Thursday, 14 April 2011

London Book Fair - A different perspective on managing digital risk

Earlier this week I was invited to speak at the London Book Fair Digital Conference. Thanks to Orna O’Brien and the team from Reed for putting on an excellent event . With over 350 executives from the trade publishing, digital retailing and technology space attending, the appetite to learn about digital best practice in the book market remains high.

It was interesting to see the majority of speakers take a binary view of the emerging digital opportunity. The consensus seemed to be that E-Books were going to be an important part of the future, and that Apps (& other digital products) were unproven, and as such were not worthy of significant investment and effort (beyond R&D). I do have concerns about this approach. A focus on building E-Book revenue is understandable given very clear market demand. However failing to grasp the wider opportunity to innovate around product & customer engagement is risky.

By way of example, in lifestyle publishing we should expect new competition from outside the industry who will offer Apps and interactive multimedia experiences which will satisfy customer needs better than traditional products. (e.g think about a travel guide created by a new wave digital developer that recognises your location, makes recommendations, and earns revenues by partnering with local businesses). Publishers that focus their digital efforts on e-books in these categories will be exposed.

In other categories of publishing, there is potential for a new wave of digital products to be created for ‘Superfans’ of authored IP who are hungry for more content linked to their favourite franchises. Publishers can choose to systematically serve this need, or let others benefit from this market opportunity.

Whilst it is true that the commercial case to support investment in these areas remains unproven, a failure to embrace these opportunities risks damaging the future earnings potential of the business. This requires a change in mindset around the management of risk which should be led from the top down.

As a starting point, I would encourage publishers to think harder about how they can deliver new digital products that surprise and delight, and take full advantage of current technology. In the LBF showcase of digital products , a children’s talking book was featured. Similar products have been around since the CD-ROM boom of the mid 90’s, which does beg the question whether some publishers are fully committed to innovation.

My panel session focused on Mobile , and what was in store for publishers. I shared my prediction that there will be a shakeup in the market with power transferring from Mobile Network Operators to the owners of the smartphone operating systems, and digital storefronts. My forecast was the market would consolidate around a limited number of players with Apple, Google and Microsoft being the likely winners in the OS space, and I-Tunes, Android Marketplace and Amazon the likely winners in digital retail. Other players would, in my view, either struggle to reach scale or would focus on serving narrow market segments.

I also talked about the emergence of new $billion businesses which exploited mobile’s unique ability to offer social, local, & personal experiences, and a trend for consumers choosing to own a variety of mobile internet devices (e.g a smartphone for general use, a mobile gaming device for social & multiplayer gaming, and tablets for entertainment and information on the move).

These trends matter to those in publishing and other categories of the media & entertainment market.

The potential consolidation of Operating Systems and digital storefronts means content owners may have less bargaining power in the future. To counter this threat, consideration should be given to seeding & supporting new digital storefronts on open platforms like Android.

The changed device ecology also raises important questions of whether content should be delivered in the cloud for consumption across a variety of devices, or whether effort should be focused on delivering a high quality native experience on the device where the majority of usage is expected (e.g tablets for books and newspapers)

The choices publishers make now (in these and other areas) will have a significant impact on the structure and dynamics of the future market.

The good news is that the book industry is early enough in its digital transition to shape its destiny, but a single minded focus on e-books will not in my view deliver the best outcome.

Friday, 11 March 2011

How to survive and prosper from Digital Transition - Planning for pain before enjoying the gain

The transition to digital formats offers a once in a lifetime opportunity for Trade Publishers to re-energise customers, address structural issues with the current industry model, and emerge bigger, stronger and much more profitable. However, a number of publishers will not I am afraid survive long enough to enjoy these benefits. The next 2-3 years will be extremely tough for the industry and will end up with a shakeout of weaker, less digitally savvy players . Operators who are not prepared to make difficult choices now, and whose balance sheets are not strong enough to invest in the digital supply chain will be exposed. Whilst publishers who play their cards well will reap significant rewards. My conviction about how the market will play out is based on experience of digital transitions in the music, tv, games and video markets. The parallels with these industries are real, and it is not too late to learn the lessons.

The next 2-3 years will see trading conditions deteriorate for trade publishers, at a time when it is essential the business invests in its digital future. The temptation to retrench and to postpone digital initiatives should be resisted ( if circumstances allow).

Publishers will contend with a physical book market declining in value. Profits will be eroded by continuing discounting by supermarkets & on-line retailers, the removal of high street capacity (Waterstones recent trading update is the shape of things to come), and the growth of digital consumption.

Unfortunately e-books, enhanced e-books and other digital formats will not in the short term make up for the shortfall. Promotional pricing and a wide selection of free titles will help to educate the market but will impact margins. Sales revenues will take time to realise their potential as Publishers learn how to price and build up understanding of demand elasticities, and storefronts mature and begin to offer more sophisticated merchandising, marketing and retailing capabilities. Costs will also remain relatively high. Current market fragmentation and lack of interoperability between digital storefronts will drive up delivery costs, whilst digital product development cost will be artificially inflated until publishers learn how to reap economies of scale & experience (for example by reusing digital engines).

