Dreamtalk: The Content Trap - A Strategist's Guide to Digital Change | Salesforce

It's a pleasure to be here with you all this morning. And what I wanted to do is share some ideas that I've been working on, forthcoming in a book actually, 10 days from now around strategy and digital change, which, on the face of it, those two words shouldn't go together. We're sort of in this funny phase with the book. So it's being launched 10 days from now, as I said, and the ebook is actually ready print, sort of done. It's being shipped to the retailers. And so I asked the publisher, I said, can we just release the ebook right now? And you can imagine their reaction. Right? So I said, actually, there's precedent for this. In fact, you have released a book in E first and then taken it to print. It was called, some of you might know this, 50 shades of grey. It was released in e, sold about 30,000 copies, moves to print, sells 90 million. That's where the analogy with my book ends. But this led to an even more uncomfortable conversation. And the reason I'm mentioning this is this tension between digital and traditional is a very general tension that I talk about in the book. As I was writing the book, it sort of became a personal journey. Around three years ago, the tsunami of online education hits higher education, and I was asked to lead the online learning efforts at Harvard Business School. Many of the ideas in the book ended up informing our efforts in what is now called HPX and the reverse as well. If we have time, I'd like to share that with you. So I have three stories for you. The first one is about this. Does anyone know what this is? Yeah, this is just rolls of newsprint, right? This particular plant was in South Africa. I go up to the plant manager and I said, what is this room going to look like 10 years from now? And I thought I would get a rousing defense of print. Instead, he walks up to me and whispers in my ear. He says, bharat, I get all my news in the iPad. What's the problem with newspapers? What's the challenge they're facing? It's not a rhetorical question. Online news, you can get it quick, you can get it cheap, you have more variety, right? It's rich media. You can personalize it. This is about as good an online alternative as you can imagine. And of course, the question to ask is, how has this affected news readership? That's how it's affected it. So readers are moving away pretty fast. Except I just realized I forgot to put the time axis here. This is like after months of preparation for this presentation, right? Where do you think the Internet is on this chart? Yeah, probably all the way to the left is when it kicks in. Actually. I didn't forget the time axis. So this has been going on for 60 years. Oh, my gosh. This has nothing to do with the Internet. What starts this decline? It was radio, then broadcast TV, then black and white TV, cable TV, 24 7, cable news, and then the Internet. By the way, if you took out time, the impact of the Internet is empirically impacted, indistinguishable from everything that came before it. And yet every story we hear is about how the Internet destroys newspapers. It did, but it had nothing to do with the news content. As we now know. The impact was really on classifieds. Classified revenue accounts for about 40% of revenues of a newspaper, more than half the profits. And if you look at the New York Times, between 1994 and 2010, average annual decline in news readership less than half a percent a year. Classifieds, on the other hand, they basically lose 90% of those revenues. Now the puzzle is why the difference, which is if we look at the online version of news and classifieds, it looks pretty much the same in terms of the benefits it offers. And yet the decline in news readership has been relatively small for classified's massive declines. The reason, I think, goes back to something pretty fundamental about behavior, which is how do we consume each of these products. Which news site would you like to go to? Well, it doesn't depend on what my friends choose. Even if my friends like Google and CNN and Yahoo, if I like the newyorktimes.com, i will go to the new york times.com in other words, I'm making decisions based on product quality and price. Classifieds. Very different dynamic. Which classified site do I choose to go to? Oh, where are the most listings? Where do people list? Where are the most buyers? More buyers, More listings, more listings, more buyers. We have what are called feedback loops or sometimes called network effects, meaning my decision to go to a particular site depends on the decisions that of many other people. It's what I call a connected product, meaning there's connections between users. This simple idea that news on the one hand is not a connected product, but classifieds is has fundamental implications for a whole bunch of things. By the way, just to show you how this plays out in terms of the revenues of newspapers. So you see, for the last decade, circulation revenues for most US Newspapers roughly stable. Why we had slight decreases in readership per household offset by price increases. Classifieds, we basically lose the entire Thing, meaning once we're ahead in classifieds, Craigslist, Trader Monster, you get more and more listings, more and more buyers, more and more listings. It's what we call winner take all dynamics, right? Here's the funny part about this story. When I have this conversation with news executives and I ask them, what's the problem facing newspapers? The conversation is pretty much the same. Meaning they'd say, oh, it's online news. Why? Oh, it's better, faster, cheaper. And at some point I say, how are your circulation revenues holding up? They say, actually, pretty well. Wait, what's the problem? Oh, classifieds. I'm like, wait, you're in the news business. And we still fall into the same trap, thinking the problem is with content. Part of the reason, I think, is who sits at the center of a newspaper? It's the newsroom, it's the editors. Remember, we never called it a classified ad paper, we called it a newspaper. Which means that there's fundamentally something wrong with the economics. It must be with