Nieman’s 80th Anniversary Reunion Weekend

Fungai Tichawangana:  Do not build a media company whose primary focus is content. Do not build a media company whose primary focus is content. I know I’ve just said the same thing twice, but I have to read it 10 times to make sure I’ve got it right.

Our first speaker this morning, Bharat Anand, is the author of the book, “The Content Trap,” which makes this and other assertions. Bharat is a Business Administration Professor at Harvard Business School.

He helped start HBX, which is Harvard Business School’s online learning platform. He believes in this concept of not focusing on content so much that in setting up HBX, they focused on other things before they focused on the content.

It seems to have worked, because just last week Bharat was appointed as Vice Provost for Advances in Learning. To break it down, it means that he’ll be in charge of online learning for the whole of Harvard University.

Bharat has won a number of awards, including two teaching awards at HBS. He has studied entertainment and media over 20 years. I’m hoping that all these years will help him as he explains to us why we should focus on other things before we focus on content as we build our media houses, Bharat Anand.

Bharat N. Anand:  Good morning.

Audience:  Good morning.

Bharat:  I need some more energy here. Good morning. [laughs]

Audience:  Good morning.

Bharat:  It’s a pleasure to be here. What I’d like to do this morning is share with you some thoughts, some lessons, some learnings around digital change.

Pretty much every organization I now encounter in the economy is struggling with the question of how do we navigate the digital world? The question that often comes up is, “Aren’t there lessons we can learn from others who’ve gone through these experiences?”

It turns out there is a part of the economy. It’s your part of the economy. It’s the media and entertainment sector which has been experiencing this for now, a quarter century.

What I tried to do in this book is capture some of the lessons around what we have learned around digital change that might not just inform ourselves as we look ahead, but folks in other parts of the economy.

Part of the reason I wrote this book is that many of the lessons that we take for granted, I think turn out to be wrong. What I’d like to share with you today is two lessons in particular.

Let’s start with newspapers, your world. Online news. Think of a product that is faster. It has more variety. It can be personalized. It has multimedia and it’s cheaper. This is pretty scary as a digital product competing with analog. We see the results as it relates to print circulation over time, which has declined by about 80 percent in the US across all newspapers.

What is surprising about this chart as I noticed this morning, is I had left out the time axis.

I apologize for that.

If we were to guess when this trend starts, it’s probably 10 years ago, maybe 15. Maybe around 1994 is what most people would guess. That turns out to be wrong. This started 70 years ago, with radio, then black and white TV, then color TV, then cable TV, then 24/7 cable news. Finally, the Internet hits.

By the way, the impact of the Internet is empirically indistinguishable from 60 years of technology that came before it. And yet, this is the dominant narrative around why newspapers are in trouble.

As we now know, the Internet destroyed many newspapers not because it killed news and journalism. It’s because it killed classifieds. The red line there is total print circulation across all US newspapers over the last 15 years. Basically, those declines in circulation are offset one‑for‑one by price increases.

In other words, total circulation revenue’s roughly stable. On the other hand, classified ad revenues, which is the light blue line, falls by about 90 percent. This obviously, is what destroyed newspapers, though it raises a puzzle which is, classifieds went online. Online classifieds are faster, better, cheaper than print classifieds.

In other words, it’s the same features as we talk about online news. Why is it that in one case we see slow declines, in the other case, massive declines? It has to do with customer behavior in a very fundamental sense.

What do I mean by that? When you and I decide which online news site to go to, we’re making decisions based on the design of the site, whether it offers trustworthy news or fake ‑‑ at least, most of us don’t like that ‑‑ the price, personalization, and so on, and so forth.

In other words, we’re making decisions based on product features. I don’t care if most of my friends like Google News or CNN or Yahoo. If I like the newyorktimes.com, I’ll go to the newyorktimes.com.

In other words, we’re making the decision one by one. That is not how we make the decision about classified sites that we choose to go to. The only factor that matters is where are the sellers? Where do the sellers list? Where there’s more buyers. More buyers, more sellers, more sellers, more buyers.

These are feedback loops called network effects, which give rise to connected decisions. Meaning, I don’t care if a site is beautiful to look at, or it has a wonderful design. If there’s another site where everyone is, I have to go there. By the way, think Craigslist.

What are the implications of this? This is a metaphor for what’s happening in the economy. Most organizations that you and I are familiar with are what I would call content or product organizations. We produce stuff in the hub. We sell it to customers in the spokes. Digital comes along.

The beauty is we can reach many more spokes. Except I would argue, that’s just scratching the surface. That’s phase one of digital. Phase two is when you realize the spokes can talk back to us. Customers can tell us what they like. It’s data interactivity personalization.