The choices for Publishers during this testing period will be stark. Either make major Investments in the digital supply chain in a period of declining revenues, with the expectation of a long pay back. Alternatively JV or partner with digital specialists to share the financial risk of digital transition, but risk losing control of your digital destiny. Or make small, piecemeal investments in digital based on current market size, with the risk of being unprepared when the market reaches its inevitable tipping point.

Publishers that make the wrong choices, or who execute their chosen strategy poorly will end up as casualties in an industry shake out. Those who plump for the first option and make significant investments in their digital future but craft the wrong strategy or fail in execution will burn cash, undermine the financial health of the business & be exposed to takeover (unless they have a friendly parent to bail them out). Publishers that take things slowly and play the waiting game will shrink in size by over relying on a weak physical books market, with their best option being to continually cut costs to maximise returns in a declining market. Whilst those that opt to JV & partner with digital specialists, may be protected from the next wave of industry consolidation but will in the longer term end up with a weak digital value proposition for authors. Given the risks involved with every approach, my expectation is alot of businesses will be impacted by the shakeout, and the industry will consolidate around 3 big international publishers with room for a large number of operators to serve niches in the long tail.

Nevertheless publishers that make the right digital investments, have a credible plan to deal with the short term industry issues , and understand how to position themselves in a reshaped market, , will emerge stronger & better able to benefit from a more attractive business fundamentals. My confidence in the long term future is based on three things.

Firstly demand for authored content will, over time, increase materially. The convenience of digital consumption, coupled with improved customer insight & precision targeting that digital platforms will deliver will enable publishers to increase volumes (borne out by the experience of other digital transitions and by recent research conducted by Bain found that 42% of E-Book readers buy more books than before, while only 7% buy less)

Secondly significant new opportunities for creating customer value will emerge. Whether by reimagining children’s, cooking and travel titles as interactive multimedia experiences, or seeding fan communities which connect readers to their favourite authors. Publishers that create exciting new digital propositions will be better able to maintain premium price points and protect against aggressive discounting.

And Thirdly innovation in the packaging and windowing of content, will help to squeeze more value from authored content. New digital windows that complement current hardback and paperback releases, and offer customers something new over and above a standard e-book will help to squeeze more value out of existing IP, and create excitement and noise around digital product launches. Best practice learnings from the movie industry prove the real opportunity around digital windows. However to realise this upside the industry will need to find new ways of working together.

Whilst new packaging models, such as subscription (think book clubs for digital customers) can complement current a la carte pricing, . There is growing body of evidence from the music (e.g. Spotify) & video (e.g. Netflix) space that the subscription model resonates with digital customers, is supported by attractive economics and helps to expand the market.

In summary, digital transition is an opportunity for publishers to develop a new & better business model, based on deeper customer engagement and insight, offering author fans more of what they like and expanding the market by attracting consumers who would not consider themselves book lovers.

To realise the digital pot of gold will be a very long & painful haul. It will require new thinking, new digital skills, and a new era of industry co-operation. Complex rights, technology and workflow issues will need to be aggressively managed. There will be many casualties along the way, but the battle is one well worth fighting.

Friday, 18 February 2011

Selling Content in the Digital Age – Why is it so hard, and shouldn’t it be easier ?

Media companies across the spectrum are struggling to find a sustainable model for monetizing digital content. As the transition from analogue to digital formats gathers pace, solving this problem lies at the heart of the strategy and potential survival of organisations across the print, video, music, and home entertainment industries.

Businesses have, since the advent of mass media 100 years ago, packaged products that large numbers of customers have consistently been happy to pay for. The entertainment, knowledge, stimulation, escapism and overall experience that media products have delivered has created utility that audiences both rich and poor have been happy to pay the cost of a cup of coffee or in some cases a simple meal.

However in the past 10 years the landscape has changed dramatically. Whilst the core product and value being offered to digital consumers remains essentially the same , willingness to pay for digital formats has dramatically declined in some parts of the industry (e.g music, newspapers), increased in other categories (e.g pay TV), with the jury still out in sectors early on in their digital transition (e.g book publishing & games).

On the surface this is hard to fathom. Digital products should be commanding higher rather than lower prices across the board, given the potential to increase customer utility via the benefits of increased choice, control, and immediacy. After all, if consumers have demonstrated they are prepared to pay materially more for a cup of coffee over the past decade, why shouldn’t they be paying more for products that are an even more important part of their daily diet ?

How can this be explained ? Well a systematic analysis of what content consumers are willing to pay for on digital formats, and what they are not, reveals some consistent themes.

Firstly on the open internet it is currently incredibly hard to get customers to pay for content. However on closed or Walled Garden digital Platforms, particularly those linked to simple ‘on bill’ payment mechanisms (like mobile and pay TV), it is relatively easy.

Why ?

