The Commercial Experience 21.07 - the rapid proliferation of new advertising businesses and what it all means.
If everyone is moving into the advertising and media business, what does it mean for existing players ... and will there be enough room to house them all?
I wanted to go a bit deeper on one topic today. The topic still stays true to the idea of this newsletter being focused on areas at the intersection of technology, media and commerce. It’s about the plethora of newly emerging media companies emerging out of non-media organisations and how it impacts the concept of who the competition is for incumbent media organisations.
When thinking about competition, just assume everyone is a competitor.
Last week a media company kindly asked me to present my views on the next few years in advertising and media to their senior team. Suffice to say my imposter syndrome was elevated. Here was a group of people with significant media experience who had run highly successful businesses with millions, and in some cases billions, in revenue, asking me for my views? To be honest with you, it was equal parts flattering and daunting.
One area we discussed at length on that day was the loose concept of what defines competition. Which lead to a question around the idea of ‘what business are you really in?’
Theodore Levitt first made this strategic question popular 72 years ago in a Harvard Business Review piece called ‘Marketing Myopia’. Levitt’s core argument was that businesses lose their way when they lose perspective of what business they are really in. His example is that of the railroads.
“The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because the need was filled by others (cars, trucks, airplanes, even telephones), but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad-oriented instead of transportation-oriented; they were product-oriented instead of customer-oriented.”
At this presentation last week I decided to raise a provocation to the room (virtual of course) around what business they really thought they were in? Were they in the inventory business? The advertising business? The growth business?
My basic assertion was they were in the business of helping their customers “sell more stuff”, and ultimately this needed to be their north star. The business ofs elling more stuff is ubiquitous, and its a language that is well understood and compelling across departments and functions of a business. In Levitt’s view, this would mean this business was not selling inventory spots and dots. but was well and truly in the business of moving products and services for its customers. (for those reading along, I coined ‘selling more stuff’ as the more business friendly term ‘accelerated growth’.)
If this provocation was widely accepted, it then had implications for who the media business defined as competitors. It would mean this business would have competitors in the same space, at the same scale. But also competitors in the same space, but smaller scale. And competitors in adjacent areas that were completely different. Basically, any business with the aim of helping their customers “sell more stuff” was competing for their revenue.
The second part of this pillar of the presentation was based around what I called “competition you can’t see clearly … yet”. This basically meant businesses that could easily build a competitive offering, but hadn’t yet (either due to a lack of interest, or it may be something coming in the future). A mix of known unknowns and unknown unknowns.
When all of these potential competitors of all different shapes and sizes converged on one slide it became a very crowded affair. An immediate competitive set of 3-4 businesses became one where there were 50-70 competitors who could be deemed to pose a credible competitive threat in terms of scale, resource and outcomes.
An ackowledgement of this completely changes your commercial approach and what you stand think you really represent. What your product or service is. How you interface with the market. Even what you invest in and the areas you choose to deploy scarce resource. When you assume, rightly, that growth is not something any business is entitled to … and that there could be multiple credible competitive substitutions for what you presently offer … you move away from an obsession with product to a focus on the outcome which that product provides. Selling more stuff. Accelerated customer growth. Whatever you call it … a media business really isn’t in the spots and dots game.
So with this in mind, what does this influx of ‘new’ media businesses mean? And what do we need to consider around their ability to generate accretive value?
AdExchanger ran a podcast last week on the emergence of new ad businesses. Their view was that in the US, Amazon’s notorious ‘Other’ revenue line was the inspiration. (Google ‘Amazon other revenue’ to get a picture of this). This ‘Other’ is growing like a weed, and the sentiment is that the growth of this line of revenue has validated that non media businesses exploring an advertising adjacency line of business is one worth pursuing.
In Australia we are seeing the same phenomenon, albeit at a reduced pace. We’ve had sporting leagues launch media businesses, telecommunications companies, retailers and even financial institutions. They may not look the same as a ‘traditional’ media business, but they are certainly aiming to help their customers “sell more stuff”.
Their proposition is generally that they have either one of 1/ a large audience, 2/ proprietary and rare data insight, 3/ unique access to audience and/or context, 4/ the ability to generate a better outcome than the same resource allocated elsewhere, or a mix of all four. These are all adjacencies these sporting leagues/financial institutions/retailers have decided to pursue to generate new value.
With adjacencies, market fit is one element that can determine success. The other one is around how related the adjacency is to the core business.
Bain & Company has done some of the most important research and thinking in this area. It argues that the further an adjacency strays from the core business, the higher likelihood that it will fail.
Bain outlines 5 key areas that determine what it calls “relatedness to the core business” - shared customers, shared costs, shared channels, shared capabilitiies, shared competition. In Bain’s analysis, a 1-Step adjacency has 35% chance of success … and relies on each of these areas being between 50-100%. Below outlines a guide around whether a new business is a 1, 2 or 3 step adjacency … or true diversification.
This visiual is interesting, as when we look at most of the new media extensions there are some significant areas of issue around ‘relatedness’. In many instances the appeal of an adjacency is based on a perception of shared customers and increased extraction from existing customers, rather than economic advantages related to any of the other areas. For most businesses with media adjacencies, costs, channels, capabilities and competition are all pretty new functions with new investment needed, with minimal sharing that can be applied with the core business.
Does this mean these ‘new’ media businesses may struggle to become long term value contributors to their parents? It’s hard to tell. But in the short term they are definitely distracting and dangerous for the incumbent media organisations they’re seeking to steal revenue from. So for incumbents they’re a threat regardless of whether they survive long term, as in the short term they represent an increase in businesses the incumbent has to compete against.
Looking at the above requirement from Bain that successful adjacencies must share elements with the core business across 5 operational elements, my view remains that the most elegant fits from ‘non advertising’ to ‘advertising’ are the Buy Now Pay Later businesses. And the businesses that need to think deeply about the likely success of their media experiments are the traditional retailers.
The other element of the Bain adjacency perspective is around the value of being a follower in either a hot market (high growth) or a cold one (CPI growth). Bain’s view is it’s better to be a leader in a cold market than a follower in a hot one.
For incumbent media businesses this certainly raises some strategic questions. Do you rediscover your core and seek to extend your leadership position, or do you try and move into hot businesses as a follower and attempt to buck the trend that it’s unlikely to generate much in real value. The above matrix shows that being a follower is really never that interesting or lucrative.
And for the non media businesses looking at media, is it reasonable to think if you executed well you’d become a leader? Because if you’re a follower, or at best achieve parity, the results are hardly worth the risk. Or do you look to build on the core and extend your leadership? All very meaty strategic questions with potentially hundreds of millions, or billions, of dollars at stake.
Coming back to the session I did last week with the media company. When I closed I outlined that in my view what will win in 2022 is what is likely to win in 2023-2025. And that was demonstrating that you can make a meaningful and material contribution to selling more stuff for your customers. That’s your core business and what you need to not stray from. Any investment or decision that adds to that - that’s strategic - and any investment or decision that doesn’t stand up to analysis on this issue - that’s a distraction, or at worst vanity.
I hope you enjoyed this weeks analysis. We will return to more regular programming next week.
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