sized market for it, you can price the software in a way that makes the consumer feel like they are getting good value for the money they spend and make a lot of money.
- Make the product as sticky as possible. With a product that provides good value (or are a necessary evil, like accounting systems) and for which the switching costs are high (or for which there is no other alternative), you can probably make a little more than the minimum rent that a free market might make you expect. This is why banks (or the cable company or the phone company or…) get away with bad service, low return on funds that are deposited, high service charges, etc. This is also why AT&T (for instance) wants to bundle your Internet service with your phone, cellular and television service. The bundles are priced to make you have to switch them all if you switch one. This makes it difficult/costly to switch and therefore makes the product bundle sticky and we all pay more for less value—what a racket.
—is a really good way to make money in the software business. It is also how you make money in any service business.
Jeff Besos has applied this model successfully twice. Once with Amazon Prime and again with Amazon Web Services. He has a bigger challenge with the Post, there a many “free” (i.e. ad-driven) alternatives on the market. Bloomberg and CNN would be good examples and they are able to leverage their product (that would be news) over several platforms. There are also very low barriers to entry and a heck of a lot of competition, so of it good and some of it not. But, in either case it is formidable since even those that offer “bad” (overtly biased, lacking in veracity and not timely) seem to have little trouble pulling in large audiences, if they say what the audience wants to hear.
On the positive side, the Washington Post has a very good brand and that is important for people who are serious about getting the best reporting and getting in the timeliest manner possible. They also have world-class people and a resulting product that is objectively (as rated by many reviewers) both broad in its coverage and high quality.
What’s my point? In a networked world, the same rules (both beneficial and disadvantageous) work on what might be characterized as old-school products and this is why every company should be thinking about what is often called a “digital strategy”.
That term (digital strategy), to me, is a statement of how technology (networks, AI, big data, smart contracts, etc.) can be effectively applied to improve your ability to:
- Make you clients happy. At Textura, the digital strategy wasn’t an add-on, it was the core of the business plan. It was our mission to improve the efficiency and effectiveness of the construction industry through the use of information technology. And, we did that. We transformed the way contractors and their subs interacted and the way the subs got paid. There is not doubt that the vast majority of our clients were much better off (and happier because the process was easier and they got paid faster) using our services than they were with any other alternative available.
The Washington Post delivers a good product. Its users should be happy in that they receive what is advertised and what they want. So, Jeff Bezos can tick of that bullet, the real challenge to having a successful business is with the next one.
- Differentiate you from your competition. Here again, Textura was able to clearly differentiate itself from the competition. It had the “network”. This meant that if you were a player in construction (General or Sub-contractor) you were likely on Textura’s payment system. That meant that the cost of doing the next job (signing up, learning how to use the system, etc.) was near zero. You just needed to define a project (if you were a general contractor) or sign-on to a project (if you were a subcontractor). This made it very difficult (even if you wanted to invest in the technology (which would have been substantial) to compete with Textura because in addition to building the software, you would have to get all the players to get signed-up on your system and why would they, they were happy where they were— so that would also a substantial challenge for any would-be competitor.
And, while it is never a good idea to underestimate Jeff Bezos, I cannot imagine The Post (as good as it is) being able to differentiate itself from the glut of competition in this area. Now it may be there is room for another more player in rarified premium market (i.e. good enough to attract customers even though it is behind a pay-wall) for news. Or, it may be that Jeff Bezos will be happy with a breakeven proposition from the Post and call that being successful. But, I don’t see a long term way for the Post to extract premium (a charge no matter how small on an individual basis that provides what investors might regard as a “good” ROI in the long term) rents from its subscribers.
While there are other components (which I would argue are mostly tactical in their scope) to a digital strategy, if you don’t attend to the basic issues outlined above there won’t be a solid foundation upon which to build out a successful implementation on the strategy.
So, the story here is:
- No matter what business you are in, you need a digital strategy;
- A digital strategy is much more than just a “web strategy” although the web is definitely part of it; and
- That there are some pretty straightforward ways to make money in the technology space, but make sure that your plan doesn’t defy the laws of physics as it relates to basic business and economic rules.
Copyright 2017 Howard Niden
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