Walled Gardens (like Kindle, I-Tunes and new players like Microsoft's Zune) promise a consistency of experience (in quality of streaming, speed of download), the support of a trusted aggregator brand, quality customer service, and simplicity both in terms of ease of finding and in paying for content . This experience makes it easy for impulse content purchasing, which is frankly very hard on the open internet. In addition there is growing evidence that consumers will pay for the convenience of mobile access, and the entertainment value of seeing content on the big TV screen that Walled Garden operators can offer (even when the same content is being offered free on the internet).

The open internet cannot currently compete with these benefits. Not only is getting consumers to part with their card details (or to use payment intermediaries like Paypal) a challenge for low value micro transactions , audiences are also in a different mindset on the open internet. So long as there are high quality, free and roughly comparable alternatives a couple of clicks away, most consumers will understandably choose not pay.

This all helps to explain why the vast majority of pay revenues for digital content remains on closed platforms, and this I would contend is likely to continue for some time (or at least until mass adoption of a new micro payments systems like Google’s new ‘One Pass’ , or on-line entertainment retailers like Amazon start to build very large businesses in digital formats).

Secondly many digital products, either by accident or design, do not offer sufficient customer value to command a premium pay price point.

In the newspaper and magazine market, some incumbents have delivered digital products of arguably lower perceived value than their physical equivalents.

Offering consumers the opportunity to cherry pick favourite stories, undermines the value in the bundle of content offered in print. Failing to deliver true portability removes another benefit supporting purchase. Whilst replicating analogue content on-line without delivering the real benefits of digital distribution (such as true personalisation, social & multimedia features, and increased depth and choice), disappoints customers used to enjoying new benefits from going on-line.

Creating compelling digital products is an expensive & highly skilled business (something that has not come easily to incumbent media companies). Not everyone has the stomach for it – particularly when business models are unproven, old media revenues are declining, and legacy cultures are entrenched. However to expect customers to pay without delivering a premium product is misguided.

Thirdly the skill that has been applied to digital packaging has varied enormously in different parts of the media industry. And choosing the right pricing and packaging strategy has a huge impact on the success of digital pay propositions.

The mistakes made in packaging digital content are well documented and include the polar extremes of stymying take up by pricing too aggressively (e.g digital movie downloads priced higher than the cost of a DVD) and giving away content that customers are used to paying for and thus devaluing it forever (e.g the digital editions of some newspapers).

However there is a growing body of smart operators deploying new packaging models which leverage digital’s added value and reflect changing customer behaviours. Whether offering access to content across multiple devices for one guaranteed price (pioneered by Sky and other pay TV platforms), intelligently packaging physical and digital products together (e.g the added value Nook experience available in Barnes and Noble stores ), crafting freemium offers that drive purchase through trial (e.g mobile games offered by publishers like EA), or bundling content with hardware & access (e.g Virgin Media’s bundle of video on demand programming for its pay tv customers, and Vodafone’s bundle of digital music with mobile internet access). Those that experiment with these new models, and build new digital packaging skills to support these efforts, will create the foundations for success.

These insights help to explain why some media companies have prospered whilst others have floundered in transitioning their business to digital, and provide a guide to what digital pay strategies are likely to be successful in the future.

I would recommend that media companies consider the following as they develop their monetisation plans for digital content.

1. Ignore the sirens cry that all digital content must be free – pursuing a strategy that balances advertising with pay revenues hedges risk in a digital world that is dynamic and uncertain.

2. Invest in digital product (and product development talent) to support pay offers & deliver an experience that is not only surprising and delightful but also better quality, more flexible, more personal and social than analogue or physical alternatives (Virgin Media's Tivo box proposition is a nice example).

3. Strengthen relationships with walled garden operators (with a particular emphasis on those reaching large number of customers across multiple platforms) who will to continue to account for the vast majority of pay revenue in the short term.

4. Explore strategic partnerships with ISPs – and other entities with large customer databases, billing relationships, and the potential to package content & access bundles.

5. Use the open internet principally as a free showcase for pay products – ensuring sufficient data is being captured to maximise free to pay conversion rates.

6. Develop packages that enable consumption across multiple devices. And Where appropriate integrate physical and digital products in one offer – to ensure customers are retained during digital transition.

7. Convene cross industry initiatives to deliver new pay propositions (which include a critical mass of popular brands) and aim to reach consensus of what products will remain free.

In summary, I would contend that in the future it should be easier (not harder) to get customers to pay for digital content. Lessons can be learned from the mistakes of the past. So long as media companies apply rigorous thinking & slick execution to their monetisation initiatives, the obstacles to getting consumers to pay for content can be overcome.

The development and marketing of digital media products should be treated no differently from other fast moving consumer goods. If the product has a clear target audience & competitive positioning, delivers benefits that are valued & clearly communicated, & billing is seamless and convenient, then customers will pay.

Google One Pass - Hoping to make micropayments easier on the open internet

Barnes and Noble Nook - offering a value added experience in Barnes and Noble Stores

Virgin Media Tivo box - a nice example of a digital product that reflects changing customer behaviours

Microsoft Zune - One of a number of operators providng that i-tunes isn't the only Walled Garden in town.