June 8, 2011
Arguably no market has evolved more in the internet era than the media business. And despite the incredible evolution and disruption we’ve seen, the pace of change shows zero signs of letting up. Depending on which segment you’re talking about, we live in a world characterized by more options, more convenient and flexible means of distribution, lower prices, and in some instances higher quality products than we’ve ever seen before.
As an investor in and observer of the industry, one place I find people – entrepreneurs, large incumbents, and investors (present company included) alike – consistently misreading the market is in the complex interplay of all of those elements. In particular, people have consistently missed the way that interplay can lead quality – as defined by traditional standards – to be deemphasized by consumers in favor of one or more of choice, flexibility, distribution, price, portability, and sociability. To understand markets and pick winners in a media segment, you need to develop a nuanced assessment of this ever-evolving interplay. Over or under-emphasize any one of them and you may completely miss the point.
I was struck the other day by an example of this while reading an interview that magazine publishing legend Jann Wenner did with AdvertisingAge (the definitive ad industry trade publication). Wenner started Rolling Stone magazine in 1967. Today, his Wenner Media empire also publishes US Weekly and Men’s Journal, amongst others. He is a certified legend and regarded by many in the publishing world as a genius and a visionary.
The interview was focused on Wenner’s view of the impact of the iPad, and tablets in general, on the magazine business. A few highlights of Jann’s wisdom:
Magazines that depend on photography, and design, and long reads, and quality stuff, are going to do just fine [staying in print]. Because in those areas there’s a real advantage to getting a print product and having something you can hold and that of course is portable and has a luxurious feeling and is comfortable and immersive and you can spend time with it and it’s organized for you.
[Reading a magazine on a tablet is] more convenient only if you’re traveling, if you’re away from home. Otherwise it’s still easier to read the physical magazine, which is widely available on newsstands, at airports, and everywhere. . .There isn’t much advantage as a magazine reader to read it on the tablet — in fact less so. It’s a little more difficult.
People cherish [print magazines]. There’s something to hold onto.
I have little doubt that Wenner is flat out wrong. Do I believe that we are racing towards the shuttering of every newsstand and the screeching to a halt of every printing press? Of course not. But do I think that, broadly, the medium to long term future of magazines is about print first? No way.
Wenner is failing to consider the whole picture, holding far too preciously to the beautiful quality of a printed page and missing the fact that his evolving consumer base is increasingly interested in a more complex value proposition, where beautiful, large format pictures are only one component. Indeed, if I’m sitting still in a chair looking for something to read, I too would rather read a paper copy of Rolling Stone. But consumers don’t sit still that much these days. Take me out of that static situation, and like an increasing number of people, I’d prefer the flexibility of having an infinite number of magazines at my fingertips, all available through one device – my iPad. Cling to a traditional definition of what defines quality in a magazine experience, and you will undoubtedly lose. Integrate a broader view of the consumer’s lifestyle, and you’ve got a shot at winning.
Consider a few examples where quality as traditionally defined has already lost:
- mp3s and iTunes: once Apple introduced the brilliantly integrated iPod & iTunes HW/SW experience, consumers quickly abandoned the superior music quality of CDs (mp3 files are in fact only 9% the size of the uncompressed format delivered on a CD). Today, most consumers don’t even seem to be aware that they are sacrificing audio quality when they listen to their iPod. As a result, CDs have lost more than half of their market share. Quality has lost, and portability, choice, and breathlessly convenient distribution have won.
- Social gaming: Farmville – are you serious? The functional and graphic experience of social games isn’t even in the same universe as a Halo or Call of Duty. At first glance, these games look like a throwback to the Atari era – no right minded investor would back these concepts on the basis of the games themselves. But the distribution model and social experience, driven by seamless Facebook integration, are dead-on perfect, and as a result these games don’t even compete with traditional games – they’ve invented and defined an entirely new entertainment category. The initial reaction of Electronic Arts and the other gaming big boys to Farmville probably echoed Jann Wenner’s reaction to magazines on the iPad, and now they’re paying the price. Score one for distribution and social.
- Netflix and your local video store: DVDs in the mail seemed preposterous to many when Netflix first launched its service in 1999. Why wait for a movie rental to arrive when I can just go to the ubiquitous local movie rental shop and get what I want right now? Blockbuster didn’t give them a second thought, and Netflix proceeded to absolutely nail the business model, understanding that consumers wanted more choice and there was real value in having a movie waiting for you in your home when you wanted it. Again, distribution and choice win. The immediacy and the lower total cost of the local video store lost.
- HD TV: Here’s one where you can make a case that quality has won. 10 years ago I wouldn’t have dreamed of spending more than about $400 for a TV. If I needed a new TV tomorrow, I can’t imagine I’d spend less than $1,000. HD signals plus LCD and Plasma screens have redefined the game in the TV market. And we’ve all upped what we pay for cable service – we need that HD signal to take advantage of our big fancy flat screens. The distribution model has stayed fundamentally the same, so technology-driven quality has won out.
But keep a close eye on TV, as a combination of tablet and handheld-driven video plus the evolution of social in the TV world starts to impact viewing. There are already millions of kids out there watching stuff on their small screens rather than the big screen in the living room – sacrificing video quality in the same way we sacrifice audio quality on our iPods. Portability and sociability are making rapid inroads, and we can expect that to continue. The next big innovations and winners in TV/video will likely surprise some purists in their ability to compromise quality in favor of an experience that is more flexible and richer along other dimensions.
By nature, I’m a quality-oriented guy. I still buy CDs to get the superior audio experience in my car and on my Bose surround sound system in my living room. But that quality focus led us to make one bad investment bet several years ago based on a belief that inferior quality plus superior distribution would not dominate a particular media segment. And I completely missed the social gaming phenomenon by focusing on the trivial, simplistic nature of those game experiences. Our investment in Flat World Knowledge reflects the way we’re increasingly thinking about the media business – flexible, portable, and social. I’ve learned my lesson, I hope, and will continue to work to think less like Jann Wenner and more like Marc Pincus. Here’s hoping you will to.