Technology Titans In Trouble

Something strange is happening to America’s titans of technology. At the precise moment when the economy is supposedly gaining strength, and at the very time when technology platforms are evolving in increasingly productive ways, many dominant firms are experiencing dramatic slow-downs (or even outright declines) in sales revenue.

Just last week, for instance, Amazon slashed its sales projections for the upcoming holiday season. Apple revealed that it was losing iTunes music volume to online streaming services. And IBM abandoned its $20 earnings per share “road map” target for 2015, while an analyst complained, “too much of its revenue comes from old-school business lines, and not from potential growth areas.”

But why are such admired firms suddenly struggling to attract customers? After all, IBM rescued itself from collapse by shifting from a hardware focus to a customer focus in the early 1990s. Amazon virtually invented the online sales industry in the late 1990s. And Apple’s iTunes, along with the iPod, revolutionized the music industry in the early 2000s.

All three firms, though, now appear to be struggling to maintain their competitive market positions. Amazon’s initial venture into mobile phones, for instance, flopped earlier this year. Apple is pinning its hopes on integrating its recently acquired Beats music streaming service with its own iTunes service. And IBM industry analysts are now referring to the firm’s predicament with expressions like “a sad national story.”

At first glance, these firms appear to be focused on different technology sectors. Nevertheless, they do seem to share a common problem. Namely, their customers are underwhelmed by their offerings, and they are taking their sales revenue elsewhere.

Unless these firms can rediscover the internal development capabilities that first drove them to prosperity, their days as industry titans may indeed be numbered.

Apple and Random House: New Partners

Show us a publisher that is clinging to a traditional business model, and we’ll show you one that is embracing the future.

Consider the newspaper industry, for instance. The Christian Science Monitor, a global paper that first emerged in 1908 (when the cursed Chicago Cubs last won baseball’s World Series), recently abandoned its daily subscription edition and adopted a continuous 24/7 cycle of free online postings. On the other hand, Rupert Murdoch‘s The Daily continues to cling to a daily delivery, subscription based business model, even though its deliveries are made electronically via Apple iPads.

Likewise, consider the magazine industry. The venerable Time continues to promote its glossy national news weekly as its flagship publication. But its traditional rival Newsweek is about to be relaunched as a companion product for the web-only The Daily Beast, and The Atlantic (which was created in Boston in 1857 as a literary journal) has been reborn as a Washington-based home of political bloggers.

And what of the book industry? Until this past week, five of the “big six” book publishers had embraced Apple’s new business model for e-book sales via its iPad tablet. But Random House, the largest book publisher of them all, valiantly refused to sign on to Apple’s new business model …

… until Steve Jobs prepared to take the stage to introduce the snazzy new iPad 2.

Wholesalers and Retailers

Traditional retailers such as Barnes & Noble and Borders usually purchase their merchandise from publishers at wholesale prices and then mark up (or discount) their customer retail prices to whatever the market will bear. This model tends to serves both entities well; after all, publishers can restart their printing presses whenever new orders arrive from retailers, and can generally rely on wholesale revenues to cover their operating costs. And retailers can respond to variations in market demand by modifying their retail prices, thus maintaining some control over their own revenue streams.

Apple, however, insisted on a new business model for e-books when it introduced its iPad last year. Instead of paying publishers for distribution rights up front and then managing the retail prices that are charged to retail customers, Apple negotiated retail prices with publishers up front and then agreed to share customer revenues on a 30 / 70 basis. In other words, Apple abandoned the retailer’s traditional right to discount book merchandise, while avoiding the concomitant cash flow burden of paying wholesale prices up front to acquire products for resale.

Most publishers, lusting after the promise of future profits from e-book sales on Apple iPads, simply fell into line and acquiesced to Steve Jobs’ demands. But Random House initially refused to do so; it insisted on withholding its e-books from the iPad retail platform. This past Thursday, though, Random House finally lost its nerve.

Agents and Partners

Steve Jobs made Random House’s commitment about the iPad a key part of his splashy introductory public demonstration of the iPad2. Many believe that Apple was feeling pressure to make the iPad 2 as attractive as possible, given the flood of competitor products that are now challenging the iPad for supremacy in the tablet market. Thus, Apple arguably needed Random House as much as the publisher needed the technology firm.

It wasn’t clear, however, who would blink first in the weeks leading up to the iPad 2 announcement: Random House, the only holdout publisher from the iPad platform because of its dissatisfaction with Apple’s 30 / 70 business model, or Apple, a vendor that was competing with the Amazon Kindle and other e-book readers. Apple was arguably in a difficult position, not being able to offer readers the written works of President Barack Obama, John Grisham, and other famous authors publishing under the Random House umbrella.

Ultimately, it was Random House who blinked first; it simply agreed to accept Apple’s standard contract terms. The industry is now referring to those terms as an “agent model” because Apple has become a sales agent of the publishing houses, compensated on a commission basis. In other words, Apple has forced its content producers to accept it as a junior partner on all book sales.