news. So where else do we see this dynamic? All over the place. This is basically the history of digital Microsoft versus Apple and PCs. Apple, probably the better product for 30 years, ends up with 3% market share. Why? Microsoft owned the networks. More buyers, the more likely other people will buy PCs, because we wanted to share files. More buyers, more app developers, more app developers, more buyers, and so on. Here's. I think what's interesting about this. We've just seen the greatest corporate transformation in history, and Apple's market share in PCs has increased from about 3% globally to about 9% globally. Barely moved the needle. Conversely, and I hope there's no one from Microsoft in this room, we've seen a company which probably makes every mistake known to mankind, and yet top five in market cap. That's the power of networks. Facebook versus Google. Right. When Google came out, I remember many people said, oh, this is a better product. It allows you to actually create circles of friends, and so on and so forth, till someone said, there's no one else playing in the sandbox but me. Ebay, marketplaces, same idea. When it wins around the world, it wins big. When it loses, like in Japan and China, it doesn't go from 80 to 75%. It goes all the way down to zero and exits the market. Airbnb, same idea of connections, which is more people list on the site, more renters, more renters, more listings. You end up with winner take all. This is a tweet from an Airbnb executive a couple years ago. It's A pretty rude tweet. I would hope you don't tweet like this, but it actually shows the power of networks. Uber. What's interesting is when they start Uber black with their own drivers, it's sort of growing nicely when they open up to partner drivers. Exponential growth, Right? Again, the same dynamic. Tencent, one of the top five companies in the world in the Internet, in market cap in China. Tencent's history is a history of networks. They start with instant messaging, move from there to social networks to multiplayer games, and finally to something like WeChat, one of the fastest growing apps in history. Networks connections can be created. Right. This is not just a law of nature. One of the things I'm proud about was I actually thought about this example before the craze this summer. So Pokemon cards. There's nothing about a card which says this is a connected product. Oh, but Pokemon goes to great lengths to convince you and me that the value of this card lies in trading with others. And suddenly I don't want to be the only kid in school who doesn't have a card. Right? Friends and family plans from wireless carriers trove a personalized reader newsreader from the Washington Post. Nice technology. Sort of didn't go too far. They then make one change. They keep the technology exactly the same but optimized for Facebook. They suddenly have millions of readers within a few weeks. And then Facebook changes its algorithm and things go sort of south. So coming back to newspapers, there is a moderately unknown company out in Norway, Shubsted, which recognizes this dynamic. About 15 years ago, they look at classifieds and they say, this is a winner take all dynamic. If we don't move fast, we lose the entire game. So what do they do? They actually build out. Just when the dot com bubble is crashing, everyone's moving away from newspapers. They move in. They create the online classified site and you can see the results here, which is when you win in classifieds, you're 3 to 5x ahead of the second player. And you can see that reflected in profit margins. Here's what's more interesting then. Oh, by the way, there's something quite fascinating about their market share. They now own jobs and real estate in Norway, about 90% market share. They say in their annual report, we have 115% market share in cars. I went to them and I said, I know you guys are smart. You're not that smart. Which is market shares typically add up to 100%. They said, no. You don't realize the site is so liquid that people all Over Europe are actually listing their cars on our site. So there's more cars sold on their site in Norway than there are cars in Norway. They then take this to the newsroom. I don't know if you remember the volcanic ash crisis over Iceland spreads over Europe. Here's what happens. All travel disrupted. What was the most popular story during that crisis? No, it wasn't about the geological formation in the rocks. It wasn't about when the next crisis is going to happen. The challenge for everyone in Norway was how do I get from point A to point B? All air travel disruptive. Did they notice that people are actually sort of exchanging conversations on their website. Someone's saying, anyone going from Oslo to Tron time? Someone replies, yep, I have a car. I'm going at 3 o'. Clock. I can pick up three people at the train station. This starts feeding on itself. They go to the IT team, they build an app within seven hours. It's called Hitchhiker Central. It becomes easily the most important product feature during this crisis. Everyone in Europe using it. This gave rise to a fundamental question. How can we help readers help each other? The result of this is this is the question they ask during every major news event. Their front page traffic is off the charts. Online CPMs as high as print CPMs, which is basically unheard of in the Western world. Okay, so that's about user connections. And I wanted to leave you with two questions, by the way. One thing you see is companies that win on connections they really don't have to market. Think about how much money Microsoft spends on convincing you and me to buy the next generation operating system. Effectively. The installed base is their salesforce. Two questions for you. One, do you face network competitors in your business? And secondly, how can you create user connections for your product? And the reason this is interesting is if you win the network game that often trumps product quality. We see this Apple versus Microsoft. We see this vhs, Betamax. We see this all the time. Because if I've got the installed base, very hard for someone else to make product feature improvements and simply