Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Saturday Post: If You Are In The Path Of A Disruptive Technology You Are Toast - Goodbye Newspaper Companies

Posted by Tom Foremski - June 27, 2009

Disruption.jpg Last week my Saturday Post was about how Internet based technologies have been used to create applications and services that devalue existing business models. It's a hugely disruptive process. [The Internet Devalues Everything It Touches, Anything That Can Be Digitized]

This trend is occurring because it can occur -- because if you have the ability to significantly improve a service at a dramatically lower cost, then there will be startups that will attempt to disrupt the business models of existing companies.

One of the best examples of how the Internet can devalue business models is Craigslist and its effect on the classified ads business.

The Pew Center reports that in 2000 this was a $19.6 billion a year business. In 2008 it had fallen to $9.9 billion because of online classified ads -- mostly Craigslist.

And Craigslist doesn't charge for the vast majority of its classified ads. Craigslist has managed to pull the majority of nearly $10 billion out the classified ads industry in a single year using an operation staffed by just 30 people. There are estimates that Craigslist could take in $100 million this year.

Again, we see the power of the Internet and how it devalues everything it touches. In this case, Craigslist's use of Internet technologies has managed to transmute $10 billion in value into $100 million. It's the opposite of the dreams of alchemists - Craigslist has managed to transmute gold into lead.

Media is one of the most visible industries where business models are under attack because of the disruptive nature of Internet based business technologies.

I was asked recently, "what could the newspapers have done to survive this disruption?"

I answered: "nothing." Even if newspapers had done everything right: started blogging five years ago, offered free classified online advertising as Craigslist, etc. It would not have been enough to avoid the continued disruption of their business models.

This is an important point. What's happening to newspapers, and other media companies, is not a business cycle. It's not their fault. When an industry faces a disruptive trend there is nothing that can be done -- except a complete reinvention of your business. You can't just tweak a few things here or there.

Newspapers cannot survive in the online digital world because the economics of the new world can only support the disruptors -- the companies in the forefront of disrupting the old business model.

The revenues from online publishing are far below what it takes to support the costs of doing business for newspaper companies. Their legacy costs are: office buildings, printing presses, large admin staffs, reporters, editors, production editors, webmasters, photographers, pension plans, healthcare, lights, property taxes, etc.

Even if newspapers had cut back on staff costs earlier, and taken other steps a lot earlier -- it would only delay the inevitable disruption. It would be rearranging the deck chairs on the Titanic.

My definition of a disruptive technology is that it disrupts. You can see the train wreck ahead but you can't downsize fast enough, you can't slow down, you slam straight into it.

Occasionally, companies can reinvent themselves but it is rare--most will go out of business or be acquired. And that's what will happen to most newspapers in this country.

If you are a disruptor company such as Google, or Cragslist then you are fine. Your business model works, your costs of doing business are low enough that you can carve out good profits from your revenues.

But if you are in the path of a disruptive technology then you are toast.

Let me show you an example: Take a look at the microcomputer and the enormous amount of destruction this disruptive basket of technologies created over a ten year period.

The microcomputer was considered a toy technology and was dismissed as such by the computer industry --yet it managed to destroy hundreds of companies. All those East Coast computer companies and beyond, all those companies that eventually could see what was happening -- yet were unable to avoid the disruption, they were unable to downsize fast enough, unable to reinvent themselves in time -- they smashed into the train wreck.

Even IBM, the world's largest computer company barely survivied. It had to reinvent itself as a computer services company.

If you are in the path of a disruptive technology you are toast. Disruptive technologies disrupt.

[A Saturday Post is a weekly essay feature that explores current trends and ideas about the future. If you'd like to contribute a guest post please contact Tom at Foremski.com.]

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