Business synergy is a myth – chasing it is fruitless
An established company is always tempted to position a new business as secondary and supportive to the core business. It’s the easiest way to manage the internal tensions that always erupt when cash is diverted to a new venture. Orchestrating the sales relationship between the old and the new keeps everybody happy, everybody, that is, except those leading the new business. They want to kill the core business, or at least steal market share from it. For them, synergy is a market handicap. It forces them to compete with one arm tied behind their back. Their competition has both arms free.
Chasing synergy impedes both the parent company and the new start-up. It creates sales channel conflict and slows them both down. A customer’s basic intention is always to drive your price so low that you go out of business. The customer is smart. The customer sees a chance to play one part of the company off against the other. The customer, always looking for a deal, is determined not pay the full rate for either the old or the new offering. The customer wants the rate to be bundled. So either the revenue of the old company suffers or the revenue of the new company. In the upside down world of revenue growth from imagined synergy, 1+1 never equals 2. It equals -1. One company or another will lose pricing power and rate sustainability. Someone high-up in the pecking order eventually has to decide which business, established or new, needs to bend over. Guess who usually does the bending?
There are many candidates for the absolute worst contribution of consultants and investment bankers to American business – like growth for the sake of growth, or industry consolidation as a guaranteed consumer benefit – but for my money this notion of synergy trumps them all. It’s often used to exaggerate the imagined benefits of a dubious acquisition or start-up strategy. But in all my years in media I’ve never seen joint selling by one company across different sales channels in the same market lead to a better financial return. Never. If you’ve ever sold anything, you know this to be true. To try it with two business units within the same operating company demonstrates a remarkable level of naiveté about media sales. It’s simple, really. It’s impossible to get sales force compensation in one operating unit structured to reward them for bringing sales income to another operating unit.
I know this because my old company, Cox Enterprises, the media conglomerate headquartered in Atlanta, has several markets where its media properties overlap. They duke it out with each other every day, while up on high the Cox family enjoys the fruits of the internecine battle. Every now and then an eager-beaver 30-year-old consultant or banker would trot in to advance the notion of synergy as an original idea, glibly promoting the potential of a “one stop-one shop advertising buy” over our newspapers, broadcast outlets, cable systems and Internet properties. Our advertising leadership would always pucker up when they heard that phrase. They knew someone was about to get screwed.
Cox is different. Cox Enterprises was formed in 1898, when James Cox borrowed $28,000 to buy a little newspaper in Dayton, Ohio that was ranked the fourth newspaper in town. Out of four. One hundred years later, Cox revenues were close to $10 billion. Last year they were over $15 billion. An early radio enthusiast called Leonard Reinsch led the company charge from newspapers into radio and then into television and even on into the automotive industry. Cash thrown off by the company’s newspapers funded each new step.
From Reinsch and his management team came many of the practical, operating lessons about building or acquiring new businesses that over time were refined and absorbed deep into the corporate psyche. Get in early. Be patient, don’t push for profit too quickly. Operating focus and disciplined execution always matters. And most of all, never constrain a new business with the interests of the parent. Get it independent quickly, because a new medium has its own characteristics and business dynamics and the earlier they’re found, the better your competitive position and the quicker you learn how to sell it.
Newspaper response to the Internet was shaped by the half-baked illusion that it could be used to add value to the print newspaper until some miraculous moment arrived when a magic switch could be pressed and digital presentation and delivery would seamlessly replace that print paper – the world would then carry on much as it always had. But the actuarial tables that predicted gradual, manageable decline were nothing but a happy and solipsistic conceit that made everybody feel good about life. Chasing synergy left digital newspapers with no clear path to profit. The online unit was never forced to stand on its own two feet and was never held accountable for hitting unambiguous sales growth targets. Worse, local advertisers were trained to believe that the newspaper’s digital product had value only if bundled with print. They were trained to believe that it had no independent promotional value. The alternative choice, a much harder and more risky call, was to invest in the development of radically new digital products to create new sources of financial value, gutting the decaying print product over time and ruthlessly leveraging only what was directly relevant from it. Cox’s autotrader.com is a great example. Tribune’s cars.com and careerbuilder.com are good examples, too.
The danger of cannibalization causes any established company to flinch when confronted with the need to launch a new product. Why do damage to a successful business? Because even if the economics of the new business do not at first appear to be as promising as the established one, it’s always better to own a threat than to consign it to the competition. “At some point,” says John Donahue, chief executive of eBay, “either you cannibalize yourself, or someone else is going to do it. That’s what spurs you to innovation.”
If a business is suddenly faced with both price destruction and simultaneously dramatic loss of share across its most important revenue streams, then conservation and synergy is no option at all. When you bundle sales like print newspapers did with online, you siphon off value in the old business while simultaneously retarding growth in the new business. It’s a losing proposition for both.
As we can now see.