In the disruptive digital world, only cannibals survive

It’s now fashionable to trot out the Harvard Business School thesis on “disruption” when talking about the effect of the Internet on established business. This kind sloganeering spreads through the business herd like a bloody virus, so it was good to see the New Yorker rip the thesis apart late last year: I’ve attached a link to that article at the end of this post. The worm is turning.

Of course newspapers were “disrupted.” The issue is why they didn’t or couldn’t do anything about it. And the answer to that is clear. Entrenched interests flee from risk. Any established company flinches at the prospect of moving outside its core business, especially if it might attract new competition, presage smaller margins, jeopardize the quarterly earnings report or, god forbid, threaten the dividend.

The prospect of genuine change freezes organizations lacking in fortitude and imagination – and those qualities are derived directly from leadership. In business, the link between culture and performance is direct and concrete. That’s why business failure can always be traced back to a malfunctioning culture tolerated or even endorsed for way too long by uninspired executive management.

Amid all the empty chatter about disruption the astonishing digital success stories of Cox Enterprises and Tribune Company have gone unnoticed and unheralded. Cox’s AutoTrader.com is now the largest digital auto sales product in the world. Based on last year’s revenue its market value is now up around $8 billion. And based on recent newspaper sales, that’s at least 20 times the value of Cox’s remaining newspaper portfolio. It’s amazing what can happen when you refuse to be disrupted.

Tribune was the driving force behind cars.com, second only to autotrader.com in that category.

The automotive advertising category was very important to newspapers because it was their single-biggest revenue contributor. In the late 90s it might have contributed as much as $75 million to $100 million of revenue to a mid-sized metropolitan daily newspaper. It wasn’t the most profitable advertising category, that was employment advertising – but automotive was the biggest.

David Hiller, Tim Landon and Donn Davis, the guys that led Tribune Company’s business development group in the late 90s, are the unsung heroes of the recent sale of cars.com.

They were the driving force behind the creation of Classified Ventures, the parent company of cars.com, back in 1997 – that’s just two years after the Netscape IPO. In June 1998 the venture launched cars.com in eight markets. As a testament to Landon’s salesmanship, the newspaper owners contributed capital, user traffic from their websites, brand advertising in their Sunday editions – and their automotive classifieds listings. They also contributed their inclination to restrict the running room of the new venture. They wanted synergy, they wanted value-add. What they didn’t want was a self-sponsored new competitor.

Landon led a miserable life. Local newspapers fought him tooth and nail for the right to sell their own bundled print and online packages off their own rate card. They refused to cede rate control. The venture was going nowhere. Meanwhile Cox’s autotrader.com, unencumbered by newspapers and adroitly led, was beginning to get dominant scale. April 1, 2000 is generally regarded as the day the Internet equity bubble finally burst. That was also the very day Dan Jauernig, a Canadian investment banker, was bought in as chief executive officer to execute a cutback plan for Classified Ventures. By then it had run through $80 million.

Jauernig stabilized the company. He quickly recognized that if he was to make cars.com successful, he needed to build out a network that provided seamless market coverage nationally. For that, just as the creators of television networks had done, he and Landon designed an online network with two kinds of affiliates. Some newspapers would be owner affiliates and some would be independents, or non-investor affiliates, in non-owner newspaper markets. Out on the road he went to sell those potential independents on the value of joining cars.com.

The trip was a spectacular failure. Jauernig, an earnest and likeable Canadian, ran smack into a newspaper business unwilling to change – for anything. Either newspapers wanted the same deal as the owners or they had some petty historic conflict with the owners they couldn’t forget or they refused to accept that new digital competition would ever rob them of market share. The reasons seemed spurious but the result was always the same. It was an object lesson for Jauernig on the nature of newspapers. It was also the best thing that could have happened. It made it possible for him to recruit, train and manage an independent direct sales force to operate in markets where he could not secure affiliation.

