Mysteries of Online 1: Cannibalization
January 29, 2009
Big news. Visits to newspapers’ Web sites rose in the last few months. You can read read the Associated Press story here. Sorry. I won’t quote from the write up because I don’t need the AP’s dead tree inspired, legal eagles occluding the sun in Harrods Creek. The guts of the AP story is that some dead tree — aka traditional — publishers with Web sites are getting more traffic. More traffic is good, right? More traffic equals more revenue, right? The AP seems blissfully unaware that at the same time click fraud, which is consistently under estimated, is increasing, said TechCrunch here. But there’s a bigger problem with Web centric online services offered by some traditional newspaper publishers.
The good news, bad news dynamic underscores the paradoxical nature of online information. For every upbeat innovation, there may be one or more downbeats. Paraphrasing Jacques Ellul, it takes technology to tame technology. The consequences are more technology and unexpected consequences. One consequence is trouble controlling costs and another is a net shortfall in revenue. The online revenue was supposed to be additive. In fact, the online revenue is lower than forecast and traditional revenues sources continue to slump, often faster with the online service than without it.
That’s the core of the cannibalization issue.
Cannibalism
Cannibalism as I use the term means eating another snail. I am using my first hand knowledge of South Africa’s cannibal snail as my inspiration in this Web log post. The cannibal snail works up an appetite. Looks around for food that is close. If there is nothing tasty, the cannibal snail eats any other cannibal snails even if the other snail is a relatives. Really close relatives.
As applied to online, most people who use this term mean that one product may suck customers, money, and attention from some other product. The cannibal part refers to eating money from one member of the product family to fatten another member.
Here’s how this works. A company publishes a big fat encyclopedia with inclusions (meaty ad inserts). The publisher gets the great idea to break up the big directory into smaller chunks; for example, split out the research firms from the drug distribution companies or maybe the descriptions of the Microsoft products. A price is slapped on these spin outs which can be offered online if the big book is a print only product. I am going to use examples that are about 25 years old because the examples are useful and relevant even in 2009.
A cannibal snail. Newspapers and other print media are slow moving and end up eating their own revenues. Source: http://www.johnrobertmarlow.com/g_africa–cannibal%20snail%20(side).jpg
The cannibalization angle is that most spin out or derived products don’t earn as much money as the daddy product.
Inelasticity: Just Charge a Lot and Forget Spin Outs
Even more surprising, based on my tests with the Pharmaceutical News Index, between 1981 and 1986 is that for certain products, a high price or a low price has little impact on the number of information products sold. I learned you can pump up the price of an information product and some customers will pay for the product regardless of the cost. The surprise came when I left the price unchanged and created child products. Revenue declined. The people who wanted a segment were happy to pay less. The market for the information was not growing. Therefore, I got bitten by one of cannibalism’s fangs. Spinning out child products directly hurt sales of the big daddy product. Cannibalization, in short, left me hungry for revenues.
Aggregation Versus Local News Web Site
A newspaper has a tough time competing with aggregated news outside of a newspaper’s core market. Ric Manning, I, and a number of other Courier Journal professionals created Business Dateline. In the database’s first year of existence, the product generated hefty online revenues and turned a profit, tough to do in the Stone Age of online. The Courier Journal shared that revenue with the 50 or so participating business news organizations. The database did not cannibalize the revenues of any one news partner. We selected only certain stories and packaged them with other stories that had a local angle but addressed a broader business issue; for example, labor management, site selection, marketing tactics, etc. The local angle provided an anchor, but the business message was broader. Local news Web sites don’t blend big picture and microscopic view.
The reason is that aggregated information does not meet the same types of information needs as a local or sharply focused news source. When an innovative outfit launches Craigslist.org, the local Web sites and the local newspapers take a hit. Craigslist.org is more hip, cheaper to use, and more timely. Why wait for a dead tree edition of the Courier Journal? Go online when you want.
When a local newspaper creates an online Web site, that Web site cannibalizes the local hard copy newspapers. The bite may be modest but when every penny counts, the reality is that ad revenue from single source Web sites costs money to get and then is not as lucrative as selling the used car dealers full page ads on Sunday. The other gotcha is that the most sophisticated local news consumer will use the Web site for free. The better job the local newspaper Web site does, the quicker the sophisticated Web user is to drop the subscription. The Web is free, doesn’t ask for money at the holidays, and does not leave the paper in the mud.
