Posted by: hdemott | April 9, 2010

The Moat Part 2: People or Profits – Choose One

Yesterday I wrote a bit about stealth mode and how it was germane to creating a moat around your business – and went on to drscribe some of the possible moats available to you.

Today, I wanted to explore that a little further and tie it in with the new versus old media divide – discussing people and profits.

Both of these can be a source of a moat. Many new media businesses have gone for mass scale quickly before hitting profitability. The network effect that you get from a large user base can deter competitors and allow you to move toward profitability from a position of scale – rather than trying to force the issue from day 1. Pandora is a perfect example – growing the business to an overwhelming scale while working toward profitability.

On the other hand, profitability from a small size can also be a moat – if you can scale the profits while growing – preventing your competition from getting a good hold as they try to react to you – rather than do their own thing. Google is a great example of this – but a rare one who was able to not only choke off the market – but also generated so much profit that they took the whole market.

What is instructive is to look at the old media companies as they enter the new media marketplace. Since they are already profitable, but seeing their business under pressure, the do online like it was offline – spending little money (it would hurt profit margins) and tryin to directly graph their old business model onto the new form factor.

So radio stations stream their terrestrial signals rather than building something like last.fm. Magazines put their stories online, but do little to use the medium at hand to bring them to life. Look at the recent GQ app for the iPad. Rather than touching to go to articles – they want you to page through the magazine like you were holding it in your hands (see here). Yeah, I understand that they are in the advertising business (and the ads in this case are part of the content) but come on guys, that’s not what the new media world is about.$4.99 per month for Time magazine! Really? (see here)

It is a classic business issue. When you have a profitable business (particularly one under public scrutiny) you are loathe to shift business models at the expense of profitability – so you defend your existing moat – even though you know that competitors are tunneling under the moat and will soon be in the keep. Better to keep the farce up with shareholders than to explain that you are spending millions of dollars with an uncertain return far down the line. Of course, others are spending those millions – and if any are successful – you are dead.

So the question is, do you want to scale your business – or do you want to generate profits – for most companies in the new media world the choice is mutually exclusive to a certain level of scale – and for old media companies – as long as there are competitors in your space, defending profits may lead to utter and total collapse.

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