Phase three is the classified site. It’s not just hub to spoke or spoke to hub. We can connect spoke to spoke through digital. That’s how it was different from virtually every technology that came before it. That’s what creates these connected dynamics. That’s what creates winner take all in the economy.

Most digital giants are phase three organizations. This is what I call the content trap, meaning if we were to try and create an organization based primarily around content and we clash with strategies based on connections, the latter usually wins. That’s not a matter of opinion or belief. It’s just a matter of economics.

This has sometimes been framed as product versus platform. My point is, you’ve got to do both. In other words, it’s not that we ought to discard the great quality content we produce, but think much more deeply about connectedness.

Digital giants get this wrong as well. Think about the most famous battle in personal computing, Apple versus Microsoft. 1984, Steve Jobs said, “We have produced an insanely great product.” Insanely great, and end up with three percent market share.

The reason is Microsoft had the installed base. They had the network. We had to share files with each other. Most of us bought a PC.

Here’s what’s even more interesting. We’ve just seen the greatest transformation in corporate history with Apple over the last 18 years. Its market share in personal computers though, has gone from three percent to about nine percent globally. It barely moved the needle.

Microsoft, my friends there give me license to say this, been on the wrong end of every battle in the last 18 years. It’s still number three in market value. That’s the power of connectedness.

Connectedness at Airbnb. Marriott sells rooms. Airbnb connects people who have rooms with others who need rooms, which gives them license to post these rude tweets.

Uber. Here’s what’s interesting. Most of us know its growth. The blue line is when they were relying on their own cars and drivers. The red line is when they opened up and they allow third‑party partner drivers to be part of the network.

Another way of saying this is, if you want growth, innovate. If you want exponential growth, connect.

People often ask me, “What’s the exemplar of connections?” Think about a company in China, Tencent. Some of you may have heard of this. It started in instant messaging, then multi‑player games, social networks, and finally WeChat, one of the fastest growing apps in history.

This is not just a communications company. You can read books through the WeChat app. You can watch videos. You can actually transfer money through these virtual red envelopes to your friends and family.

That alone caused its share of mobile payments to go from 19 percent to 37 percent in one year. This is today the competitor to media companies, to banks, and to retail.

You’re probably thinking, “Has any media company got this right?” Here’s one in Norway, Schibsted. Some of you may have heard about it. Here’s the interesting part about Schibsted. They were one of the most successful to transition to the digital world.

They take this philosophy of connectedness not just by winning classifieds, but into the news room. I don’t know if you remember this volcanic ash crisis over Norway a few years ago? I won’t pronounce it.

One of the most popular stories, it wasn’t about what’s the nature of the ash, how did it start, the weather patterns, the health implications. All those are interesting stories. At the moment of the crisis, the only thing that people cared about in Norway is how do I get from point A to point B, because all air travel was disrupted.

They started posting messages on the site asking, “Is anyone going from Oslo to Trondheim?” Schibsted managers see this. They create an app within seven hours called, “Hitchhiker Central,” whose only function was to allow readers to share messages with each other.

That becomes the most popular app across all of Europe. They asked this question, “How can we help readers help each other?” That’s become the defining question in the newsroom.

These stories actually inspired us here at Harvard when we were creating online learning, as Fungai was saying. When we started out we said, “Let’s create the best platform with the best content to put online.”

Three months into the effort I had a few students who said, “Professor Anand, we don’t just learn from the faculty. We learn from each other.” Here I am writing this book called, “The Content Trap,” and we’re falling right into this trap.

We pivoted the whole platform and thought about how can we meaningfully engage peers around social learning? Here’s one example. The first page of the platform now is just a global map, where you can see who’s on. You can see their profile pictures. You can message each other.

The first day we launched this, 300 people logged in, 13,000 profile views. All they want to do, it turns out, is just check each other out.

Forget the content. That’ll come later.

Anyway, then we actually spent a lot of time creating these courses. We’ve also designed features such as what we call, “The Online Cold Call.” In the classroom here, I could call on anyone. I say, “James, what do you think about this?” James suddenly has to pay attention.

Online we created something called The Online Cold Call. James is going through the course. Suddenly at random, a pop‑up appears. It says, “James, you’ve been cold called. You have a minute to answer this question.” Clock ticking in the corner. “30 words or less. Your answer is visible to the entire cohort with your profile picture.”

That’s just elements of how we can think about social. This is the geography of peer‑to‑peer conversations we’re seeing online.

We’ve now created also a studio about a mile from here in GBH, where in 60 physical seats we have 60 TV screens. We can run classes with people anywhere in the world. This is multi‑person spoke to spoke.