take over. All right, so that's story one. Story two. Music. This makes newspapers look like a growing industry. Every time I see this chart, I say a prayer at bedtime, thanking God that I don't compete in this space. This is CD sales decline over the last 15 years. And of course we know the story by now. What triggered this? Napster launches in 99. Six months later you start seeing massive declines in CD sales. Or at least that's the story we were Told, let's go back to newspapers and think about diagnosing the problem. What else might be going on? Oh, there's a couple things. We had the dot com crash, demand for CDs declines, the recording studios try and increase prices, price increases lead to more declines, and a vicious cycle ensues. A second, much simpler explanation is all that happened was we moved from CDs to digital formats. Now, by the way, if that story were true, we can actually test it because we've had at least two previous format changes, perhaps three in the music industry. Vinyl to cassette, cassette to CDs. Right? Right. So we went back and looked at those format changes to see how fast the declines were during those periods. I mean, it's sort of crazy. Even those squiggly lines look the same in these curves. Now, if I looked at the previous chart, the strategic implication is hire 90 more lawyers. By the way, hiring lawyers is good if that's the problem you're trying to solve. If I look at this chart, the question simply is, how do I make money on the digital format? Oh, and it turns out, of course, we've seen a lot of value creation there. MP3 players and hardware. You have Sony Music, Sony Electronics, an explosion in broadband Internet access. Right. A large part of early demand for broadband was basically for file sharing of music and movie files. So while Warner Music is suffering, its sister division, Time Warner Cable, is enjoying its best decade. And then we have other complementary products like this, most intriguingly, concerts. The price of concerts more or less track the rate of inflation till about the mid-90s. After that, as file sharing takes off, the price of concerts explodes. Oh, it's very interesting. Thirty years ago, the concert was priced low. It was the advertisement for you to buy the cd. Now, as we can't control the price of music, that relationship flips. Free music is the advertisement for you to go to the live concert, which we can't pirate, by the way. Artists like this. On a CD, they made $1 out of every 15. On a concert, they take home 70 cents on the dollar. Which is why we had these ostensibly weird pronouncements from artists about a decade ago saying we sort of don't care about piracy. Studies show that average artist incomes have increased for many artists. And by the way, if we look at this from that light, if we simply looked at the black chart here, you define your business as the CD business. Sorry, you're doomed. The moment we think about complementary products and services. And here I'm just talking about three concerts, digital sales excluding Streaming and ipods. This industry looks in pretty good shape. It's just that value got redistributed. What's the implication of this? I'd love for you to think about this idea of compliments and I'll get a little nerdy on you for 30 seconds. What's a compliment? A customer values your product more when he or she has the complementary product relative to the case when they don't have that right. Put it another way, you drop the price of a compliment. That's great for your business. Now, the moment you look at it that way, you see compliments everywhere. Imagine a world without ketchup and mustard. The manufacturers of hot dogs would want to create this. Imagine cars and roads, one without the other. Electric cars and charging stations. That's the chicken and egg problem. Imagine a company that manufactures tires that starts telling us where the best gourmet restaurants are. From the perspective of core competence, this makes no sense. You put on the compliments hat, oh, this is fantastic because I'm going to tell you about those restaurants 300 miles away in the south of France, and you're going to have to drive there. One of my favorite examples is movie theaters. So some theaters in the US And Europe have doubled their ticket prices. They haven't changed the greasy popcorn. They haven't changed the seats and the size. They haven't changed the movies. And they're totally sold out. What is it they're doing? One way to think about it is we go to the movies. We go to the movies. We go to the movies. We get married and we still go to the movies. Then at some point we stop going to the movies. Oh, we have kids. How do we get babysitting? That's what they offer right next door. There is no core competence. They have in childcare. They partner with organizations to offer that charge market prices. Double the price of movie theaters. What a great growth opportunity. This, of course, is the story of digital giants, where most of the companies think about Apple making most of its money on hardware. I would love for all the other products and services to be priced as cheaply as possible. Microsoft make money on software. I would love for hardware and content to be commoditized. Google and Facebook make money on advertising. I would love for content, software and hardware to be cheap. And this is exactly what we're seeing. In other words, if I'm sitting in the center there without really understanding what's happening in the ecosystem, not a good place to be. So how do we think about compliments and where do we See it. By the way, this goes directly against the logic of core competence, which tells you narrow, narrow, narrow your focus. We actually start seeing this everywhere. So I put out this question for my online students. Just give me some examples of compliments. The next day, I get 600 responses. That's the beauty of online. Some of these examples hit home pretty personally. We got a dog about three years ago. Anytime you buy a dog, you should get a lifetime subscription for carpet cleaners. Beaches and parking lots. We went to this island in the Caribbean a few years ago, and beaches were public. Beautiful