Strategy in the media

Strategy & Leadership

ISSN: 1087-8572

Article publication date: 8 November 2011



Henry, C. (2011), "Strategy in the media", Strategy & Leadership, Vol. 39 No. 6.



Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

Strategy in the media

Article Type: CEO advisory From: Strategy & Leadership, Volume 39, Issue 6

A gloomy forecast from a hedge fund Cassandra

In July, 2007, Dalio and a co-author wrote in Bridgewater’s daily newsletter about “crazy lending and leveraging practices,” adding, “We want to avoid or fade this lunacy.” A couple of weeks later, after the subprime-mortgage market froze up, Dalio’s newsletter declared, “This is the financial market unraveling we have been expecting […] This will run through the system with the speed of a hurricane […].”

This spring, he told me that economic growth in the United States and Europe was set to slow again. This was partly because some emergency policy measures, such as the Obama Administration’s stimulus package, would soon come to an end; partly because of the chronic indebtedness that continues to weigh on these regions; and partly because China and other developing countries would be forced to take drastic policy actions to bring down inflation. Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.”

Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said.

John Cassidy, “Mastering the machine: how Ray Dalio built the world’s richest and strangest hedge fund,” New Yorker, July 25, 2011.

Twitter wisdom

Success turns luck into genius. It’s dangerous when an entrepreneur, who chanced upon a great idea, gets enthroned as an all-wise seer.

Gary Hamel,!/profhamel/statuses/94815143782920193

Taxing “economic pollution”

Did the tax code contribute to the severity of the financial crisis in 2008-9? At one level the answer is a simple yes, because the tax deductibility of interest payments encourages families to take out bigger mortgages and companies to borrow more relative to their equity capital.

But where in the tax code should we focus attention if the goal is to prevent similar crises in the future?

Banks and other financial institutions should be the priority, because their overborrowing was central to past crises and is likely to be a salient issue in the future. It is also ironic – perhaps even bizarre – that while we try to constrain how much banks borrow through regulation, we give them strong incentives to borrow more through the tax code …

One goal is “tax neutrality,” meaning that from a tax perspective it would be equally attractive to raise capital through issuing debt or through issuing equity. This could be done by limiting the tax deduction on interest payments or creating an equivalent type of deduction for dividends. In other words, you could raise more or less revenue with such a change, but the debt bias can be addressed.

I proposed that we go further and consider a tax on “excess leverage” in the financial sector. The idea – already being applied by some European countries and further developed by some of my former colleagues at the International Monetary Fund – is based on the premise that a high level of borrowing relative to equity is a form of pollution, creating negative spillovers for the rest of the economy …

One way to structure this approach would be as a “thin capitalization” tax – so companies of any kind would be taxed on debts that exceeded some reasonable multiple of their equity (perhaps a multiple of three or four).

Simon Johnson, “Could tax reform make the financial system safer?,” New York Times, July 21, 2011.

The “Netflix Paradox”

Arguments abound about why Netflix should not be as successful and as highly valued as it is. But the animating force of the perceived Netflix Paradox is disbelief that a company that does what Netflix does can thrive amid the wreckage of the media industry. Netflix is primarily in the business of aggregating entertainment content created by other companies and selling access to it as a subscription service to consumers. In a media culture committed to the proposition that “Content is king,” the robust success of a mere redistributor is something incomprehensible and, frankly, a little unnerving, especially while those responsible for the creative lifeblood that flows through its veins struggle for profitability.

In fact, the dirty little secret of the media industry is that content aggregators, not content creators, have long been the overwhelming source of value creation. Well before Netflix was founded in 1997, cable channels that did little more than aggregate old movies, cartoons, or television shows boasted profit margins many times greater than those of the movie studios that had produced the creative content. It is no coincidence that although, say, 90 percent of the public discourse surrounding Comcast’s recent $30 billion acquisition of NBC Universal involved the Conan O’Brien drama or the shifting fortunes of Universal Pictures, in reality, 82 percent of the new company’s profits come in through the cable channels.

The economic structure of the media business is not fundamentally different from that of business in general. The most-prevalent sources of industrial strength are the mutually reinforcing competitive advantages of scale and customer captivity. Content creation simply does not lend itself to either, while aggregation is amenable to both.

Take scale. Because making a blockbuster movie is expensive, people assume that it is a scale business – that is, the bigger you are, the more cheaply you can produce something. But the defining characteristic of scale is high fixed costs that can be spread most efficiently by the largest player. Moviemaking is not this kind of business. The cost of a blockbuster does not vary based on the size of the studio producing it. Creating hit-driven content in any medium does not require significant fixed costs …

Customer captivity – the “stickiness” of the company-to-consumer relationship – is similar. If Universal had a successful slate of movies last year, customers aren’t more likely to seek out Universal films this year. Again, series or franchise films may be slightly different, but even with that content, the company is much less likely than the talent to be able to reap the benefits of captivity.