Let’s assume that a local newspaper signs a deal with an aggregator and offers a Web site. Makes no difference. The revenue from the aggregator combined with the revenue from the local Web site won’t make up for the costs of the dead tree operation as well as the costs of the Web site. Advertisers won’t pay as much for online. As print display rates rose, advertisers looked elsewhere. (Think Google and other online networks.) But the revenue expectations of the dead tree crowd cannot be met.
Dead tree publishers have 400 or 500 years of business practices behind their business models. Jumping online throws some of those cherished operational procedures out the window. I get calls from PR people who think I am a journalist. I am not a journalist. I am a researcher, and when I don’t get answers quickly, I post my opinions and ask for input. Whatever the journalism schools teach, I don’t know. I’m 65 and happy to work in my small corner of the vineyard.
Publishers are like me when they have to deal with online information. There’s a technology hurdle. There’s a velocity of action issue. There’s a nerd management issue. There’s the cannibalization issue. What I have observed is that dead tree outfits talk a good game and then set up online services that are almost certain to accelerate three bob sled runs for their financial department:
- Loss of subscribers which means less dough comes in
- Declining ad revenue at the same time the cost of selling those ads goes up
- Inability to control non linear costs that are common to online services.
When dead tree wizards talk to me about economies of scale in online or a method to avoid cannibalization, I head for the exit.
What dead tree publishers want from their online services. Google and Facebook have one of these vehicles. Anyone can buy one, right? Money talks.
Source: http://www.testriffic.com/resultfiles/18218bugatti-veyron-big.jpg
What publishers get is more like this. A traditionally engineered approach based on market research, committees, and strategic planning. Works really well. Problem was that most people did not want an Edsel. Whatever sales the Edsel generated came at the expense of Ford Motor’s other products. In the 1960s, the Edsel had zero impact on GM and Chrysler.
Designed to be a winner but it’s an Edsel. Source: http://www.carburetor.ca/carbs/images/cars/60Edsel-large.jpg
A company like Yahoo is supposed to be pretty good at online. The company has emulated many successful online services; for example, email, news aggregation, and online photo sharing. The company is a mess.
A newspaper lacks Yahoo’s technical focus and business methods. Furthermore, if Yahoo can’t make its high tech business hum like a Veyron in online, how can a dead tree publisher. Microsoft is in the same sub division, rubbing shoulders with Yahoo.
The outfits that seem to be generating revenue have little in common with dead tree publications and seem to have more craft in dealing with the vagaries of online information. Amazon is doing okay. Facebook seems to be on track. There are quite a few services that are so so. But the majority of the savvy tech outfits are struggling.
Cannibalization is more common among the dead tree crowd. Savvy online companies make an attempt to avoid killing one product to fatten a new one with less earning potential. Much of Microsoft’s slow march toward online or cloud services is probably due to cannibalization issues. I don’t know how Microsoft will deal with cannibalization. Oracle seems to be taking tentative steps toward cloud computing and I want to see how it deals with cannibalization of its flagship products’ revenues.
I submit that when technology centric companies cannot handle the cannibalization challenge, I think that dead tree outfits will face the same battle with less armor. In fact, I think some of the online services offered by dead tree publishers are the equivalent of marching into battle in the 1st century BCE naked and with no weapon. The foe is today’s equivalent of Julius Caesar. I wonder is Sergey Brin is related to him?
To wrap up, cannibalization is one of the inherent “rules” in online.The silent killers are cost and revenue shortfalls.
Stephen Arnold, January 29, 2009
Comments
2 Responses to “Mysteries of Online 1: Cannibalization”
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Truer words have not been spoken for months.
As someone who makes his living selling real products (physical items) online, I can’t help but wonder at how silly most we ventures have been and still are.
Ironically, I sell parts for cars such as the Edsel and am doing quite well. No cannibalization here, as the market didn’t really exist before the web, since the bits that I have were too hard to find and distribute in the dead tree/telephone/snail mail world.
Sorry, meant to say “how silly most web ventures have been and still are.”