Content is No Longer King….Long Live the King (Part 1)

We often hear that content is king.  But I wonder if this is still true.

Let’s take some very simple examples.

I am sure most of you know that the iPod was not a revolutionary invention.  It was merely a new spin on the already existing MP3 player.  The real innovation was the integration of the iPod with iTunes.  This changed the game.  Using this model, the distribution of content became as important as the creators (the musicians) and the publishers (the record labels).  Apple is now one of the most powerful and profitable players in the music industry.

I now own an Amazon Kindle.  I have to admit, I love it (I’ll blog about that another time).  But what strikes me is that we are seeing the same “content distributor as king” dynamics unfold again.  In the book business, the author’s royalty is a pretty small slice of the pie.  I should know because I just signed a two book deal with Penguin’s Portfolio imprint.

Here are some illustrative figures for a printed book (kept very simple using made up, yet not far fetched numbers) …

• An author can expect about 10% +/- of the retail price of the book.  So if the book retails for $25, the author gets $2.50.
• The retailer expects roughly a 50% discount and then they sell it for whatever they can get.  If they sell it for a 20% discount, they gross approximately 30% of the price of the book (about $7.50).  Their profit is quite a bit less due to overhead costs.
• Finally the publisher gets the remaining 40% or so – about $10 a book.  By the time the publisher has covered all of their costs, books that sell poorly can lose them money because they need to pay the editorial staff, the various designers, the printers, and the shipping companies.

As you can see, the creator of the content (the author) gets a small slice.  The publisher of the content gets a small slice.  And the distributor gets a small slice.  The rest of the money is eaten up in various costs.

Enter in the digital age.

Book on Kindle sell for $9.99 as a rule (we’ll make it $10 to keep it simple).  Let’s look at an illustrative breakdown now.

• The author gets 5% of the retail (eBooks typically get a lower royalty) – $0.50.  As you can see, an author can make 80% less with a Kindle book.
• The publisher and Amazon split the rest in a way I am not privy to.
• The publisher’s costs are lower because they don’t need to pay for shipping and printing.  They still incur the upfront design and editorial costs.
• Amazon’s costs are close to zero.  They only need to pay a small amount to Sprint to provide mobile services.  No overhead (except maybe some computer servers).  No distribution.  No warehouses.

In this model, I want to be Amazon.  Everything sold is nearly pure profit.  The content creator (me) is definitely not the financial king in this model.  The publisher does fine.  But the distributor appears to be the one in charge.

This concept of distribution as king appears in all areas.  I was speaking with a seasoned consultant from the retailing industry.  He indicated that a few years ago, the power shifted from the manufacturers to the retailers.  Wal-Mart has the lion’s share of power in the industry and they now call the shots.

You could argue that Google has a similar position, although their financial model is a bit different (AdWords accounts for most of their profit).  But like other distributors, they don’t create content.  Instead they aggregate content from a variety of sources into one distribution system.

I just read on Friday that Comcast may be buying a 51% stake in NBC from GE.  This shows how the power is moving from the creators of the content (the writers) and the publishers of the content (NBC and their production staff) to the distributors of the content – Comcast.

Are you a content creator or you a content publisher?  Does someone else control distribution?  Or, are there new entrants who might control distribution?  Beware.  The current and future distributors/aggregators of your content could be one of the most serious threats to your business.

More to come…

How To Create a Culture of Innovation

I define innovation as an “organization’s ability to adapt and evolve repeatedly and rapidly to stay one step ahead of the competition.” A culture of innovation, when done right, gives you a competitive edge because it makes you more nimble with an increased ability to sense and respond to change.

A culture of innovation has less to do specifically with new products, new processes, or new ideas. There are of course discrete innovations such as the iPhone or a battery that is powered by viruses (MIT has developed this). These are valuable and necessary in order to create a culture of innovation.

But a culture of innovation is more than new ideas. It needs to be repeatable, predictable, and sustainable.  This only happens when you treat innovation like you treat all other capabilities in your business.  This means having, amongst other things, a defined process.

An organization’s innovation process must achieve three things.  It must:

• focus on the “right” challenges
• find appropriate solutions to those challenges, and
• implement the best solutions.