The other story I wanted to share is what happened to music. By the way, this makes newspapers look like a growing industry.

CDs got killed. The reason, of course, was Nabster. It launches in 1999. Six months later, the decline starts. Piracy killed the music industry. That’s the story we were told.

What’s another explanation for this decline? One is plausibly, that digital formats came along and it was simply a question of transferring from one format to another. If that’s the case, we can actually test that hypothesis by looking at previous format changes and seeing how fast those declines were when we went from vinyl to cassette, cassette to CD.

We went out and collected this data, and here’s what it looks like. If you believe that piracy is the culprit, the right strategic implication is get as many lawyers in the room as possible. I love lawyers as long as they’re tackling the right problem.

If you believe it’s simply a format change, the only question is how do we make money in the new format? For recording labels one interesting application was concerts. What happened to live events? The price of concerts used to more or less track the rate of inflation.

After piracy explodes, the price of concerts explodes. Why? 30 years ago, concerts were priced cheaply. In effect, they were the advertisement for you and me to go and buy the CD. Now that we can’t control the price of music, that relationship flips.

Free music is the advertisement to go to the live concert which we can’t pirate. By the way, artists like this. On a CD, they took home $1 out of every $15. On a concert, they take home 70 cents on the dollar. Taylor Swift and others are making about $3 million a night. It’s just that they have to work slightly harder now.

The tragedy in all this is Universal, which was the largest record label, sells its concert business in 1999.

Why? Because we were telling them so. We said, “Focus on your core business. Focus on what you do best, which is making content, as opposed to thinking about these complementary products.”

Here’s what’s happened to the industry in music. The dark black line is CD sales. No matter how smart we are, we can’t solve that problem. Everything else is the addition of digital formats, subscription‑based streaming, live concerts, and iPod sales.

Another way of saying this is the music industry has never been in better shape. It’s just that value got transferred from one area to another. By the way, we see complements in every part of the economy, hot dogs and ketchup, cars on roads. Think about a tire manufacturer that tells us where the best gourmet restaurants are.

The reason Michelin started this 100 years ago was to tell people in France, in Paris, about those awesome restaurants in the South of France. They had to drive. There’s no relation to the core business. It’s a beautiful complement.

This, I think, is the battle that’s going on in digital today, which is every major digital giant is in one core business there. For every one you want all the other parts of the ecosystem to be as cheap and widely available as possible, whether it’s hardware or software, or e‑commerce and so on. It’s not a good place to be in the middle.

Another way of saying this is we always just say, “Content is king.” If you’ve never heard that phrase, by the way, you’re lucky, because that was never true.

Differentiated content was king. Unique content was king. Even if we believe that, think about this — three trillion dollars of market value in the outer circle here. In other words, if content is king, I would submit that complements are King Kong.

That’s the phrase of the day.

Here’s media and the history of media. Every time a technology comes along we think it’s going to hurt our business. Every single time it ends up either being revenue neutral or helping.

Radio — we tried to kill commercial radio. It seemed sensible. Finally, we realize it actually helps the music business, and so on, and so forth. Digital video recorders, TiVo and so on, When they came out, we thought this is going to kill advertising. Why? Because people are going to skip ads.

Except, as it turns out, after 15 years television broadcast advertising’s roughly stable. There was a beautiful technology for ad skipping before DVRs. It was called the neck.

Just because we can observe ad skipping now doesn’t mean it didn’t exist. That’s the point, right? When we think about digital and what to offer there, here’s something to be cautious about.

When we offer the same content through digital pipes, you’re telling customers, “Treat these two things as substitutes.” What might a digital product that’s complementary look like? Here’s one example, and I apologize for all those people who don’t like Tom Brady.

If you took live sports and said, “What’s a lovely complementary digital product?” Fantasy sports. Millions and millions of kids, some of us, are playing this. It turns out people who play fantasy watch more TV.

Because we want to track what the scoring on those real games on Sunday, this was the best thing for the NFL. They had nothing to do with fantasy. They created a network called the “Red Zone.” They charge five bucks a subscriber, and they’ve never had it so good over the last 5, 10 years.

My nephew, by the way, is a four-screen consumer. He plays fantasy on his cellphone. He’s trash-talking with his friends who are losing the fantasy game. He has a movie on the side, and the TV with the real games.

I just want to close with this one slide which is, when we think about digital, our premise usually is, let’s make the best product. Let’s stick to our core competence. Let’s try and be innovative. Let’s look at what others are doing and mimic what they’re doing.

If you just take these stories seriously, watch out for that. The thing we miss is connectedness, either connectedness between users, or connectedness between products. That’s the message I’d love to leave you with. Thank you so much.