The direct sales team quickly became much more profitable than its newspaper affiliate counterparts, consistently achieving better margins and extracting up to 15-20% more revenue per customer. It could be much more aggressive on rate increases because it was not conflicted by the need to protect print revenue. If a dealer is spending $2,000 a month online and an associated $2,000 a month in print, the mere threat of reducing the print investment because of a suggested digital rate hike is enough to make that newspaper affiliate advertising sales manager cave. A direct sales force that sold everything, everywhere, would be much more profitable. A lot more efficient. And a whole lot easier.

The New York Times was one of the early newspaper company partners in the venture. In a long list of ruinous decisions, it gave up its 20% ownership position for nothing, and left the venture to develop its own Internet auto channel and sales effort for the New York market. That’s right, gave it up for nothing. Jauernig saw the opening. Immediately, he deployed his direct sales force to fill the gap in his network. Today New York is the company’s most successful market.

In 2014, Jack Williams, long time head of digital at Gannett Company, saw the opportunity. Cars.com was shackled to its legacy newspaper ownership. It had become a services business, not a free-spirited creator of independent financial and market value. It was captive to an affiliate model that was throttling it. If you could unshackle it, there was potential for revenue – and earnings – growth. The newspaper company owners, increasingly desperate for cash, were shopping the venture but were afraid that private equity would force an abrupt end to the cozy affiliate deals their newspapers had enjoyed for so long. Gannett stepped up and offered to keep those deals in place through a long transition period. The company picked up the 73% of Classifieds Ventures it didn’t already own for $1.8 billion in cash. That established the total value of cars.com at $2.5 billion, which is 5x its 2014 pro forma revenues of $535 million and 14.6x pro forma 2014 EBITDA.

Tribune’s share of that came out to $686 million, with an after-tax windfall of about $424 million. That’s less than just one year’s profit at Tribune Newspapers back in in the glory days of newspapering, the price paid for not running alone, free and unencumbered at the opportunity. But in an era of newspaper industry sorryass capitulation to the Internet, it represents a rare victory.

Hiller and Landon fought two battles simultaneously. First, they were fighting to win the digital automotive advertising category. Second, they had to beat back newspapers partners who would not disentangle themselves from their core print business and put digital, first. While their newspapers were fixated on the future of news as they saw it, Hiller and Landon set in motion the events that ultimately precipitated the destruction of the economic platform on which that news was based. But in so doing they created a new media franchise worth billions of dollars. Given the odds against them and the intensity of the fight, it was an extraordinary achievement.

And it underscores the fact that the theory of disruptive innovation is just that, a theory. It is not the irresistible force of nature that academics at Harvard pretend it to be and soon, like previous business clichés, from ‘paradigm shift’ to ‘win-win situation’ to ‘tipping point’ to ‘SWOT analysis’ to ‘stack ranking,’ it will be just another catch-all fictional absolute from long ago and we’ll all be able to get back to the real world of thinking through our management and competitive challenges free from academe’s theoretical claptrap…at least until a new illusion catches on.

Hiller and Landon also proved that the principles of digital innovation are not the exclusive  preserve of Silicon Valley upstarts. They can be applied to defend market position and create new value by large established companies as well, including media companies like Tribune and Cox. It just takes leadership, persistence – and a ton of moxie.

Exposing the fallacy of technology “disruption:” http://www.newyorker.com/magazine/2014/06/23/the-disruption-machine

Also see an earlier post on this subject: The myth of synergy

Posted by Peter M. Winter

Peter is a traditional media veteran and a digital media pioneer. He is an active angel investor and occasional consultant. He advises established companies on cultural regeneration and also consults to digital start-ups, helping them incorporate management process without sacrificing speed. He holds five technology patents. Peter is an award-winning public speaker and writer. His new book "Cowboys and Cannibals," will be published in 2017 - it is the ultimate insider account of the battle to find a digital future for newspapers when the Internet came to town. He blogs on media and leadership at BlastofWinter.com and publishes his unconventional ideas about management on his LinkedIn page. His collection of short stories can be found on Medium.com, at Peter Winter's Life of Fiction

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