Jonathan A. Knee, “Why content isn’t King,” The Atlantic, July 2011.

Is the consumer driven economy dead?

There is no shortage of explanations for the economy’s maddening inability to leave behind the Great Recession and start adding large numbers of jobs: The deficit is too big. The stimulus was flawed. China is overtaking us. Businesses are overregulated. Wall Street is underregulated.

But the real culprit – or at least the main one – has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.

The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago – and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.

The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover …

If you’re looking for one overarching explanation for the still-terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future (and many have discovered that they don’t need to buy a new car or stove every few years). Both consumers and executives are easily frightened by the latest economic problem, be it rising gas prices or the debt-ceiling impasse …

The notion that the United States needs to begin moving away from its consumer economy – toward more of an investment and production economy, with rising exports, expanding factories and more good-paying service jobs – has become so commonplace that it’s practically a cliché. It’s also true. And the consumer bust shows why. The old consumer economy is gone, and it’s not coming back.

David Leonhardt, “We’re spent,” The New York Times, July 16, 2011.

Innovation: lemons to lemonade

Very often a business problem turns into an opportunity for innovation. A good example concerns Japan Railways East, one of the world’s largest rail carriers. During the 1980s they constructed a new high-speed railway line running north of Tokyo. This involved drilling a long tunnel under a huge mountain, Mount Tanigawa. Once the tunnel was constructed the company encountered problems with water seepage. Engineers designed systems to drain off the water which was seeping through the mountain from the melting snows on its peak.

Then a maintenance worker suggested something radical: why not bottle the water and sell it? The water was of great purity and taste. His idea was implemented and JR East entered the beverage business with a bottled mineral water. It was promoted under the name Oshimizu as a premium product derived from the pure snows of Mt. Tanigawa. Furthermore the company exploited its retail coverage by placing vending machines on over 1,000 station platforms. The product line was extended with fruit juices and iced tea. By the mid 1990s sales of the Oshimizu brands were over $50 million a year.

Paul Sloane, “Every business problem is an opportunity for innovation,” BFQ Innovation, July 9, 2011,

Overhauling the patent system

This American Life goes into clear detail about the idiocies of the patent system – how even software engineers with patents don’t believe that software processes should be patentable; how patents are regularly awarded for ideas which have been around for years; how multiple patents are often awarded for much the same idea; how IV is essentially running an intellectual-property protection racket; and how big companies are amassing patent portfolios not so that they own the intellectual property behind their products, but rather so that they can threaten to sue any company which sues them.

The end result is a highly dysfunctional situation where virtually any startup is at risk of being shut down by a patent suit; and where nameplate companies with no business and no revenues, like Oasis Research, are the perfect vehicles to launch patent suits, since they’re not susceptible to countersuits. Essentially, if you’re small, you have to hope to fly below the radar; if you’re big, you have to pay billions of dollars on patents you have no particular interest in …

The US is in desperate need of patent overhaul. We need to make it easier and quicker to get good patents, and much harder or impossible to get bad patents. We need to abolish the abomination that is the business-method patent entirely. And most crucially we need to allow defendants in patent suits to argue that the patent is invalid because it was awarded in error, with lots of prior art at the time the patent was awarded. Right now, patents can be appealed – but not in the court where they’re being enforced, with the result that trolls with invalid patents can still get paid out to the tune of billions of dollars …

Felix Salmon, “The cost of patent trolls,” Reuters, July 24, 2011,

Deflating the education bubble

Almost everyone I hear these days, including all the speakers I caught at last week’s Aspen Ideas Festival, advocates more education as a solution to our vexing problems of unemployment and underemployment. And by “education” they often (but not exclusively) mean “higher education.” President Obama, for example, wants America to have the world’s highest proportion of college graduates by 2020.

This seems smart and reasonable, especially since so many jobs now require a college education or more. But maybe we’re looking at the problem the wrong way …

Higher education has become much more expensive, student loans now account for more debt in America than do credit cards, and a lot of diploma mills (by which I do not just mean for-profit universities) have sprung up. In short, a lot of what’s going on in the higher education industry these days strikes me as something between a bubble and a scandal …

It’ll come as no surprise to readers to hear that I think technology can be a big part of solutions here. There are wonderful free online resources available now that let people educate themselves (just look at the Khan Academy), and digitally-administered tests could show employers who’s got the right stuff for any particular job.