beaches. And there's no one there. Basically empty. Why? Oh, the parking lots they built right next door had space for only about nine cars. There was no way to get there. It's actually a fundamental lesson, which is if you can't control the product, but you can control the key complement, de facto you maintain control of the product. This is a fantastic complement. Events and organizations, Dreamforce and hotel rooms. I think this might resonate with all of you in San Francisco. Really important. Compliments. Compliments and substitutes. The history of media is the history of thinking that new technology ends up substituting for the core product. And every time, it turns out to be exactly the opposite. We thought radio was going to kill. Music turns out to be the best thing. We thought VCRs would kill. Movies turns out to be the best thing. DVRs. Fifteen years ago, we thought this would kill advertising. Guess what? TV broadcast ad revenues roughly stable for the last 15 years. So what happened to ad skipping? As Jonah Peretti recently said, there was a fantastic technology that humans had for ad skipping. Before DVRs, it was called the neck. All I had to do was just move my head away from the screen. One question is, can you create complementarities for your digital product relative to traditional? If I tell you that these two products and the content is exactly the same, I'm telling you as the customer, treat these as substitutes. So one question is, what would complementarities look like? One of my favorite examples comes back to sports. Think about the NFL. What would a digital product look like that actually helps television? Oh, fantasy sports. I apologize for putting Tom Brady on this slide. If I had to do it all over again, I would still put Tom Brady on this line. So my nephew plays fantasy sports. He's a young guy. He should not be watching tv. He should be all digital. Oh, but guess what he's now watching. Not just the Pats. He's watching every team in the league. Why? Because his players are scattered all over. He's watching blowouts, which we never used to do. He's watching non local teams, he's watching crappy teams. This turns out to be the best thing for TV viewing. And then of course, we introduced the NFL red zone charge $5 per subscription. This is a bonanza for the NFL. And they had nothing to do with creating the digital product. Estimates are total value of TV rights about $11 billion. Total amount of money changing hands in fantasy, billions of dollars. So this is about product connections. Compliments are not about user connections, they're about product connections. Thinking more expansively, my last story has to do. Coming back to Shipstead, this is essentially its digital strategy, which was move fast, separate digital from print, hire outsiders in the digital format, aggregate content, free model and so on. Before you call your team members and say, let's do exactly this, just hold on a second. So we have this company called the Economist. They were slow. They were so slow in going digital they couldn't even register their domain name and time. For 15 years, if you typed in theeconomist.com, you would see a photo of Alan Greenspan. Greenspan was faster than the Economist in registering the domain name. Just think about that. They never separated digital from print. They always staffed it with insiders, had a paid model, and guess what? One of the most successful magazines in the last 15 years. How do we make sense of this? Oh, I think the tendency is we look at each of these choices row by row as opposed to column by column. We miss the connections, we miss the fact that these choices are fundamentally connected. It's what I call functional connections. Why did the economists do things so differently? Because their value proposition was never about breaking news. It was about getting you away from clutter. It was about offering you a view on the world, which made sense consistently across many different topics. The next slide shows these connections. I'm going to warn you, it's pretty complex. I told you, it's pretty complex. The idea was let's create a consistent package. How do we do that? We get people to write in the same format, the same voice, collective production and debates on Monday morning. And so when the Internet comes along, it sort of does nothing for their model. Because If I'm reading 60 articles back to back, it's hard for me to replicate that package on the Internet with the consistency there's a collective yawn in the organization. Having said that, when the Kindle and the iPad come along, they move fast because they say the lean back experience can now be replicated. It's a very simple idea. Context matters, and yet we so often ignore this. But it has fundamental implications for strategy and management. Typically, we're looking at choices one by one. You might call this the initiative strap, as opposed to thinking about these connections. For 20 years, we've heard about best practices, probably the most dangerous idea in management. Why? Because most of these choices have some downside. Just because my competitor is doing something, that doesn't imply I need to follow suit. In fact, competitive advantage fundamentally is built around differences. So if you ask customers what is it you care about in online news, here's what they would say. By the way, if you try to cater to customer needs on every one of these dimensions, there is simply no chance you can succeed. The point is, you want to prioritize what's important for you and your organization. Strategic success often comes from saying no. So to step back. Three ideas, tendencies, mindsets we often see offer the best quality product, right? Particularly in a digital world. Narrow your focus core competence and think about what your competitors are doing and benchmark and copy everything they're doing. I would submit these are fundamentally wrong because they miss the idea of connections, user production or function. My threefold mantra in thinking about this don't just create. Create to connect. Don't just preserve, expand to preserve, and dare to not mimic. That's the content trap. Thank you so much.