These translate into three “portfolios” an organization must create:

• A portfolio of challenges
• A portfolio of solutions
• A portfolio of projects

Let’s take each one at a time.

A Portfolio of Challenges

All companies have challenges. They can be technical challenges on how to create a particular chemical compound. They can be marketing challenges on how to best describe your product to increase market share. They can be HR challenges around improving employee engagement.

An organization’s ability to change (i.e., innovate) hinges on its ability to identify and solve challenges. Challenges are sometimes referred to as problems, issues, or opportunities. But at the end of the day, they are all just various forms of challenges. I will use these terms interchangeably here.

Where do you find these challenges? You can find them anywhere – from customers, employees, shareholders, consultants, vendors, competitors, and the list goes on.

Let’s face it, companies have no shortage of challenges.

And guess what, some of the most important challenges to solve are hidden due to organizational blind spots and assumption-making.

The “meta-challenge” for all organizations is to find which challenges, if solved and implemented, will create the greatest value. Given that organizations have limited resources and money, prioritization is critical.

My favorite quote (used many times in this blog) comes from Albert Einstein – “If I had an hour to save the world, I would spend 59 minutes defining the problem and one minute finding solutions.” Most companies spend 60 minutes of their time finding solutions to problems that just don’t matter.

Therefore, the first step in creating a culture of innovation is to surface, identify, and codify challenges. And then you must become masterful at valuing, prioritizing, and framing these challenges.

Think of your innovation portfolio much like you would handle a financial investment portfolio.  You want some safe bets (incremental innovation) and some riskier investments (radical innovation).  You also want a variety of innovations ranging from technical challenges to marketing challenges, and service challanges to performance improvement challenges.

Once you have the right challenges to solve, the next step is to find solutions.

A Portfolio of Solutions

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EVA, SVA, and the Economy

While at Accenture, one of our analytical tools was Shareholder Value Analysis (SVA) – a tool based on Economic Value Added.  The premise is that by looking at a company’s financials, we can determine where to best target our innovation efforts.  The analysis can show us, for example, if reducing SG&A will have a greater impact on EVA than, let’s say, COGS.  It will tell us the impact on EVA if we increase sales by a certain amount.   It is a very powerful tool.  You can see the general model by clicking the image on the right.  The analysis is obviously a lot more complex.

This model works nicely in good times.  But does it work today?  What is it telling us?

I asked two of my ex-Accenture colleagues who are experts on SVA the following question:

Cost of Capital is part of the EVA equation. Given the credit crisis, how has this impacted EVA? Is cost of capital going up? If so, what does that mean in terms of where companies should invest then efforts? Or is it going down because the prime rate is so low? What does this mean that from a targeting perspective?

Here are the two responses:

Response #1: On the EVA question, theoretically the Cost of Capital is down given the prime.  But actually it’s up given the credit markets — the Libor is a good proxy (the rate at which banks lend to each other). The B2B rates are even worse, hence all the talk about the credit markets freezing up. In terms of targeting Cost of Capital, that’s a tougher question. Most of the action in EVA around the Weighted Average Cost of Capital (WACC) is related to more or less leverage. So targeting it would mean more leverage and there’s not too many companies that want to go in this direction now. In fact, we may have determined a “ceiling” on how far you can push on that lever.

Response #2: From a mathematical perspective, marginal cost of capital is fairly low these days. The availability of capital, however, is the real issue. In the current market it is difficult to raise capital. Therefore if an enterprise can generate excess cash and can identify opportunities with good returns they should certainly invest. It is no different for an individual. Assuming that a major catastrophe is not looming on the horizon and assuming that one has available cash, this is the time to invest. I should hasten to add that the “classical” capital market theories upon which WACC and EVA are based are NOT, in my opinion, quite valid in a tumultuous market where risk free rates are almost zero and people are simply keeping cash “under the mattress.”

Interesting thoughts.

My follow up question is, “Assumiung WACC is up, what is the relative impact of cost reduction versus revenue growth on EVA?”

What do you think?  I’d love to get many different perspectives on this topic.