Andrew McAfee, “Education and employment: some thoughts against the conventional wisdom,” July 6, 2011,

Disruptive innovation comes to higher education

A disruptive technology, online learning, is at work in higher education, allowing both for-profit and traditional not-for-profit institutions to rethink the entire traditional higher education model. Private universities without national recognition and large endowments are at great financial risk …

Price-sensitive students and fiscally beleaguered legislatures have begun to resist costs that consistently rise faster than those of other goods and services. With the advent of high-quality online learning, there are new, less expensive institutional alternatives to traditional universities, their standing enhanced by changes in accreditation standards that play to their strengths in demonstrating student learning outcomes. These institutions are poised to respond cost-effectively to the national need for increased college participation and completion.

Clayton M. Christensen and Henry J. Eyring, “How disruptive innovation is remaking the university,”, Working Knowledge, July 25, 2011,

Getting past the internal barriers to innovation

Many conventional metrics we use to estimate value are based on faulty assumptions. Net present value (NPV) is a case in point. The logic of NPV is to project cash flows into the future and then discount those flows back into today’s dollars at a given cost of capital. Given that money today is always worth more than money in the future, you are trying to establish what the future value of the investment will be in terms of that money’s value today. If it is positive, it’s thumbs up, if it’s negative, it’s thumbs down.

One problem is that NPV calculations tend to compare today with some future state. What they should be used for is to compare today with two different future states: one in which we do nothing and one in which we do something. Doing otherwise biases the business against innovation because what you are projecting may look unattractive relative to your business today.

Another well-known problem is that if you are a P&L leader in a publicly traded firm, you pay dearly for missing quarterly targets and don’t get dinged at all for failing to invest in the future. Imagine you’re the guy who was running the Walkman business at Sony a decade ago. Your career depended on that business going forward, and the numbers that mattered had to do with the performance of that business, not with Sony as a whole. So when the first little inklings appeared that there may be a shift from battery cassette players to solid state rechargeable digital music archives like the iPod, your incentive was not to embrace that reality but to eke out another quarter or two doing what you were already doing […]

My own research has shown that there are a number of big companies that have overcome these problems. But they do it very consciously. That makes all the difference. I’m thinking of HDFC Bank in India, Yahoo! Japan, Infosys, and Sagentia in the UK. All four companies have systematic ways of estimating how long a particular advantage is going to last, systems that nurture innovation, and processes that make sure the right people are at work on the business […]

Established companies have the opportunity to do more experimentation if they commit to consciously embracing new models, because they have more resources to buffer themselves in the advent of adversity.

Rita McGrath “Is your business biased against innovation?”, Ideas@work, July 22, 2011,

The new face of marketing

To engage customers whenever and wherever they interact with a company – in a store; on the phone; responding to an e-mail, a blog post, or an online review – marketing must pervade the entire organization […] In today’s marketing environment, companies will be better off if they stop viewing customer engagement as a series of discrete interactions and instead think about it as customers do: a set of related interactions that, added together, make up the customer experience …

Designing a great customer-engagement strategy and experience depends on understanding exactly how people interact with a company throughout their decision journey. That interaction could be with the product itself or with service, marketing, sales, public relations, or any other element of the business.

When the hotel group Starwood sought to enhance its engagement with customers, for example, the company pored through data about them and identified clear demographic groups staying at its more than 1,000 properties. In 2006, the company unveiled a specific new positioning for each part of its brand portfolio, ranging in affordability from Four Points by Sheraton to its Luxury Collection and St Regis properties.

Each brand seeks to deliver a different customer experience, on dimensions ranging from how guests are greeted by staff to the kind of toiletries offered in rooms. Crucially, for each type of property, Starwood sought to design not only the desired experience but also how it would actually be delivered. It therefore had to decide what coordination would be necessary across functions, who would operationally control different touch points, and even what content customers wanted in the company’s Web site, in loyalty program mailings, and other forms of communication.

Starwood’s experience underscores the fact that, despite the growing impact of digital touch points such as social media, effective customer engagement must go beyond pure communication to include the product or service experience itself.

Tom French, Laura LaBerge, and Paul Magill, “We’re all marketers now,” McKinsey Quarterly, July 2011.

Are we hard-wired for fairness?

Darwinian-minded analysts argue that Homo sapiens have an innate distaste for hierarchical extremes, the legacy of our long nomadic prehistory as tightly knit bands living by veldt-ready team-building rules: the belief in fairness and reciprocity, a capacity for empathy and impulse control, and a willingness to work cooperatively in ways that even our smartest primate kin cannot match. As Michael Tomasello of the Max Planck Institute for Evolutionary Anthropology has pointed out, you will never see two chimpanzees carrying a log together. The advent of agriculture and settled life may have thrown a few feudal monkeys and monarchs into the mix, but evolutionary theorists say our basic egalitarian leanings remain.