Back From The Dead?

Interestingly, as new book publishers and online retailers settle their differences and adapt to the emerging environment of e-books, some tiny independent booksellers – written off as relics of a bygone age just a few years ago – are learning to survive by trading used books, staging community events, and selling ancillary merchandise. Apparently, the challenges faced by traditional book stores like Borders and Barnes & Noble are creating market space for small and nimble competitors to establish their own strategic niches.

As long as reading remains a hobby, a pastime, and an avocation for millions of American bibliophiles, there will always be publishers and retailers to serve them. Nevertheless, with the rise of the agency model, the distinction between the producers and the purveyors of written material will likely continue to blur.

Super Bowl 2014: Welcome to the Big Apple!

Congratulations to New York City for winning the right to host the Super Bowl, American football’s professional championship game! In 2014, the Big Apple will crown the league’s champions for the first time since 1962, when its New York Giants lost to the Green Bay Packers at Yankee Stadium.

In order to award New York the Super Bowl, though, the National Football League (NFL) was required to break with its 44 year tradition of playing championship games at sites that can guarantee that snow storms will not mar the festivities. That tradition has led to repeated stagings of the games in subtropical cities like Los Angeles and Miami, with occasional diversions to chilly northern cities like Detroit and Minneapolis that sport indoor stadiums with weather domes.

The NFL has offered a number of explanations for its decision to risk extreme weather conditions during its marquee event, ranging from respect for the New York Giants’ deceased owner Wellington Mara, to a residual desire to help Gotham recover from the trauma of 9/11. Although these factors might indeed appear to be convincing, the League’s decision was also undoubtedly influenced by the continuing evolution of its own business model.

Who Provides The Revenues?

Forty four years ago, at the birth of the Super Bowl era of American football, the internet didn’t exist at all; furthermore, television promotion and coverage of major sporting events was in its infancy. All of baseball’s World Series games, for instance, were still played during the day time hours because the television networks were not yet convinced that viewership would justify evening “prime time” coverage; thus, the first night game in World Series history would not be staged until 1971. And two different television networks (CBS and NBC) actually co-broadcast the very first Super Bowl game; apparently, the game failed to sell out its tickets, and neither network was interested in paying for exclusive rights.

At that time, far more significant portions of total NFL revenues were derived directly from fans in the form of game day ticket sales, concessions business, and other retail activities. Today, however, far more revenues are received from television broadcasters, online services, and other indirect sources. Thus, the comfort levels and spending patterns of the fans who actually attend the games are now far lower priorities (from a revenue generation perspective) than the abilities of media organizations to deliver huge audiences via electronic communication technologies.

A few simple numbers can easily illustrate this point. If 100,000 spectators are watching a game in a stadium and 100 million additional spectators are watching the same game on television or via an online web stream, a well placed video beer advertisement might reach 1,000 times as many thirsty customers as an equally well placed stadium sign. And those video viewers might buy beer by the keg or the case instead of by the cup!

The American Dream

Interestingly, though, many football fans actually support the placement of the Super Bowl in a cold weather locale, even though they will experience a far greater level of physical discomfort if they attend the game in person. For such fans, a cold weather climax to the season represents a return to the roots of the sport, promising an experience that is as traditionally authentic as the one enjoyed by hockey fans who attend the frigid outdoor Winter Classic each New Year’s Day.

In fact, the attraction of Sun Belt locations for outdoor winter sports games may have peaked with the Baby Boomers’ migration to America’s subtropical regions during the post World War II period. As long as the lifestyles of sun drenched states like California and Florida represented the American Dream, teams like baseball’s legendary Brooklyn Dodgers were happy to move there, and major sporting events like the Super Bowl were increasingly staged there. The migration of American sports leagues to these regions, in other words, reflected an underlying shift in cultural preferences.

The recent outmigration of citizens from states like California and Florida, though, has led to a resurgence in population and wealth of traditional cold weather cities like New York, Chicago, and Washington DC. As the American Dream of an ideal cultural lifestyle has shifted from I Dream of Jeannie’s Cocoa Beach to Seinfeld’s Upper West Side of New York, sports leagues that cater to the broad American public have shifted their marketing promotions as well.

Another Few Decades? Fuhgeddaboudit!

So will it take another few decades for the NFL to decide to stage another Super Bowl in a cold weather location? Although New York itself acted cautiously, requesting only a one time waiver of the warm weather requirement, League Commissioner Roger Goodell has publicly acknowledged that similar proposals will be welcome in the future if the 2014 championship game is a success.

In fact, as long as marketing executives believe that Times Square provides a more compelling media image to the American consumer than Malibu Beach, Goodell will likely remain focused on cities like New York. Why? Because the nature of the NFL’s evolving revenue structure simply favors the economics of playing high profile games in the Big Apple.