P.S. I leave these financial calculations to the data experts (“spades”) and focus my energies on new ideas that solve problems (“diamonds”).

Best Companies to Work For

Fortune Magazine released their list of the top companies to work for.

#1 on the list is the 7,000 person data storage company, NetApp.  They have some great business philosophies that show they treat employees like owners of the company – a key to creating a truly innovation organization.

The article says…

NetApp early on ditched a travel policy a dozen pages long in favor of this maxim: “We are a frugal company. But don’t show up dog-tired to save a few bucks. Use your common sense.”

Rather than business plans, many units write “future histories,” imagining where their business will be a year or two out.

Five paid days for volunteer work, $11,390 adoption aid, and autism coverage.

The company has gained market share during the slump, hasn’t had layoffs, and has more than $2 billion in cash on hand to help it ride out the global financial crisis.

Clearly they are doing something right.

Predicting the Next Meltdown

I just got back from over two weeks on the road. I was in and out of five airports. As you go through security, the routine is always the same…

- Take off your shoes
- Take out your liquids
- Take out your computer

Why are we put through these security gymnastics?

On December 22. 2001, Richard Reid was caught with plastic explosives in the soles of his shoes. That’s why we now have to walk barefoot through airports.

On August 9, 2006, two dozen people were arrested in the UK because they were plotting to bring liquid explosives on planes leaving Heathrow airport. Now we have to travel with miniature shampoos, shave creams and toothpastes.

Computers are scanned because, well, that’s the obvious place to look. I guess.

What do these have in common? For the most part, the security scans we now endure were due to cleverness on the part of terrorists. Rarely are we subjected to scans that are due to the cleverness of government agencies.

Are there ways to easily smuggle weapons on planes in spite of our increased security? Of course. Nearly every time I pass through a metal detector, I have metal collar stays in the dress shirt I am wearing. Although the detector never beeps, these could easily have been turned into razor sharp weapons.  Does this mean that next week I will have to travel topless through the airport?  Good thing I have been working out.

Give me 15 minutes and I could rattle off dozens of other, more sinister ways to smuggle weapons on board.

Reactionary Innovation

This is a reactionary approach to business.

The current financial situation also demonstrates a reactionary approach to business. Enron has a meltdown. What should we do? Implement ridiculously stringent rules like the Sarbanes-Oxley act. Our financial institutions start to falter. OK, let’s spend $700 billion of the tax payers’ money to sort out the mess.

I’m not saying that these rules and legislation are good or bad (or ugly). That’s a conversation for another time. But I do find it ironic that the “big ideas” always seem to come in response to some tragedy. They are rarely proactive.

What does this have to do with innovation? Everything.

Most organizations use creativity to help them determine what to do next. They brainstorm ideas, select the best solutions, and then implement the most promising ones. Creativity is used to determine what your company or organization will do next.

Predictive Innovation

But in these rapidly changing times, creativity can be equally (if not more) valuable for determining what the marketplace and your competitors will do next.  Or, if you are the government, it may help determine what your banks and terrorists will do next.

When is the last time you had a brainstorming session where you asked the following questions?

• What are we most afraid our competition will do to us?
• Who is not a competitor now, but might be in the future?
• What shift might happen in the buying habits of our customers that may make our product/service less appealing?
• How can the sagging economy help our business?
• What emerging products or services may make our business irrelevant?

The list of outside-in questions can be endless – and valuable.

In your next brainstorming session, try the following:

• Brainstorm your own list of questions, building on mine above.
• Determine which ones you want to tackle first.
• Brainstorm, using a variety of creativity techniques, to identify “possible” outcomes.
• For those which are deemed plausible, brainstorm a list of “triggers” for each. These are market conditions that tell you that the given scenario is moving from “possible” to “plausible.”
• Set up a corporate “radar” system to help monitor external conditions. Have everything in place such that you can implement critical ideas when market conditions dictate.

This approach blends creativity with scenario-based planning . It helps you move from reactive solutions to proactive solutions. And in today’s volatile world, this might just be the key to your long-term survival.

P.S.  If you want to see where airport security is heading, visit Ryanair’s website.  For adults only.

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