Studies have found that the thirst for fairness runs deep. As Ernst Fehr of the University of Zurich and his colleagues reported in the journal Nature, by the age of 6 or 7, children are zealously devoted to the equitable partitioning of goods, and they will choose to punish those who try to grab more than their arithmetically proper share of Smarties and jelly beans even when that means the punishers must sacrifice their own portion of treats …

A sense of fairness is cerebral and visceral, cortical and limbic. In the journal PLoS Biology, Katarina Gospic of the Karolinska Institute’s Osher Center in Stockholm and her colleagues analyzed brain scans of 35 subjects as they played the famed Ultimatum game, in which participants bargain over how to divide up a fixed sum of money. Immediately upon hearing an opponent propose a split of 80 percent me, 20 percent you, scanned subjects showed a burst of activity in the amygdala, the ancient seat of outrage and aggression, followed by the arousal of higher cortical domains associated with introspection, conflict resolution and upholding rules; and 40 percent of the time they angrily rejected the deal as unfair.

Natalie Angier, “Thirst for fairness may have helped us survive,” New York Times, July 4, 2011.

Media: the past is prologue

Three hundred years ago news traveled by word of mouth or letter, and circulated in taverns and coffee houses in the form of pamphlets, newsletters and broadsides … Now, the news industry is returning to something closer to the coffee house. The internet is making news more participatory, social, diverse and partisan, reviving the discursive ethos of the era before mass media. That will have profound effects on society and politics.

In much of the world, the mass media are flourishing. Newspaper circulation rose globally by 6 percent between 2005 and 2009, helped by particularly strong demand in places like India, where 110m papers are now sold daily. But those global figures mask a sharp decline in readership in rich countries.

Over the past decade, throughout the Western world, people have been giving up newspapers and TV news and keeping up with events in profoundly different ways. Most strikingly, ordinary people are increasingly involved in compiling, sharing, filtering, discussing and distributing news. Twitter lets people anywhere report what they are seeing. Classified documents are published in their thousands online. Mobile-phone footage of Arab uprisings and American tornadoes is posted on social-networking sites and shown on television newscasts. An amateur video taken during the Japanese earthquake has been watched 15m times on YouTube. “Crowdsourcing” projects bring readers and journalists together to sift through troves of documents, from the expense claims of British politicians to Sarah Palin’s e-mails. Social-networking sites help people find, discuss and share news with their friends.

“Back to the coffee house,” The Economist, July 7, 2011.

The challenge of successful innovation

Eastman Kodak’s success began when it introduced the first effective camera for non-professionals in the late 19th century and in continual improvements to cameras and black and white and color films throughout the twentieth century. Its products became iconic global brands.

The company’s maintained its position through enviable research and development activities, which in 1975 created the first digital camera. Since that time it has amassed more than 1,100 patents involving electronic sensing, digital imaging, electronic photo processing, and digital printing. These developments, however, continually created innovations damaging to its core film-based business.

Digital photography created a strategic dilemma for the company. It could move into digital photography and destroy the highly profitable film-based business or it could exploit the film-based business while it slowly declined and then – when it was no longer profitable –try to leap out of the business into digital world. It was an ugly choice and the company chose the latter.

Today, the company has just 15 percent of the employees it once had and its stock prices are about 15 percent of what they were before it finally stripped out its production capacity and distribution systems. An enduring benefit of its research and development activities is that the company now owns patents on much of the underlying technology used in all digital cameras including those in mobile phones. It is building a new digital revenue stream on licenses and infringement payments for use of those technologies …

  1. 1.

    Don’t try to fight change. You may not like its direction and may understand how it will affect your current business, but you will not be able to stop its momentum and trajectory if it is beneficial to many customers. In such conditions you can only protect your existing product by making it as productive and competitive as possible, by adjusting its strategies to better serve those who are most loyal and resist change, and by carefully monitoring the pace of change and the investments you make in the existing product …

  2. 2.

    Don’t wait too long to change. Waiting to move into new markets with new products gives upstart companies and other competitors opportunities to become players with better products and larger market shares once you decide to enter …

  3. 3.

    Be willing to sacrifice some short-term profit for long-term gain and sustainability. Careful strategic consideration must be given profits during transitional periods and managers needs to make the strategy clear to the company and its investors.

  4. 4.

    Own the rights to technologies and services your competitors will employ. Use your R&D efforts and make strategic acquisitions to acquire the technologies and services that competitors will need to employ in the new market so they must turn to you and share the benefits of their growth …

Robert G. Picard, “What Legacy Media can learn from Eastman Kodak,” Media Business, July 24, 2011,

Craig HenryStrategy & Leadership’s intrepid media explorer, collected these sightings of novel strategic management concepts and practices and impending environmental discontinuity in the news. A marketing and strategy consultant based in Carlisle, Pennsylvania, he welcomes your contributions and suggestions (

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